Markets Becalmed Ahead of US Data and Weekend

new time

  • The FX market is becalmed and the news stream is light 
  • The North American session features the data highlight of the week for the US with April CPI and retail sales due 
  • Germany holds the last state election this weekend ahead of the national election in September 
  • India reports April WPI, CPI and March IP; Colombia central bank releases its minutes

The dollar is mixed against the majors as the week winds down. The Aussie and yen are outperforming, while sterling and Stockie are underperforming. EM currencies are mixed. PHP and PLN are outperforming, while ZAR and TRY are underperforming. MSCI Asia Pacific was down 0.2%, with the Nikkei falling 0.4%. MSCI EM is down 0.1%, with Chinese markets rising 0.9%. Euro Stoxx 600 is flat near midday, while S&P futures are pointing to a lower open. The 10-year US yield is down 2 bp at 2.37%. Commodity prices are mixed, with oil down 0.2%, copper up 0.3%, and gold up 0.4%.

The foreign exchange market is becalmed, and the major currencies are little changed. The US dollar is mixed, but mostly a little lower.

Sterling is the weakest of the majors, off 0.3%, near $1.2850, having been rebuffed by offers in front of $1.30 several times. It has not recovered from the quarterly inflation report and Carney’s press conference. By conditioning the potential need for tightening to a smooth exit from the EU, the BOE’s message was taken as dovish. The December short-sterling futures contract fell five basis points yesterday and is consolidating the move today. The implied yield on the December 2018 contract fell three basis points yesterday and is off another two today. A break below $1.2830 would signal a test on the $1.2750 area. The technical tone of sterling is deteriorating and today sterling could finish below the 20-day moving average (~$1.2865) for the first time in a month.

The yen is the strongest of the majors, gaining about 0.2% against the greenback. The dollar lost a third of a percentage point against the dollar yesterday. This could be the first two-day dollar loss since April 11-12. Our work suggests it ought not to be surprising to learn that the US 10-year yield also pulled back yesterday and is trading a little heavier now. The yield peaked yesterday near 2.42% and is back near 2.37% now.

On the other hand, the Dollar Index is having its best week of the year, with around a one percent gain this week. The greenback advanced against all of the major currencies, seeing gains of one percent against the Swiss franc, euro, sterling, Swedish krona and New Zealand dollar. The Dollar Index had recorded lows for the year on Monday, in the initial response to the French election, but reversed high before the session was over. The key reversal saw follow-through buying that lifted the index from 98.50 to almost 99.90, which corresponds to the 50% retracement objective of the decline since April 10 high near 101.35. The 61.8% retracement is found at 100.25.

The news stream is light. It has been largely confined to Germany confirming its earlier April CPI estimate of 2.0% and the release of its first estimate of Q1 GDP at 0.6%, spot on expectations. Separately, but with the same little impact on the capital markets, the US and China have reached a limited trade agreement covering ten areas, which seem like mostly Chinese concessions on a range of products including natural gas, beef, and access for foreign credit card companies and rating agencies.

This is the first bilateral trade agreement struck by the Trump Administration. While it is unlikely to substantially change the trade imbalance, it is seen as constructive and positive. Note China also reported higher than expected new loans in April of CNY1.1 trln. This and the trade deal helped Chinese stocks post back-to-back gains to close out the week.

The North American session features the data highlight of the week for the US with April CPI and retail sales due. Ideas that the US economy is recovering from the unusually weak Q1 and that the Fed is still on track to lift rate next month requires evidence that the US consumer is returning after hibernating in Q1 and that the March decline in consumer prices was a fluke.

Retail sales are forecast to bounce back smartly after the 0.2% decline in March. The Bloomberg survey produced a median guesstimate of 0.6%. The components used for GDP calculations are expected to rise 0.4% after rise nearly 0.6% (0.59%) in March. Last year, this measure of core retail sales rose an average of 0.23% a month. Still, keep in mind that one cannot go directly from this measure of retail sales to personal consumption expenditures. Note that the core retail sales rose by an average of 0.23% in Q4 16 when the consumption in GDP rose 3.5% and rose 0.27% in Q1 17 when consumption in GDP rose 0.3%. Nevertheless, a robust retail sales report is seen as necessary to keep expectation intact.

US consumer prices fell in March by 0.3% on the headline and 0.1% at the core. April is expected to see a bounce back in prices with a 0.2% increase in both the headline and core levels. This is needed to keep the core rate at 2.0% year-over-year. The headline rate may still ease due to the base effect to 2.3% from 2.4%. With both reports, disappointment may take a heavier toll than positive upside surprises. Bloomberg continues to show that the market is implying that a June hike is a done deal (98.8% discounted). The CME and our own calculation is a bit lower (80%-83%) but still showing it mostly priced into the Fed funds futures strip.

The market refrained from pushing the euro into the gap created in response to the first round of the French presidential election. The top of the gap is near $1.0820. Yesterday’s low was about $1.0840. The euro has been confined to less than a quarter cent range today near the middle of yesterday’s range. Large option strikes may influence the price action. Between $1.0880 and $1.0900, there are about 1.3 bln euro strikes expiring today. Between $1.0830 and $1.0845, there are more than two bln euros of options expiring.

Germany holds the last state election this weekend ahead of the national election in September. Although the new SPD leader caused a short-term pop in the polls, Merkel’s CDU has bounced back. It is expected to do sufficiently well in the weekend contest in North Rhine-Westphalia to force a change in the current SPD-Green coalition. Watch for a recovery of the FDP, which could presage developments on the national stage. The FDP had been the CDU’s traditional coalition partner, but its demise in the early days of the European crisis led to grand coalitions, which no one particularly likes.

Option expiries in yen do not seem particularly relevant now (JPY113.90-JPY114.00 for $800 mln). Nor do they for sterling ($1.29 for GBP445 mln). However, the Australian dollar and Canadian dollars are near strikes. The $0.7400 in the Aussie houses an A$420 mln strike. There are options struck at CAD1.37 for $555 mln at may be in play.

India reports April WPI, CPI, and March IP. Price pressures are rising and the economy remains robust, so the RBI started a tightening cycle with a 25 bp hike at its April 6 meeting. Next meeting is June 7, and another 25 bp hike seems likely.

Colombia central bank releases its minutes. At that policy meeting, the bank surprised markets with a 50 bp cut to 6.5%. As such, minutes will be studied for hints about the next move. April CPI was reported late Friday at 4.66% y/y, slightly higher than expected. Still, inflation is moving closer to the 2-4% target range. Next policy meeting is May 26, and another 50 bp cut seems likely then.