Outlook: The data plate is skimpy today, just jobless claims and PPI. Someone is sure to try to make hay out of jobless claims. PPI is going to undergo the same scrutiny as CPI but we already know its input materials, especially energy and strange stuff like rare earths and specialty ingredients (fertilizer), driving prices. The market is expecting a dip in PPI but even if we get it, it won’t be believed–and rightly so. After PPI, the important data will be in. But instead of any upcoming data, what we need to care about is sentiment toward risk, and that is in the process of going full withdrawn-head turtle. As Bloomberg editor Joe Wiesenthal puts it, “Now the Fed is raising rates, and the meme stuff and crypto and growth stuff is getting crushed the hardest. But the question is why? What's the big deal if the Fed Funds rate goes from 0% to 0.8% or whatever? How does that change the value of Terra or a digital ape? Of course the Fed Funds rate alone actually doesn't matter. What matters is that the big risk-taking cycle is doing a 180, and the rate hikes while important are only a part of it.” The current withdrawal from risk-taking can be blamed on youth and inexperience–a whole generation of traders in every market who don’t understand inflation. They have been disrespectful of institutions, especially the Fed, without understanding their true importance. They flail around confusing personal belief (crypto is a viable alternative to sovereign money) with fairy tales. They got snookered on the crypto fable and now their feelings are hurt, like the 4 year-old that figures out fairies don’t really exist and didn’t put that quarter under the pillow. The whole thing has a Peter Pan quality. It’s not the crypto or even the S&P that should be scaring people, it’s China and its critical place in the supply chain for all those specialty metals and other goods. Those who trade the Australian dollar see it more clearly than anyone else. We always joke that the AUD is the canary in the coal mine for growth. When the AUD is falling as dramatically as we are seeing, we need to look to China. Remember that old phrase “China sneezes and the rest of the world catches cold?” We are there. Another long-standing quip is that if anyone can snatch defeat from the jaws of victory, it’s Britain. Sure enough, the entire Brexit saga has been mismanaged from the beginning and no government, even the pro-Brexit Boris, has shown the slightest whiff of managerial competence. Everyone likes Sunak because he comes across as competent, but it’s hard to see how he can surmount the latest data batch, which is awful right across the board. Then there’s Europe. We think EBC chief Lagarde is joining the hawks, but realistically, she is still on the fence. That’s because the universal forecast is for recession later this year and in 2023, and she understandable doesn’t want to have to reverse a “premature” hike. In an interview with the FT, CIO Mortier of Europe’s largest asset manager Amundi, predicts the euro will fall to parity with the US dollar this year. It’s not just the threat of recession, but also prioritizing keeping the cap on government borrowing costs that itself helps preserve the integrity of the eurozoine. “Such a decision would leave the eurozone central bank even further behind the US Federal Reserve in fighting inflation and knock the euro to $1 for the first time since 2002…” Exactly as we have been saying for a couple of weeks, Mortier points out that if the ECB raises rates twice in 25 bp tranches from the record low of =0.50, it’s just ack to zero. The market sees three hikes this year and a rise to 1.5% by mid-2024–but that’s too late in contrast to the Fed’s aggressiveness. “We think they’ll get to zero on the [ECB] deposit rate and that’s it,” Mortier said. “In the meantime the Fed will have done much more. If the ECB were focused only on inflation, then 1.5 per cent would be very likely. But it’s not.” Here’s the kicker: “Losing sight of the euro-dollar exchange rate is a big mistake when your inflation is mainly coming from imported goods,” Mortier said. The safe-haven flow to the dollar will ebb and flow, with a retreat inevitable sometime soon as some folks regain their balance. It’s a little funny that the peculiar conduct of the dollar/yen will reverse, too. Absolutely nobosdy can explain why the dollar/yen is on the backfoot and the yen rising so strongly. A safe-haven flow, maybe. Acknowledgement that the economy is actually doing better than expected. Well, nobody knows–but we imagine it can’t last, not when...

