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Judging by pre-market open price action in the futures markets, major US equity bourses look set to end the week at or close to highs for the week. After the S&P 500 index ended yesterday’s session up a modest 0.1% and just above 4200, E-mini S&P 500 futures are trading up a further 0.4% this morning, and have now climbed above 4210. No specific theme or piece of news seems behind the move; rather, the gradual upside bias seen in US equity markets this week seems to be more of a continuation of the recovery from monthly lows set three weeks ago than anything else. On the week, the E-mini S&P 500 futures are up about 1.3%. The positive bias was also seen in Asian equities overnight and is being seen in European equities this morning (Stoxx 600 +0.5%), though trade remains somewhat tentative. Meanwhile, conditions are subdued in US government bond markets; 10-year US bond yields are flat at the 1.60% mark and 10-year TIPS yields (the real yields on the 10-year bond) are flat around -0.83% mark, close to the mid-point of recent -0.80% to -90% ranges. Note that trade is likely to remain tentative ahead of the release of some key US data points at 1330BST, including Core PCE (the Fed’s favoured inflation gauge) and Personal Income and Spending numbers, all for the month of April, but things could spice up in the aftermath.
Turning to commodity markets; crude oil prices look set to end the week at or at least close to monthly highs. Front-month WTI futures currently trade just above the $67.00 level and Brent is around $69.50, both up a modest 0.5% on the session. “Boosted by good economic data and risk appetite among investors on the financial markets, Brent is making a renewed bid for the psychologically important $70 per barrel mark” commented analysts at Commerzbank analyst this morning, adding that “concerns about demand because of the pandemic are giving way to optimism in view of the rapid return of consumers”. Crude oil markets seem to have shrugged off concerns earlier this month about an increase in Iranian output should the US and Iran agree on a return to the 2015 nuclear deal and a lifting of the latter’s oil export sanctions. “Our (analysis) shows that the market should be able to absorb additional supply from OPEC+, along with a gradual increase in Iranian output” reiterated analysts at ING this morning.
Meanwhile, after yesterday’s surge higher which traders said was caused by reports that US government spending plans in 2022 would be larger than expected, industrial metal prices are consolidating; the Bloomberg Industrial Metals subindex (BCOMIN) surged from 155 to 160 yesterday, but has recently slipped modestly back under this level. Concerns about efforts in China to curb speculation in industrial metals markets continues to weigh. Analysts at consultancy T-Commodity say “it’s very confusing for the market because we have mixed messages… Investors are not chasing prices higher at current levels… On one hand, we have downside pressure on the market from China, but on the other hand, there’s a fixation by the market that the new Biden spending plan will be very big”.
Finally in commodities, gold prices have continued to ease for a third straight day, with spot prices now back to around $1890 from earlier weekly highs around $1910 (which, incidentally, was the precious metals highest levels since January) as traders take some profit in wake of what has been an impressive run higher this month. XAU/USD ended April around $1770, meaning it has rallied over $120 on the month, aided by a soft dollar, subdued yields, concerns about inflation and weakness in crypto markets. “Gold is under pressure for technical reasons… and at this point seeing a temporary correction” said analysts at ActivTrades, before adding that “any positive (U.S. economic) data could be negative for bullion, because that could mean that Federal Reserve will start tapering talks soon”.
Turning now to FX markets; despite positive risk appetite being seen in other markets (i.e. stocks and crude oil prices are higher), the US dollar is enjoying a modest bid on the last day that US and UK markets will be open this month. Various banks and institutions had been predicting a modest USD bid into the month end, as global financial institutions rebalance their portfolios (international equity market gains were stronger than US equity market gains this month, pointing to a need to sell international stocks, then buy USDs to buy US stocks in order to rebalance international equity exposure). This does seem to have come true, helped by a distinct lack of other key FX market moving fundamental developments this week. Incoming US data could move FX markets, however.
The Dollar Index (DXY) is up about 0.25% this morning and trading close to 90.20. This has exerted downwards pressure on most of the major USD pairs. EURUSD and GBPUSD are both down between 0.2-0.3%, with the former falling back towards 1.2150 after dropping under 1.2200 again and the latter losing its grip on the 1.4200 handle and falling towards 1.4150. The euro has not been too responsive to broadly balanced remarks from influential ECB member Schnabel; she expressed comfort with the idea of European government bond yields moving higher to reflect an improved economic outlook, something which is “precisely what we would expect and want to see”. The Eurozone economy has reached a turning point and its outlook has improved, she said, though reiterated that the premature withdrawal of stimulus would be a mistake and even after the ECB does wind down its emergency pandemic QE bond buying, policy is set to remain highly accommodative.
