This week’s inflation and labor data releases put the spotlight back on monetary policy trends and their impact on economic growth.
Unfortunately for risk assets, this week’s data releases pointed to a prolonged period of high interest rates even amidst signs of weaker economic activity and only marginal inflation deceleration.
Safe-haven assets like CHF gained ground while “riskier” bets like Bitcoin, crude oil, NZD, and CAD saw intraweek downtrends.
Notable News & Economic Updates:
Chinese economy grew by 4.5% quarter-over-year in Q2 vs. estimated 4.0% expansion and previous 2.9% growth figure, buoyed by easing of COVID-19 restrictions
Reserve Bank of Australia meeting minutes revealed that policymakers considered hiking rates in April
Canada CPI for March: +0.5% m/m (+0.3% m/m forecast) vs. +0.4% m/m previous; +4.3% y/y vs. 5.2% y/y in February
U.K.’s inflation surprises to the upside, CPI was up by 10.1% y/y in March vs. 9.8% expected and 10.4% in February, as households continue to deal with high food and energy bills.
BTC/USD fails to sustainably break above the $30,000 mark
New Zealand Q2 CPI slumped from 1.4% to 1.2% q/q versus projected increase to 1.5%, dampening RBNZ tightening hopes as energy prices tumbled
ECB Meeting Minutes showed a majority of the members favored the 50 bps interest rate hike in March despite global banking sector fears
Flash Global PMIs showed further weakness in manufacturing activity while the services sector strengthens:
- S&P Global U.S. Manufacturing PMI for April: 50.4 vs. 49.2 previous; Services Business Activity Index at 53.7 vs. 52.6 previous
- HCOB Flash Eurozone manufacturing PMI for April: 45.5 vs. 47.3 previous: Services PMI at 56.6 vs. 55.0 previous
- U.K. Flash manufacturing PMI for April: 46.6 vs. 47.9 previous; services PMI improves to 54.9 vs. 52.9
Notable Fed speak this week:
- Federal Reserve Bank of St. Louis President Bullard (non-voting member) doesn’t see recession in next six months; makes argument for 50 bps hike to 5.5% to 5.75% range
- On Tuesday, Federal Reserve Bank of Atlanta President Bostic said he would like to see one more rate hike before pausing and holding them above 5% for “quite some time.”
- Fed official Williams: Inflation is still running too high, so Fed needs to act to lower prices and would likely take two years to reach 2% target
Intermarket Weekly Recap
Dollar, Gold, S&P 500, Oil, U.S. 10-yr Yield, Bitcoin Overlay 1-Hour by TradingView
It was a slow start for the broad markets on Monday, at least until assets took their cues from a strong U.S. Empire State manufacturing release during the morning U.S. session. U.S. bond yields shot up and the dollar gained pips against fellow safe-havens JPY and CHF, likely support the Fed narrative of keeping rates higher for longer.
Dollar strength also didn’t do Bitcoin (BTC/USD) and crude oil bulls any favors as they saw sharp intraday downswings after getting rejected at key technical levels.
The dollar pulled back and bowed down to risk-taking on Tuesday after China’s GDP came in better than expected. The RBA’s meeting minutes also showed that members seriously considered a rate hike (instead of a pause) earlier this month, implying that the central bank can be convinced out of its rate hike pause bias.
Bitcoin regained the $30,000 level, Asian and European equities tracked Wall Street’s gains, and gold prices made their way back up to $2,000.
Meanwhile, GBP and CAD saw intraday trends that reflected their diverging monetary policy expectations, influenced on the session by fresh economic updates from the U.K. and Canada.
A stronger-than-expected U.K. jobs report fanned BOE rate hike speculations and allowed GBP to remain its near its intraday highs after some profit-taking. CAD, on the other hand, easily returned to its intraweek downtrend after a soft Canadian CPI report supported the idea of rate hike pause.
The British pound got an extra boost on Wednesday after the U.K. surprised with another double-digit inflation in March. Hawkish BOE expectations bumped GBP to new intraweek highs against its major counterparts.
And then everything changed when the fire nation attacked. And by “fire nation” I mean recession fears.
See, Canada and the U.K.’s (still) high inflation got more traders believing that major central banks will keep their interest rates high for longer. Not good when some leading indicators already show weakening economic activity.
Concerns over a sticky inflation, more central bank tightening, and recession for some major economies brought on risk aversion.
Asian and European equities closed in the red, bond yields tipped over, oil extended its losses, and safe-haven gold revisited the $2,000 mark. BTC/USD even said goodbye to the $30,000 levels!
The risk aversion train kept chugging along on Thursday as recession fears gained momentum right from the Asia open. And it was during the U.S. session where we saw higher-than-expected U.S. weekly jobless claims, weak housing data, and a notable miss in the Philly Fed manufacturing index, supporting the idea of rising recession risks for the world’s largest economy.
It didn’t help either that Fed members didn’t seem too concerned by the recession risks. For example, Cleveland Fed President Mester said that she expects monetary policy to move “further into restrictive territory” and for rates to stay above 5% “for some time.” Meanwhile, Dallas Fed President Lori Logan a rate hike pause isn’t a guarantee that the Fed won’t hike its rates again in the near future.
All put together, this likely prompted traders to reduce pivot bets on the session, characterized by a fall in U.S. equities (which took an extra KAH-POW from TSLA’s disappointing margin reports), U.S. Treasury yields and oil.
Friday’s Asia session started off slow as traders were likely waiting to see the latest Flash business survey updates (a leading economic indicator) from around the globe. And it didn’t take too long for volatility to pick up as the latest PMI updates continued to show weakening manufacturing sector sentiment, while services sector sentiment reached higher levels of optimism.
The surveys also signaled that prices continue to rise, albeit at slower rates, which throws a little bit of cold water on the idea that interest rate relief may be just around the corner.
Based on the broad fall in risk assets after the European and U.K. PMI’s, it looks like traders are focusing on the services sector component of the PMI reports, and that they signal that employment and prices components are still too strong for central banks to start talking monetary policy/interest rate pivot at the moment.
The flash U.S. PMI data shook sentiment up a bit as it slightly deviated from the rest of the globe. Both manufacturing and services components signaled growing optimism, which seems to have prompted traders to reduce some risk-off bets as they rolled into the weekend.
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