Daily Market Outlook by Kate Curtis from Trader's Way

[katetrades]

Forex Major Currencies Outlook (Apr 29 – May 3)

FOMC meeting, QRA announcement, inflation data from the Eurozone and Switzerland, NFP, preliminary Q1 GDP for the Eurozone, employment data for New Zealand as well as ISM PMI data from the US and PMI data from China will be the highlights of this very busy week.

USD

Q1 GDP surprised to the downside and printed a 1.6% annualised growth vs 2.4% as expected. The details of the report show that net trade was the biggest drag on growth deducting 0.86pp from the final figure. Additionally, inventories also deducted 0.37pp from the GDP while contribution of government spending was at 0.21pp, a big down from 0.79pp in the Q4. Personal consumption contributed 1.68pp to the final reading, down from Q4 of 2023 but business investment contribute 0.56pp, up from 0.15pp in the previous quarter. On the inflation front, PCE deflator was 3.1% vs 3% as expected while core PCE printed 3.7% vs 3.4% as expected. Fed will not be forced to cut rates sooner than expected after this reading.

March PCE data came in slightly hotter than expected. Headline number printed 2.7% y/y, up from 2.5% y/y in February while 2.6% y/y print was expected. Core reading was unchanged at 2.8% y/y while expectations were for a tick down to 2.7% y/y. Personal spending rose 0.8% m/m while personal income was up 0.5% m/m. Overall, numbers came in along the line of expectations and markets seem to be well positioned. Chances of a rate cut slightly rose but it will not affect next week’s meeting.

The yield on a 10y Treasury started the week at 4.63%, rose to 4.73%, a new high for the year and finished the week at around 4.65%. The yield on 2y Treasury started the week at 4.99% and reached the high of 5.03%. Spread between 2y and 10y Treasuries started the week at -37bp then tightened to -31bp as curve proceeded to bear steepen. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at May meeting at 97% while probability of a rate cut is around 3%. Probability of a June rate cut sits at around 12%.

This week we will have ISM PMI data, FOMC meeting, QRA announcement and NFP. No change to the rate is expected and with recent inflation data we may get more hawkish tone from the Chair Powell. Headline NFP number is seen at around 190k while unemployment rate should remain at 3.8%. Wages data will be closely watched for further signs of inflation pressures.

Important news for USD:

Wednesday:​

• ISM Manufacturing PMI​
• QRA Announcement​
• Fed Interest Rate Decision​

Friday:​

• NFP​
• Unemployment Rate​
• ISM Services PMI​

EUR

Preliminary PMI data for the month of April accentuated the divide between two sectors. Manufacturing PMI came in at 45.6 vs 46.6 as expected and down from 46.1 in March. German manufacturing is at very weak 42.2. The report shows the slowest decline in production for the year. Services PMI jumped to 52.9 from 51.5 while improvement to 51.8 was expected. The report shows that new businesses continue to grow as well as that companies have more confidence when setting prices. Composite increased to 51.4 from 50.7 the previous month. Q2 has started on a positive note for the Eurozone and today’s reading suggests positive GDP number.

This week we will get preliminary Q1 GDP reading as well as preliminary April inflation data.

Important news for EUR:

Tuesday:​

• GDP​
• CPI​

GBP

Preliminary April PMI data showed the same dichotomy between sectors as in the Eurozone. Manufacturing printed 48.7 vs 50.3 in March and dropped into contraction while services jumped to 54.9 from 53.1 the previous month. This all helped lift composite to 54 from 52.8 in March. The report shows that PMI numbers should translate to 0.4% q/q growth in the second quarter.

BoE Chief Economist Huw Pill stated that signs of downward shift in inflation pressures are start to be more clear. He added that a cut in rate would not entirely undo the restrictive policy stance but the timing for rate cuts is still some way off. Other MPC members, most notably Deputy Governor David Ramsden, a hawk, came out with dovish comments suggesting that timing for rate cuts is drawing near. Markets have been selling GBP since Friday of last week, after the weak retail sales report but then reversed mid week with GBPUSD climbing over the 1.25 level.