Elsewhere, NOK, CAD, CHF, AUD and SEK are down between 0.4-0.6% on the day versus the dollar and populate the middle of today’s G10 FX performance table. USDCAD is back above 1.2100 again, despite stronger crude oil prices that do not seem to be giving the Nikkei much of a hand either, USDCHF is back above 0.9000 despite a much stronger than expected Swiss KOF report this morning. AUDUSD, meanwhile, has stumbled back below 0.7700 recently and continues to eye developments in metal and commodity markets as well as in its cross Tasman sea cousin the Kiwi.
On which note, after big gains earlier in the week in wake of more hawkish than expected rate guidance from the RBNZ (recall that the bank now forecasts 150bps in rate hikes by mid-2024, more than markets had been pricing prior to this week’s rate decision), NZD is experiencing a bit of a technical correction and is the underperforming G10 currency this morning (down about 0.8% on the day versus USD), despite a lack of any negative NZ related fundamentals to speak of. On the contrary, the latest data released from Stats NZ showed that filled jobs rose 0.3% in April, taking employment back above pre-Covid-19 levels. In actual jobs numbers, that means approximately 2.24M New Zealanders were employed in April, an increase of 2.5% since April 2020, when the total number of employed fell to 2.18M due to the first Covid-19 lockdown. The driver of this recovery in the labour market has bene increased employment in health care, social assistance, construction, public administration and safety sectors, said Stats NZ. Conversely, employment in the transport, postal and warehousing sectors are down, in part due to the fall in airline staff numbers due to ongoing restrictions on international travel. In that sense, last night’s data is encouraging, as it shows that despite the ongoing lack of tourists, employment has broadly held up and is gaining momentum. When NZ’s vaccine rollout catches up with the likes of other Western countries and the country is thus able to reopen its borders to the world, another spurt in employment is to be expected – supporting the rationale for the RBNZ latest guidance of a hiking cycling beginning next year. “We think it makes sense to look for FX gains in currencies whose central banks have made hawkish pivots” said analysts at TD Securities. “The NZD is no exception; we are tactically long NZDUSD this week, but we think there could be larger gains ahead towards 0.7500”. This morning, NZDUSD has pulled back to the 0.7230s having been above 0.7300 earlier in the week, but dip buying may well send the cross higher in the coming weeks.
Also note that the Chinese yuan, CNY, strengthened to a five-year high against a basket of currencies last night, pushing USDCNH to fresh multi-year lows around 6.36. The 6.40 level had previously been seen as critical support but when the PBoC moved its yuan midpoint below this level earlier in the week, this was taken as a green light by traders to push the pair below this key level. There has been chatter at the PBoC in recent days about potentially allowing CNY to appreciate a little to counter the negative impact of commodity price inflation (though a higher CNY will be bad for Chinese exporters, so the net economic effect of CNY appreciation is unclear). For now, USDCNH is likely to remain under 6.40, and this will weigh on the US dollar more broadly.
The Day Ahead
The main event of the day ahead will be US data out at 1330BST; April Core PCE (the Fed’s favoured inflation gauge), Personal Income and Personal Spending data is out. The former is expected to rise to 2.9% YoY, well above the Fed’s 2.0% inflation target, though the Fed judges the spike in inflation as transitory and is not taking it as a signal that tighter monetary policy is needed at this juncture. Market participants are not completely sold on this stance, hence the increased interest in inflation protection as of late (partly why gold has been doing so well) and a much higher than expected headline YoY number might cause some market turmoil (i.e. stocks on heightened expectations for Fed tightening to counter inflation, perhaps gold and crypto higher on inflation fears). The inflation debate (i.e. is it transitory or not) will not be resolved for some months, yet however, given it is literally still far too early to know. Personal Income is set for a sharp decline MoM in April given the boost in incomes seen in March from the government stimulus cheques. Markets are unlikely to take this as a bad sign, however, and will expect incomes to remain supported in the months ahead as the US economy continues to recover.
The US May Chicago PMI survey is then out at 1445BST, followed by the final University of Michigan Consumer Sentiment survey at 1500BST. CAD traders are unlikely to be too interested in the release of Canadian budget balance data at 1600BST but crude oil traders may take notice of weekly Baker Hughes rig count data out at 1800BST. Finally, the Biden Administration is expected to release a fully costed 2022 fiscal budget at 1830BST today. Government spending in 2022 is expected to be projected at $6T, taking the US debt to GDP ratio to 117%. A large government deficit and large trade deficit (advanced trade data for the month of April, set for release at 1330BST today, is expected to show a record monthly trade deficit of $92B), coupled with the fact that the dollar does not offer attractive relative returns versus overseas currencies, could weigh on the US dollar going forward, reasons ING.
Note that Friday also marks the last trading day of the month for US and UK markets, meaning we may see more volatility as a result of month-end rebalancing flows in these markets being crammed into today’s session. Note that the US and UK have public holidays on Monday.
