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A lack of surprises in US President Joe Biden’s speech on the American “Families Plan” ($1.8T in spending proposals over the next 10 years to be funded by tax hikes on the rich over the next 15 years, as expected) before a dual session of Congress last night combined with a steadfast dovish message from the FOMC in the second half of yesterday’s US session has given the green light for risk assets to resume their upward trajectory. US equity index futures rallied overnight with E-mini S&P 500 futures (+0.7%) rallying above 4200 for the first time ever, with major US indices also gaining in wake of strong earnings results from Apple and Facebook, both of whom trade with solid pre-market gains as a result.
The US dollar, meanwhile, was hit in the immediate aftermath of the Fed event, with the DXY slumping back from the 91.00 level to hit lows overnight of under 90.50, although the buck is nursing a modest recovery this morning and the DXY is currently in the 90.60s. In terms of a quick recap of the event; no major policy changes were announced (the FFR target range was held at 0.0-0.25% and QE at $120B per month) and though the Fed made some minor tweaks to its language about its view on the current performance in the US economy to reflect the recent upturn in the data, this was not viewed in a hawkish way as the recent upturn in activity is in fitting with what the Fed has been expecting anyway (remember the Fed is forecasting GDP growth of 6.4% in 2021!).
The Fed maintained its dovish guidance; no rates hikes until its dual mandate has been met and no tapering of asset purchases until substantial progress has been made towards these goals. On which note, Powell refused to be drawn into giving any signal as to exactly what “substantial progress” means in practise, meaning no new hints were given about when the Fed might start its taper, which has been and remains the key market question with regards to Fed policy. A refusal to talk about tapering, combined with Powell’s reassurance that the expected upturn in inflation over the coming months will be transitory, has contributed to the dovish “lower for longer” message that has served risk assets so well over the past 13 months.
Turning to US government bond markets; yields were hit in the immediate aftermath of the Fed’s dovish message, but upside in risk assets during the overnight session, combined with a likely reinfusion of optimism about the US recovery, means that those losses have now been all but erased; 10-year yields are back around 1.65% having dropped as low as 1.61% at one point yesterday evening. Gold price action has mirrored the inverse of treasury yields (as is so often the case), with XAUUSD prices hitting highs at $1790 overnight but having since slipped back to the $1770s. If USD conditions remain subdued, however, this ought to keep gold supported and may bring the $1800 level into the equation soon.
Turning to crude oil prices; they appear to be garnering impetus from strength in global equities and WTI has rallied back to fresh weekly highs in the upper $64.00s, up more than 6.5% from Monday’s mid-session lows in the mid-$60.00s. OPEC+ patience (the high level meeting this month was effectively cancelled as the cartel monitors market conditions, with the next meeting booked for the start of June) seems to be helping and this week’s US inventory data has been bullish (Distillate stocks in particular saw a much larger than expected draw yesterday). Meanwhile, the pandemic appears to have peaked in mainland Europe (though is still a threat with infection rates still high) and the rate at which the spread of Covid-19 virus is accelerating in India appears to be slowing (though the country remains at the peak of its health crisis and will sadly likely continue to suffer for a few more weeks at minimum).
Returning to FX markets and taking a look at the rest of the G10 currencies; CAD sit atop the G10 performance table, with USDCAD down about 0.2% on the session following yesterday’s 0.7% decline – dollar weakness is playing a role, but CAD continues to derive impetus from 1) strong crude oil prices and 2) domestic economic news (yesterday’s Canadian February retail sales data was very strong and last week’s BoC meeting was seen as very hawkish). JPY, meanwhile, is unsurprisingly the worst performing G10 currency on the day, weighed by the recent upturn from lows in US government bond yields since the start of Asia pacific trade as well as the broadly risk on market tone which is doing no favours to safe-haven currencies such as the dollar and the yen.
AUD, NZD, GBP, NOK and CHF are all up about 0.1% on the session versus the buck, after also gaining against the dollar yesterday in wake of post-FOMC USD weakness; AUDUSD hit overnight highs just under 0.7820 but has since lost its grip of the big figure, which it is currently attempting to poke its head back above. Overnight data showing a strong rise in the price of Australia exports in Q1 came as little surprise given strength in the prices of the likes of Iron Ore and Copper over recent months. NZDUSD managed to rally as high as the 0.7280s overnight but has since slipped back from these levels, though remains well supported above 0.7250 following a decent improvement in NBNZ Business Confidence and Activity Outlooks surveys for the month of April released last night. GBPUSD, meanwhile, is ranging in the mid-1.3900s amid a lack of domestic fundamental catalysts and USDCHF has recently swung back to the south of the 0.9100 level to hit fresh two-month lows.
EUR, meanwhile, trades broadly flat against the buck on the day though EURUSD is comfortably holding to the north of the 1.2100 mark, where it also currently trades at two-month extremes (highs). Preliminary Consumer Price Inflation numbers for the month of April out of Spain and Germany this morning were both stronger than expected, adding some upside risk to the Eurozone aggregate figures which are set for release tomorrow morning ahead of the preliminary estimates of GDP growth in Q1 out of various EU countries as well as the Eurozone on the whole.
The Day Ahead
The main event of the day ahead is the release of the preliminary estimate of US Q1 GDP growth, expected to come in at 6.1%, though some desks looking for something closer to or even to the north of 7.0%. The GDP data, which may cause a bit of a stir if it comes in a long way from expectations, will be released at 1330BST alongside the weekly jobless claims report; initial jobless claims have been trending lower in recent weeks, falling below 550K for the first time since the start of the pandemic last week and expected to hold around this “low” (by the standards of the recent year) level again this week. US Pending Home sales for the month of March will be out at 1500BST but are unlikely to move markets too much – more interesting will be remarks from FOMC member Randal Quarles at 1600BST and then from FOMC member and NY Fed President John Williams at 1900BST, the latter of whom will give his take on yesterday’s rate decision.
