Markets US equities were weaker Wednesday, S&P down 0.7%. US10yr yields up 6bps to 2.91%. Bunds up 6bps as well, to 1.18%.  Equities are trading lower again as the employment piece of ISM manufacturing contracted and the prices paid component remains elevated. If investors did not take kindly to Tuesday's higher than expected inflation print in the Eurozone, they were mortified by the sticky US inflation print as the devil is always in the ISM data details. Higher than expected inflation, good new orders and mixed employment data are the perfect cocktails for the market to price in a higher US terminal rate scenario.  Anything that keeps the Fed on a more aggressive rate-hiking path will pull the rug from under any semblance of sure-footed equity markets.  With the FED hikes back on the boil. I expect the Chinese markets to continue shedding recent gains, particularly in the tech sector.   Oil Traders are debating if the likes of Saudi Arabia are becoming worried about demand destruction or, at least, want to reset relations with the US by opening up the doors to swing producers to pump more oil. OPEC and non-OPEC members are meeting later today in a discussion framed by Russia missing its production quota for several months. An OPEC meeting that drives oil prices higher would likely elicit an economic consequences trade, especially around the global end-demand outlook; hence I think the bounce would be capped in this risk-off environment. HOWEVER, an OPEC supply-driven lower oil price reaction would be a godsend to international risk markets, especially in Europe. So, the million-dollar question is, can OPEC even offset lost Russian production.  While several OPEC+ members have struggled to increase production in recent months, Saudi production has moved steadily upwards – from ~8.1mb/d in March 2021 to 10.3mb/d in April this year, according to OPEC's latest monthly report, but remains well below total theoretical capacity. Similarly, Kuwait, Iraq and the UAE have managed to raise production and are below theoretical capacity.  Given that OPEC tends to respond at a snail's pace to market developments, there was a lot of skepticism in the oil price prices overnight, suggesting the market is still erring in the base case camp. But the potential for a shift in strategy and quotas does bring a new downside risk for oil that has not received much focus until now. But hold on to your hats; it could be a wild ride on the oil market roller coaster today, especially if OPEC signals more barrels are on the way.

Outlook: This is a big data day, starting with the manufacturing PMI, the ISM version, JOLTS, the BoC and the Beige Book, among other events. Earlier we will have gotten some PMIs from Europe. The overall sense is that economies are doing better than expected or at least that catastrophe is being postponed. This is important because central bankers (and politicians) are making a big stink about inflation and in the background, economic conduct goes on as normally as it can. The one giant problem today is supply chains, getting the blame for inflation in energy, food, and Stuff. But now Covid is mostly behind us, supply chain problems from that source “should” be fading. It’s taking longer than some would have thought. The supply chain is not a rubber band. But it’s not a broken metal chain, either. You can still buy a new refrigerator or water purifier or t-shirts from Asia or a notebook PC or anything else, from Amazon, with free one-day delivery. We recently did all those things. With all the wailing and gnashing of teeth about the supply chain, for the average US consumer, it’s a non-event. Economically it’s a big deal (chips, autos) but not to the average Joe. This matters because US consumer sentiment is central to a big chunk of the upcoming global data. Supply issues arising from the Chinese lockdown may be easing soon, too, but honestly, no one knows. That leaves supply issues arising from the Russian invasion of Ukraine, and those are intractable. We learned more about fertilizer than we ever wanted to know. Bottom line, markets are coming to take supply issues in stride and while not exactly brushing them off, accepting that central banks can’t do anything much about supply-chain drive inflation but they are going to take action anyway. That makes the upcoming rate hikes (in Canada, for example) illogical. If a policy cannot affect the variable it targets, why use it? Ah, because government needs to be shown it’s doing something, even if it’s useless. Oh, okay, we have confidence that doing something, even if it’s the wrong something, is right. Got that? The only real problem is that policy has lags in taking effect and by the time supply chains get repaired, totally independently of monetary policy, central banks may have raised rates more than they should. Overshooting, and you never know for 3-9 months that’s