EUR/USD extended its sideways consolidative price moves in a two-week-old trading range. Concerns about the economic fallout from the Ukraine crisis acted as a headwind for the euro. Aggressive Fed rate hike bets continued underpinning the USD and contributed to cap gains. The technical set-up favours bearish traders as the focus remains glued to the US CPI report. The EUR/USD pair continued with its struggle to gain meaningful traction and has been oscillating in a range over the past two weeks. Spot prices remained well within striking distance of a more than five-year low touched at the end of the previous month amid lingering recession fears. Investors remain concerned that the European economy will suffer the most from the Ukraine crisis, which, in turn, acted as a headwind for the shared currency. Apart from this, the underlying strong bullish sentiment surrounding the US dollar exerted some downward pressure on the major during the latter part of trading action on Tuesday. The USD stood tall near a two-decade high and remained supported by expectations that the Fed would take more drastic action to bring inflation under control. In fact, the markets are still pricing in a further 200 bps rate hike for the rest of 2022 amid tight global supply chains resulting from China's zero-covid policy and the war in Ukraine. Hence, the focus will remain on the release of the US CPI report, due later during the early North American session this Wednesday. The data could indicate how aggressively the Fed would tighten its monetary policy, which, in turn, would influence the USD and provide a fresh directional impetus to the major. In the meantime, signs of stability in the financial markets and the recent sharp pullback in the US Treasury bond yields held back the USD bulls from placing fresh bets. This helped the EUR/USD pair to hold steady above the 1.0500 psychological mark through the Asian session on Wednesday. Market participants now look forward to the final German CPI figures for some impetus. Apart from this, traders will take cues from European Central Bank President Christine Lagarde's remarks at a conference in Ljubljana. This could produce some short-term trading opportunities ahead of the key data risk. Technical outlook From a technical perspective, the recent range-bound price action constitutes the formation of a rectangle on short-term charts. Against the backdrop of a sharp fall witnessed over the past three months or so, this could still be categorized as a bearish consolidation phase. Moreover, technical indicators on the daily chart are holding deep in the bearish territory and have also moved away from the oversold zone. The technical set-up seems tilted firmly in favour of bearish traders. That said, it will be prudent to wait for sustained weakness below the 1.0500 psychological mark, or the lower end of the trading range, before positioning for any further slide. Spot prices could accelerate the fall towards intermediate support near the 1.0450 area en route to the 1.0400 mark and 2017 low, around the 1.0340 region. On the flip side, immediate resistance is pegged just ahead of the 1.0600 round figure, or the weekly top. This is followed by the last week's swing high, around the 1.0630-1.0640 region, which if cleared decisively would suggest that the pair has formed a near-term bottom and trigger an aggressive short-covering move. Spot prices might then aim to reclaim the 1.0700 round-figure mark. The recovery momentum could further get extended, though it runs the risk of fizzling out near the previous YTD low, around the 1.0760-1.0755 area.

Annual CPI in the US is forecast to decline to 8.1% in April.  Underlying factors driving inflation higher remain in place.  A soft CPI print could cause the dollar to face temporary selling pressure. Annual inflation in the US, as measured by the Consumer Price Index (CPI), climbed to its highest level in four decades at 8.5% in March. On a yearly basis, CPI is forecast to decline to 8.1% in April. Core CPI, which excludes volatile food and energy prices, is expected to fall to 6% from 6.5% in the same period. US Consumer Price Index (YoY) Has inflation peaked in the US? The Prices Paid component of the ISM Manufacturing PMI declined to 84.6 in April from 87.1, showing that input prices in the manufacturing sector continued to rise at a softer pace than they did in March. On the other hand, the ISM Services PMI report revealed that the Prices Paid sub-index climbed to a new all-time high of 84. from 83.8. Moreover, crude oil prices rose more than 3% in April. Just by looking at these figures, it’s difficult to conclude that the 8.5% CPI inflation recorded in March was the peak. Additionally, coronavirus-related restriction measures and lockdowns in China remained in place throughout the month, suggesting that supply-chain challenges are likely to continue to drive prices higher. In the meantime, consumer demand remains healthy in the US. The US Bureau of Economic Analysis’ latest publication revealed a 1.1% increase in consumer spending in March, compared to the market expectation of 0.7%. The strong consumer demand combined with higher input and energy prices in the private sector indicates that inflationary pressures are likely to remain high in the next couple of months. Assessing the S&P Global’s April PMI survey for the US, “many businesses continue to report a tailwind of pent up demand from the pandemic but companies are also facing mounting challenges from rising inflation and the cost of living squeeze, as well as persistent supply chain delays and labor constraints,” said Chris Williamson, Chief Business Economist at S&P Global. Market implications Even if CPI prints were to point to a slowdown in inflation in April, it will not be enough to convince investors that we are at the beginning of a downtrend. The protracted Russia-Ukraine conflict and its impact on crude oil prices, China’s zero-Covid policy and robust consumer activity all point to high inflation lasting for longer.  Nevertheless, the initial reaction to a soft CPI reading should cause the benchmark 10-year US Treasury bond yield to edge lower and force the greenback to weaken against its rivals with market participants reassessing how aggressively the Fed will continue to tighten its policy moving forward. Atlanta Fed President Raphael Bostic said on Monday that he is going to stay open to the possibility that inflation will be approaching policy target at a faster pace than projected. “If so, we would not need to do as much,” Bostic added. Similarly, Minneapolis Fed President Neel Kashkari told CNBC that he was on “team transitory” and noted that he was confident that the Fed could get inflation back down to the 2% target. As mentioned above, however, factors that have been driving inflation higher remain in place and the Fed is unlikely to overreact to a single data point. Hence, a dollar sell-off on a weaker-than-expected CPI print should remain short-lived and provide an opportunity for investors to long the greenback at a lower cost. On the flip side, a surprise increase in annual CPI should trigger another leg higher in the US Dollar Index and revive speculations about a 75 basis points rate hike in June. According to the CME Group FedWatch Tool, markets are pricing a 13.5% probability of such a move at the next policy meeting.