AUD

Q1 inflation data came in hotter than expected. Headline CPI rose 1% q/q vs 0.8% q/q as expected. Yearly figure did decline to 3.6% from 4.1% in Q4 of 2023 but expectations were for a decline to 3.4%. Headline core reading also printed 1% q/q increase while yearly number eased to 4% from 4.2% in the previous quarter, but expectations were for a decline to 3.8%. Inflation coming down is a good thing, but slower than expected pace of declines means that RBA will not move to rate cuts and will hold interest rate at current level.

This week we will get PMI data from China.

Important news for AUD:

Tuesday:​

• Manufacturing PMI (China)​
• Services PMI (China)​
• Composite PMI (China)​
• Caixin Manufacturing PMI (China)​

NZD

March trade data showed first surplus since June of 2023. Kiwi has had a mixed week. It was up against weak USD, CHF and JPY but it was the weakest of so-called risk on currencies, losing the most against the AUD which was boosted by higher than expected inflation print.

This week we will get employment data.​

Important news for NZD:

Wednesday:​

• Employment Change​
• Unemployment Rate​

CAD

February retail sales were very weak. Headline number came in at -0.1% m/m vs 0.1% m/m as expected while ex autos category plunged -0.3% m/m vs 0% m/m as expected. Additionally, advanced reading for the March sees retail sales coming in flat. With January and February printing negative numbers and March seen coming flat it is clear that consumption will be a drag to Q1 GDP and CAD is suffering on the back of that.

JPY

Preliminary April PMI data saw further improvements across the sectors. Manufacturing jumped to 49.9, so close to returning into expansion, from 48.2 in March. The report shows slowest declines for outlook and new orders while employment continued to increase. Input prices have increased with the fastest rate of increase in the last nine months. Services rose to 54.6 from 54.1 the previous month due to big jump in new orders while composite improved to 52.6 from 51.7 in March. Input prices continue to rise in the services sector as well keeping the inflation pressures on.

BoJ has left interest rate unchanged at 0-0.10% as was widely expected. The voting was unanimous, 9-0. The part stating that BoJ buys JPY6tn of JGBs per month was removed from the statement indicating that the bank will return to their previously unlimited purchases. The statement shows that there are still extreme uncertainties around the economic and price outlook. Addiutionally, medium and long term inflation expectations heightened moderately while more firms starting to pass on rising wages to sales prices and it is expected that positive cycle of rising wages and inflation will continue. New projections see GDP for FY 2024 down to 0.8% from 1.2% and unchanged for FY 2025 at 1%. Ex fresh food CPI has been revised up for FY 2024 and is seen at 2.8% while ex fresh food, energy is seen unchanged at 1.9%.

BoJ Governor Ueda stated at the press conference that if underlying inflation rises there will be adjustments to monetary policy. For time being easy financial conditions will be maintained. He added that, so far, weak JPY is not having big impact on inflation trend. He clarified that there is non zero chance of prolonged weakness in JPY and added that BOJ's policy is not aimed at directly controlling the exchange rate. Markets have pushed USDJPY over the 158 level as fears of intervention subside. Tokyo area inflation for the month of April dropped below the 2% target as headline number printed 1.8% y/y increase while ex fresh food category printed 1.6% y/y. They were at 2.6% y/y and 2.4% y/y respectively in March. Inflation is not moving in BoJ’s preferred direction, but it seems that some statistical quirks made it to drop and that this reading should not represent a reversal.

CHF

SNB Chairman Jordan spoke over the weekend and stated that monetary policy should be geared towards maintaining price stability rather than financing debt. SNB has raised minimum reserve ratio for banks to 4% from 2.5%. The decision will go into effect on July 1 and SNB describes the measure as "the adjustments will ensure that implementation of monetary policy remains effective and efficient”. SNB total sight deposits for the week ending April 19 came in at CHF481.3bn vs CHF477.9bn the previous week.

This week we will get inflation data.

Important news for CHF:

Thursday:​

• CPI​

 

[katetrades]

Forex Major Currencies Outlook (May 6 – May 10)

BoE and RBA meetings coupled with employment data from Canada and trade data from China will highlight the week ahead of us.