what you have. This is pretty silly but it’s how things work. To some extent, we see traders retreating from the dollar because even though the relative real differential is being targeted to be the highest, it might be excessive, while the others are catching up. Let’s bet on those instead of the leader. Japan is an example. The economy is not as bad off as feared only a month ago. There is practically a zero chance of a rate hike or even a hawkish tone, and clearly the real return divergence can only grow–so why was the yen in a favored position (until today)? Relative real returns matter. They are not fully determinative but the top factor in FX pricing, followed closely by policy credibility and economic robustness. The dollar wins on all fronts. It’s fun to try to figure out why the dollar retreats sometimes in this crystal-clear situation, but in the end, those reasons have to do with crowd psychology and not economics or even history. Stay the course. Do Not Deduce Dept: Savings fell to the lowest since 2008 as consumers kept on spending. This is mildly interesting–it implies confidence in the future. But that’s about all you can deduce. You shouldn’t heed anguished cries that the consumer will stop dead in his tracks because he ran out of money. After all, this is America. We have credit cards. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

The USD made a solid comeback on Tuesday and prompted fresh selling around EUR/USD. Bulls seemed rather unaffected by hotter-than-expected Eurozone consumer inflation data. Investors now eye ECB Lagarde's speech for some trading impetus ahead of the US ISM PMI. The EUR/USD pair witnessed heavy selling on Tuesday and snapped a three-day winning streak to over a one-month high, around the 1.0785 region touched the previous day. The US dollar made a solid comeback amid a sharp spike in the US Treasury bond yields, bolstered by hawkish comments from Fed Governor Christopher Waller. This, in turn, was seen as a key factor that exerted downward pressure on the major. Speaking at an event in Frankfurt on Monday, Waller backed the case for a 50 bps rate hike for several meetings until inflation eases back toward the central bank’s goal. Apart from this, a generally weaker tone around the equity markets further benefitted the safe-haven greenback. The market sentiment remains fragile amid doubts that central banks can hike interest rates to curb inflation without impacting economic growth. This, along with concerns that the global supply chain disruption would push consumer prices even higher, tempered investors' appetite for riskier assets. The fears were further fueled by hot Eurozone inflation figures, which showed that the annualized Harmonised Index of Consumer Prices (HICP) hit another record high level of 8.1% in May. The data reaffirmed market bets for more aggressive rate hikes by the European Central Bank, though failed to impress bullish traders or ease the intraday bearish pressure surrounding the EUR/USD pair. Spot prices, however, managed to find some support near the 1.0680-1.0675 region and bounced over 50 pips from the daily low. The overnight late recovery lacked any follow-through buying amid sustained USD buying, which seemed unaffected by a goodish recovery in the US equity futures. Market participants now look forward to ECB President Christine Lagarde's scheduled speech for some impetus. Later during the early North American session, traders will take cues from the US economic data - ISM Manufacturing PMI and JOLTS Job Openings. Apart from this, the US bond yields and the broader market risk sentiment will influence the USD and produce some trading opportunities around the EUR/USD pair. Technical Outlook From a technical perspective, the overnight downfall found a decent support near the 38.2% Fibonacci retracement level of the 1.1185-1.0350 slide. That said, the emergence of fresh selling on Wednesday favours bearish traders. It, however, will be prudent to wait for some follow-through selling below the aforementioned support, around the 1.0680-1.0675 region, before positioning for any further decline. The EUR/USD pair might then accelerate the fall towards the 1.0625 intermediate support en-route the 1.0600 round-figure mark. The downward trajectory could further get extended towards the 23.6% Fibo. level, around mid-1.0500s. On the flip side, the 1.0775-1.0785 region, coinciding with the 50% Fibo. level, might continue to act as strong resistance. Sustained strength beyond would be seen as a fresh trigger for bullish traders, which, in turn, should allow the EUR/USD pair to surpass the 1.0800 mark and test the next relevant hurdle near the mid-1.0800s. Bulls might eventually lift spot prices to the 61.8% Fibo. level, around the 1.0880 zone, which if cleared decisively will set the stage for an extension of the recent recovery move from the YTD low.

