Let’s hope the Fed is right!
The Fed officials all belong to the same choir singing the same song: inflation should be transitory. It’s nice how they have left the backdoor open saying that inflation should be transitory. Well, let’s hope they get this right as the latest numbers show that for the past 6 months US inflation is running at an annual pace of 7.4%. Let’s take a look at what’s the latest in this transitory inflation saga. Yesterday yet again one of the Fed governors, Christopher Waller (FOMC voter) saw it necessary to reiterate the Fed’s view that inflation pressures should be transitory. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The PPI numbers, however, dared to disagree with Mr Waller. The US PPI m/m (price change of finished goods and services sold by producers) was confirmed at 0.6% (0.3% expected). The year-over-year change was as high as 6.2% suggesting that there are price pressures for producers and that the pressures threaten profit margin growth unless they are passed to customers. Furthermore, if we take the last 6 months increase in the PPI there is no base effect and the annualised rate of increase is even higher: 7.4%. This is a very high number, let’s hope that the Fed indeed has the tools to control inflation before it really takes off.
The S&P 500 index mustered enough bullishness for a decent 1.2% rally, as investors bought the dip in most market sectors. The Dow Jones Industrial Average (+1.3%) and Russell 2000 (+1.7%) were even more bullish outperforming the benchmark index. Nasdaq Composite was the weakest of the bunch with a 0.7% gain. The rally was broad with ten out of eleven S&P 500 sectors gaining. The industrials (+1.9%), financials (+1.9%), and utilities (+1.8%) sectors all rallied strongly taking the first three spots. The information technology sector rallied 1.4% and taking 4th place. The energy sector was the laggard with a loss of -1.22%. While stock markets renounced after three days of losses the yields didn’t move considerably yesterday.
Major USD Rivals
US Dollar index (DXA) consolidated yesterday after running higher the day before. Index fluctuated about in a relatively narrow range and then closed near to the opening levels. Therefore a narrow-bodied candle that often signals reversal was created. Similar consolidation was seen in EURUSD, GBPUSD and AUDUSD. The CAD and CHF were relatively strong movers (since the publication of yesterday’s report) moving -0.35% and 0.30% respectively. We suggested in yesterday’s analysis (here) that USDCAD would be likely to rally higher after reversing the recent down move. Once again our analysis helped TIOmarkets traders to get the direction right!
Oil traded lower yesterday (-3.0%) as investors worried about the covid chaos in India. However, at the same time, there is demand for crude for the second half of this year and is expected to prevent any significant drops in USOIL. Gold gained as the recent rise in US Treasury yields steadied (The 10-yr yield decreased three basis points to 1.67%) and money flowed out of BTCUSD. The price of yellow metal is up almost 1% since the low yesterday’s trading. The price of silver steadied yesterday after dropping over 2% the day before.
Yesterday we reported how Bitcoin dropped more than 10% as Elon Musk said that Tesla Inc has stopped accepting bitcoin to purchase its vehicles. In yesterday’s trading, we saw the BTCUSD studying and attracting buyers at 45700. The broken uptrend and a breakout of a bearish wedge are negatives for this market. Now, these technical factors are accompanied by a lower high at 59370 and high profile negative comments about the currency. This is likely to dampen the enthusiasm around this market and could make investors look for other alternatives for their investments. There are better technologies out there (e.g. Ethereum) while bitcoin’s code is criticised for being too simple and outdated. If weakness in BTCUSD continues it is likely to impact other cryptocurrencies too. The flip-side is of course that should the stage a sustainable rally the other crypto markets would be likely to follow. Our view is that while BTC is near to a support level and could rally short-term, there are several bearish factors that make us focus on very short term moves only. Lower highs and breaks below trendlines are bearish, not bullish.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has on several occasions repeated its commitment to ultra-accommodative monetary policy. The rates are likely to stay near zero while asset purchases continue.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration has indicated it will seek to deliver another two trillion dollars in infrastructure spending.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower for about one month now. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Payrolls||Friday’s miss in payrolls was the biggest in the recorded history. Analysts expected to see one million new jobs in April but the actual number came in at 266K (down from 770K in March).|
|Inflation||The price of lumber has increased approximately 700% in a year while the price of copper has gained 100% in the same period. US stocks are trading at all-time highs. The CPI has started to rally lately. Over the last 6 months, inflation is running at a 5% annual pace.|
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Market News & Facts
- Fighting continues in Gaza and unrest has spread to Israeli towns
- New Zealand manufacturing PMI for April came in at 58.4 (previous 63.6)
- Tesla stops accepting bitcoin as payment for its vehicles
- Bridgewater: There will be more inflation than the Fed expects
- UK first-quarter GDP -1.5% vs. -1.6% expected (+1.3% previous)
- Australia in danger to lose AAA rating
- Bridgewater founder Ray Dalio: government spending to devalue USD
- Tesla has halted plans to buy land for its Shangai facility
- Biden threatens unemployed with loss of benefits if they don’t accept jobs
- Unavailability of semiconductor chips to cause inflation
- China’s population growth is slowing fast
- China’s CPI in line with expectations (0.9% vs. 1.0%)
- UK spending data shows a 39.6% rise yoy (previous 20.3% yoy)
- State of emergency in the US due to a pipeline cyber attack
- Australian business confidence 26 vs. 17 previous
- Historic NFP disappointment: 266K instead of 990K
The Next Main Risk Events
- USD – Core Retail Sales m/m
- USD – Retail Sales m/m
- USD – Industrial Production m/m
- USD – Prelim UoM Consumer Sentiment
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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