USD

Employment Cost Index (ECI) for Q1 showed growth of 1.2% q/q vs 1% q/q as expected and up from 0.9% q/q in the Q4 of 2023. The number came in at 4.2% y/y, down from 4.8% y/y in Q1 of 2023, but it is still highly elevated. Fed is considering ECI to be one of the best indicators of overall wage pressures and as it is seen going up it will spark debates of much stickier inflation.

Treasury funding announcement for the Q2 saw a $41bn larger borrowing than stated in January of 2024. The reason was lower cash receipts. Treasury expects to borrow, issue Treasuries, in the amount of $243bn with end TGA balance of $750bn. Expectations for Q3 are for a $847bn borrowing with a TGA balance of $850bn at the end of the quarter.

ISM manufacturing PMI for the month of April returned to contraction after briefly moving to expansion in March and printed 49.2 vs 50 as expected. The details show drops in new orders and production while prices paid jumped above the 60 level indicating growing inflation pressures. ISM services PMI also dropped into contraction and printed 49.4 vs 50 as expected and down from 51.4 the previous month. This is the first time since December of 2022 that the reading dipped below the 50 level. New orders dropped but remained in expansion while new export orders dropped into contraction. Employment index fell deeper into contraction while prices paid component rebounded heavily after dropping in March which will bring up concerns about inflation pressures boiling.

Fed has left Fed funds rate unchanged in 5.25 - 5.50% range as was widely expected. The statement showed that economy continued to expand at a solid pace but "there has been a lack of further progress toward the Committee's 2 percent inflation objective." Regarding inflation the statement showed that "The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." There will be a reduction in QT "...monthly redemption cap on Treasury securities from $60 billion to $25 billion." Expectations were for a reduction to $30bn. Fed remains data dependent and Inflation remains the most important data point that Fed will monitor.

At the press conference Powell has stated that Fed is not satisfied with 3% inflation adding that it is unlikely that the next move in rates will be a hike, he repeatedly pushed against the rate hike. When pressed about rate cuts he stated that there would have to be significant weakening of labor market and added that couple of tenths in the unemployment rate probably wouldn't do it. He thinks that monetary policy is restrictive and he will need “persuasive evidence” to prove to him that it is not tight enough.

March jobs report was the first in a long time that missed expectations. Headline NFP number showed 175k jobs added vs 243k as expected. The unemployment rate ticked up to 3.9% while participation rate remained the same at 65.7%. Underemployment, U6, also ticked higher and printed 7.4%. Wages rose 0.2% m/m compared to 0.3% m/m the previous month and 3.9% y/y vs 4.1% y/y in March. Private education and healthcare services continues to be the biggest contributors adding 95k of the 175k total, but leisure & hospitality and government are much weaker than has usually been the case over the past 18 months. Private jobs added 16k while government jobs added 8k. Powell has noted that significant weakening of labor market is needed for rate cuts and this report could mark the beginning of that weakening.

The yield on a 10y Treasury started the week at 4.67%, rose to 4.69% and finished the week at around 4.50%. The yield on 2y Treasury started the week at 5% and reached the high of 5.05%. Spread between 2y and 10y Treasuries started the week at -33bp then tightened to -31bp as curve proceeded to bear steepen. The 2y10y is inverted for over twenty months. FedWatchTool sees the probability of no change at June meeting at 86% while probability of a rate cut is around 14%. Probability of a July rate cut sits at around 42%.

EUR

Preliminary Eurozone CPI for the month of April saw headline number unchanged at 2.4% y/y as expected but core CPI fell by less than expected as it printed 2.7% y/y, down from 2.9% y/y in March while a drop to 2.6% y/y was expected. Monthly reading saw increase of 0.6% which makes it a fourh consecutive year of 0.6% m/m inflation increases in April. German CPI came in unchanged at 2.2% y/y vs 2.3% y/y as expected with French CPI also printing 2.2% y/y. These numbers indicate that bringing inflation all the way to the 2% target will go slower than expected. However, this will not deter ECB from cutting in June. Preliminary Eurozone GDP for the Q1 came in at 0.3% q/q and 0.4% y/y vs 0.1% q/q and 0.2% y/y as expected. All of the four major economies (Germany, France, Italy and Spain) beat expectations and had Q1 GDP surprised to the upside.