Outlook: The calendar is stuffed full this week, with consumer sentiment a possible star in the US today–but remember that sentiment has been falling back while consumer spending remained robust, even at the expense of savings. And not to sound like a broken record, but that looming recession so many predict is still not in evidence. Last week the Atlanta Fed GDPNow came in at 1.9% for Q2. We get another one tomorrow. And the US is not alone. We get GDP from Australia and Canada this week, likely more robust than earlier feared and in the case of Canada, a cattle prod for two more fat (50 bp) hikes. The BoC remarks tomorrow could be interesting. The point: it ain’t necessarily so that relentless hikes and hawkishness–beating inflation at all costs–will crash economic activity and market sentiment at the same time. We are accustomed to the two things going together. Central bank hikes lead inexorably to the economy contracting and equities falling back, too. There is no law that says you can’t have hikes and hawkishness with the economy (meaning the consumer) fighting back with the same and nearly the same degree of activity, and the stock market seeing those higher earnings instead of seeing only economic contraction. This implies inflation lasting longer, and because capital spending will not necessarily be part of that push-back, recession can still be out there in the future–just not now. For a clutch of reasons–Shanghai re-opening, the amazing foreign policy unity in Europe, acceptance of the Fed’s hawkishness, the S&P’s retreat from bear market territory–risk sentiment is swinging its needle from panic/fear to “oh, okay.” This is not the same thing as the embrace of risk, but it’s a hole in the wall of despair. Case in point: commodities are diverging from one another instead of acting like a single massive monster. It would be rare for a market about to get punched in the jaw with the end of QE–technically, tomorrow–and massive rate hikes to keep going on the same path. But not impossible. Can it last? Maybe not. That’s a version of the soft landing and it has low probability. In FX, when in doubt about the dollar, look to the Other Dollars and also to the crossrates. If we are right about sentiment swinging to a less negative mode, the Other Dollars should be about to shine. Foreign Affairs: A TV show last week polled viewers about whether Kissinger is right that Ukraine will have to give up some territory to Russia to make Russia go away. A whopping 90%+ said “Go to hell, Henry.” So did the Polish and Ukrainian top officials, who spoke eloquently about the principles they embrace. Nobody has forgotten Kissinger’s betrayal of the Kurds. It’s not only Americans in solidarity with Ukraine–Europe’s support for Ukraine is amazing and wonderful. Putin has done what Merkel could not. It may be foolish economically to ban Russian oil in any part, but never mind–the point is not the oil or the economy. It’s solidarity. How rare for a political principle to win. Musings on the S&P: Before our emergency hiatus, we wrote that the reason we may avoid a reversal in the stock market is a stubborn refusal to enter bear territory and stay there. That turned out to be correct, but recession fear still stalks the land. On the daily chart, we easily see the downward sloping channel, happily getting a robust pushback at the moment but likely ending at the Bollinger band top (4251.56) or the channel top itself (4376.07). The Average True Range breakout indicator lies in-between at 4354.30. Notice the whole shooting match is below the cloud, a sell signal. There is only one question: what is the probability of the current rising wave continuing to break out above all these resistance levels to deliver a reversal? In FX, the answer would depend on current events, economic releases, central bank statements, etc.. We just saw it happen in dollar/yen. In the S&P, the probability is nearly zero. See the weekly chart. The dark green line is the 200-day/40 week, a meaningless number over long periods of time but still a solid sell signal to many. If enough people believe, they cause it to happen. The Fibonacci retracement lines tell the same story. The probability is high that the S&P falls to the 50% retracement (3532.96) or the 62% retracement (3212.63). Again, Fib numbers and the secrets of the universe in some magic set of numbers is nonsense, but becomes a self-fulfilling prophecy all too often. All these indicators are standard, conventional indicators that come packaged with every charting software. You can add fancier indicators but will get the same outcome–the probability of a deep dive is very, very high. The point is that is...

