Dark clouds gathering
View from the Trading Desk
In contrast to recent weeks, this one has started on an exciting, yet worrying, note. US Dollar appreciation has continued as Federal Reserve interest rate speculation reaches a new fever pitch. In fact, we’re only seeing the first signs of pushback, with Federal Open Market Committee member Loretta Mester saying a 0.75% increase in the next meeting is unwarranted. That said, the market still expects more than 2.00% of hikes for the Federal Reserve by year-end, which contrasts sharply with other central banks.
On Friday, both Euro and Sterling suffered declines which continued this morning—even with Emmanuel Macron’s victory over the populist candidate, Marine Le Pen, in the French election. The prime reason for these currency moves appears to be asset-price driven. Equity markets on the week are as follows:
- The Hang Seng is down 7.50%
- The Shenzhen CSI is down 8.50%
- The FTSE 100 is down over 3.00%
- The Euro Stoxx 50 is down over 2.00%
- The S&P 500 is down 2.75%
- The Nasdaq is down nearly 4.00%
It’s a sea of red out there. Futures in this morning’s session pointed towards further weakness, while the ramping up of rate expectations has likely only made the bond rout steeper. Commodity price gains also suggest most consumers are in for more cost-of-living pain in the near future, but equities declines aren’t the cause, they’re a symptom of a decline in disposable incomes.
Bottom line: The cost-of-living drop in most developed markets is a worrying sign. While most businesses have been able to pass cost increases to consumers, the UK consumer is facing the largest decline in household disposable income in 66 years (Office for Budget Responsibility). UK Retails sales have declined by 1.30% m/m—probably due to the 9.00% y/y increase in the Retail Price Index—and consumer confidence is just off historic lows at -38; at the height of the financial crisis in July 2008, it was -39. It's no secret that consumption drives the market, which is why there could be more sell off to come.
The week ahead
Sterling weakened against most other G10 currencies last week amid growth concerns in the second quarter of 2022 and a potential slowdown in monetary policy tightening by the Bank of England. This has sent Cable into a steep sell-off, with the pair down 2.50% in the last week and trading at the lowest level since September 2020. BoE Governor Andrew Bailey has warned of the difficulties of managing inflation and the potential for a recession if the central bank tightens too much. However, senior policymaker Catherine Mann has been hesitant to support a pause in interest rate hikes when demand levels could continue to weaken.
- Public Sector Net Borrowing data for March will be released on Tuesday. Forecasts are for £14.2B print versus £12.3B in February.
- The Confederation of British Industry (CBI) will publish the latest Realised Sales for April on Wednesday. Current estimates suggest a reading of 12 versus the March figure of 9.
- The Nationwide House Price Index m/m for April is expected to post gains of 0.8%, which will mark nine months of consecutive gains.
The Euro is trading higher against the Aussie Dollar this morning following a sell-off in the commodity market as global growth concerns build. A hawkish Federal Reserve is keeping the lid on any EUR/USD gains, with the pair trading 60 basis points lower this morning. Over the weekend, Emmanuel Macron secured a second term as French President with 58.55% of the vote. The election saw the lowest turnout since 1969 at only 72%. European Union Diplomat Josep Borrell has highlighted that there’s no formal agreement on a potential ban on Russian energy imports. However, a decision could be made at the next EU summit as European countries scramble to obtain alternative energy supplies.
- Business confidence rose in Germany in April, with the ifo Business Climate index moving to 91.8 from 90.8 in March.
- The European Central Bank will publish its latest Economic Bulletin this Thursday at 9:00AM.
- German preliminary Gross Domestic Product q/q data for Q1 2022 will be released on Friday with expectations of a marginal gain of 0.2% versus -0.3% in Q4 2021.
- Eurozone flash Consumer Price Index and Core CPI y/y data for April are due at the end of the week, with respective readings of 7.5% and 3.1% forecast.
The Greenback has continued to strengthen today, with the US Dollar Index trading 0.50% higher and hitting a two year high as the Federal Reserve enters a blackout period before its next meeting on the 4th of May. A 50 basis-point interest rate hike is fully priced in for the meeting. Federal Reserve policymaker Loretta Mester pushed back on talks of a potential 75 basis-point hike, suggesting a more methodical, rather than overly aggressive, approach is needed. However, markets have priced in a 0.75% hike for the June and July meetings as front-loading of monetary tightening by the central bank looks more likely. US Treasury yields ticked lower this morning, and stock market futures are pointing lower across the board, with the S&P 500 down 1.00%.
- Durable and Core Durable Goods Orders m/m for March are the first pieces of data out of the US this week, and are forecast at 1.00% and 0.50%, respectively.
- The Conference Board (CB) Consumer Confidence Index looks set to rise to 108.50 in April from 107.2 in March.
- Projections for growth in the US economy in the first quarter of 2022 are currently at 1.00% compared to a 6.90% gain in Q4 2021, with the formal release of advance GDP q/q this Thursday.
- The Federal Reserve will be monitoring this week's release of the Core Personal Consumption Expenditures Price Index m/m, which is expected to rise another 30 basis points in March.
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