GBP

Final manufacturing PMI for the month of April was revised up to 49.1. Services and composite PMI readings were slightly upgraded to 55 and 54.1 respectively, up from 53.1 and 52.8 in March. The report shows improvements in business and consumer spending which led to increases in activity and new orders. Business expectations for the next year are upbeat.

This week we will have BoE meeting and preliminary Q1 GDP data. With inflation staying high but projected to decline much faster than in other countries we could see BoE to start to prepare the terrain for a June cut, although August is what markets are pricing as we will get more data points by then. Sticky services inflation may prove to be the reason why they opt for an August as the first rate cut date.

Important news for GBP:

Thursday:​

• BoE Interest Rate Decision​

Friday:​

• GDP​

AUD

Official April PMIs saw manufacturing come in at 50.4 as expected, down from 50.8 in March while services recorded a big drop to 51.2 from 53 the previous month while expectations were for a 52.2 reading. For the manufacturing sector new orders and new export orders remained above 50 while employment index remained in contraction. Production index made a decent jump and there was a surge in prices paid index indicating inflation pressures. For the services sector employment and new business components remained below 50 and business expectations index declined. Composite was thus dragged to 51.7 from 52.7 in March. Caixin manufacturing increased to 51.4 in April from 51.1 in March.

This week we will have RBA meeting as well as trade and inflation data from China. With inflation staying stubbornly high and labor market still holding tight RBA will not make any moves at this meeting.

Important news for AUD:

Tuesday:​

• RBA Interest Rate Decision​

Thursday:​

• Trade Balance (China)​

Saturday:​

• CPI (China)​

NZD

Business confidence continued to deteriorate as April printed 14.9, down from 22.9 in March. The biggest drops were seen in overall activity, all sectors declined as well as in employment category. Residential construction and profit expectations also posted big drops. Pricing intentions component grew but slight positive is that inflation expectations inched lower.

Q1 employment report showed growing weakness in the labor market. Employment change was -0.2% q/q vs 0.3% q/q as expected. The unemployment rate rose to 4.3% from 4% in Q4, higher than 4.2% as expected, while participation rate dropped to 71.5% from 71.9% in the previous quarter. Wages have declined a bit but are still very elevated with Labor cost index at 0.8% q/q and 3.8% y/y. The impact of high interest rates is weighing down on the labor market.

CAD

February GDP reading printed an increase of 0.2% m/m vs 0.3% m/m as expected. Manufacturing growth was negative while service industries posted a 0.2% increase. Advanced March reading sees GDP coming in flat.

BoC Governor Macklem stated that there is a limit on how much rates between US and Canada can diverging adding that it is unlikely that rates will go down to the pre-pandemic levels. He added that core inflation is expected to ease gradually and that cut in rates will signal that inflation is moving towards the 2% target.​

This week we will have employment data.

Important news for CAD:

Friday:​

• Employment Change​
• Unemployment Rate​

JPY

Early hours of Monday saw USDJPY jump to the 160 level and then finally intervention happened. The pair was pushed down below the 155 level. It has bounced after that but as the London session started it was pushed back below to the 155 level. Ultimately the pair crossed the 158 level. After the FOMC meeting that weakened the USD, BoJ took advantage and again intervened in the market pushing the pair below the 152 level.

Final manufacturing PMI for the month of April was revised down to 49.6 from 49.9 as preliminary reported, but still a good jump from 48.2 in March. The report showed slower decline in output and new orders, they are still below 50. New export orders also declined due to weak foreign demand while input prices increased as weak JPY pushed up prices.

CHF

SNB total sight deposits for the week ending April 26 came in at CHF475.7bn vs CHF481.3bn the previous week. April inflation data saw headline CPI come in at 1.4% y/y vs 1.1% y/y as expected and up from 1% y/y in March. Core CPI also rose as it printed 1.2% y/y vs 1% the previous month. The numbers are still well below the 2% target so SNB will not be phased by these data points. CHF has gained strength after the inflation report.​