The Australian economy is seen growing by 0.7% in the first quarter of 2022. RBA says the Australian economy is resilient, remains upbeat on the outlook. AUD/USD has limited upside potential even on an Australian GDP beat. AUD/USD is testing bearish commitments near monthly highs in the run-up to the first quarter Australian GDP release due this Wednesday at 0130 GMT. The South Pacific Island nation’s economic activity is likely to be hit at the beginning of the year, courtesy of the Omicron covid variant outbreak and severe flooding in New South Wales (NSW) and Queensland. The Australian economy is seen expanding by 0.7% in the three months to March, on a quarterly basis, after rebounding by 3.4% in the final quarter of 2021. Meanwhile, the country’s GDP rate is seen dropping to 3.0% YoY in the reported period vs. a 4.2% sharp expansion witnessed in the previous quarter. Australia's economy staged a solid turnaround last quarter as the country emerged from its most stringent pandemic lockdowns. Q1 GDP unlikely to alter RBA’s hawkish stance Despite the impact of the further disruptions, accounting for a rocky start to the year, the Australian economic performance for the quarter ending March is unlikely to be viewed as how the economy could perform for the entire year. The economic damage due to the severe floods and the Omicron wave is likely to be a one-off event. This view is also endorsed by the Reserve Bank of Australia (RBA), as cited in the updated forecasts in May’s Statement of Monetary Policy, “the Australian economy remains resilient and is expected to grow strongly this year. GDP is forecast to expand by 4¼ percent over 2022. Growth is expected to moderate thereafter, to 2 percent over 2023.” For the first quarter GDP outcome, there is little scope for an upside surprise, as Australia’s current account surplus shrank to A$7.5 billion ($5.38 billion), well short of the forecast of A$13.4 billion. Net exports are expected to subtract 1.7 percentage points from GDP in the first quarter. On the other hand, Australian government spending jumped 2.5% in the March quarter and will make a 0.7 percentage points contribution to economic growth in the quarter. However, the net impact is likely to remain a minus for the country’s national accounts. Even as Australia experiences a meager growth, it is unlikely to alter the RBA’s hawkish shift on the monetary policy stance. The country’s solid labor market, pent-up consumer demand and elevated household saving ratio continue to paint a rosy picture of the economy for this year. Markets are pricing in another 0.25% rate hike to 0.60% at the RBA's June policy meeting next week, followed by a string of hikes to bring the OCR to around 2.5% by the end of the year. The central delivered a hawkish rate hike of 25 basis points (bps) to 0.35% as it prioritized battling the inflation monster, which reached a two-decade high of 5.1% in the first quarter. Trading AUD/USD with Australia’s GDP report The recent downward correction in the US dollar from 20-year highs has helped AUD/USD hit the highest level in four weeks just above 0.7200. A dense cluster of healthy resistance levels aligns near the 0.7240 region, which could cap the renewed upside in the aussie if the Australian GDP print beats estimates. In case, the GDP rate disappoints or comes in line with expectations, the immediate support at 0.7130 could be tested. A big downside surprise could expose Friday’s low of 0.7084 Note that the aussie’s reaction to the Australian GDP report could be also impacted by the prevalent broader market sentiment and the US dollar price action. AUD/USD: Daily chart

EUR/USD - 1.0747 Euro's intra-day strong retreat in Asia on broad-based rebound in usd suggests recent corrective upmove from May's 5-year bottom at 1.0350 has possibly made a temporary top at yesterday's fresh 1-month peak at 1.0786 and further weakness to 1.0727/31 would be seen, below would head towards 1.0698, 1.0663 later. On the upside, only a daily close above 1.0786 would indicate aforesaid pullback over and risk one more rise towards 1.0807. Data to be released on Tuesday : New Zealand building permits, NBNA business outlook, NBNA own activity, Japan unemployment rate , industrial production, retail sales, consumer confidence, construction orders, Australia building permits, business inventories, current account, net exports contribution, China NBS manufacturing PMI, NBS non-manufacturing PMI. U.K. nationwide house price, Swiss exports, imports, trade balance, retail sales, GDP, France consumer spending, GDP, CPI, producer prices, Germany unemployment rate, unemployment change, Italy GDP, CPI, EU HICP, Canada GDP. U.S. monthly home price, Chicago PMI, consumer confidence and Dallas Fed manufacturing business index.