EUR/USD - 1.0562 Although euro's retreat from last Thursday's 8-day high of 1.0641 suggests recovery from April's fresh 5-year bottom at 1.0472 has possibly ended, Friday's rebound from 1.0483 to 1.0600 in New York and yesterday's fall to 1.0496 at European open suggest further volatile swings above said support would continue before prospect of another fall, below 1.0483 would head towards 1.0472, then 1.0405/10. On the upside, only a daily close above 1.0600 would risk re-test of 1.0641, break, 1.0698/00 later. Data to be released on Tuesday New Zealand retail sales, NAB business conditions, NAB business confidence. U.K. BRC retail sales, Japan all household spending, Australia retail sales, Italy industrial output, Germany ZEW economic sentiment, ZEW economic expectation. Canada leading index and U.S. redbook.

EUR/USD - 1.0562 Although euro's retreat from last Thursday's 8-day high of 1.0641 suggests recovery from April's fresh 5-year bottom at 1.0472 has possibly ended, Friday's rebound from 1.0483 to 1.0600 in New York and yesterday's fall to 1.0496 at European open suggest further volatile swings above said support would continue before prospect of another fall, below 1.0483 would head towards 1.0472, then 1.0405/10. On the upside, only a daily close above 1.0600 would risk re-test of 1.0641, break, 1.0698/00 later. Data to be released on Tuesday New Zealand retail sales, NAB business conditions, NAB business confidence. U.K. BRC retail sales, Japan all household spending, Australia retail sales, Italy industrial output, Germany ZEW economic sentiment, ZEW economic expectation. Canada leading index and U.S. redbook.

Outlook: Payrolls were 428,000 and the unemployment rate, 3.6%. This nearly matches the original March print of 431,000 and beats most forecasts. Some folks are still struggling to disambiguate the Fed’s comments, or rather Mr. Powell’s. Fed-watcher Ip at the WSJ has a spot-on summary: “Employment is the best contemporaneous indicator of the business cycle and it shows no sign of a slowdown. Indeed, job growth remains well above its long-run sustainable pace, suggesting the labor market is not just tight, but too tight. “Moreover, recent gains in labor supply evaporated as the labor-force participation rate ticked down to 62.2% from 62.4%, although for people aged 25 to 54, it only edged down to 82.4% from 82.5%, not far from its pre-pandemic level.” The Journal is kind enough to note in the chart footnote that 2022 data is not really comparable with earlier data. But in the end, the main point we should take away is that the economy is nowhere close to stagnation or recession, if we consider the jobs data has predictive value. We suspect jobs and employment data to be inaccurate, to be polite, and while heed it we must, we like capital investment better. Broadly, capital investment can encompass consumer durables and things like housing and autos, while business capital spending is proxy for futures GDP. Last week the Atlanta Fed GDPNow forecast for Q2 was raised from 1.6% to 2.2% on the rise in auto sales that contributed to real personal consumption expenditures growth from 3.6% to 4.4%. We get another forecast today. As for business capital spending, Capex itself is down a little, although annual rates after a pandemic shutdown are not the best data. The charts are from the Yardeni package and, as always, intriguing. Nondefense capital goods ex-aircraft and business owner expansion plans are definitely encouraging and suggest Q2 GDP will NOT be another negative and thus, technically a recession. As for the equity markets, it’s not clear that the bubble has burst. It may be leaking, but we can’t say it has burst. The doom-and-gloom crowd are out in force, which contributes to additional losses, but the cycle gang thinks there is a chance the bottom is near. One reason equities can come back is that after a global fall of about 15%, traders will realize that cash and bonds are still delivering a low rate of return and it’s negative in real terms, while equities have the potential to deliver meaningful real return. It’s the highly speculative high0tech sector that is suffering the most and leading the pack down, but some companies are getting excellent growth (like the oil companies Buffett bought last week). The wall of worry today includes China’s zero-Covid policy and lockdowns, crippled supply chains, high inflation, the Russian invasion of Ukraine and appalling conduct there, and the risk of slowing growth everywhere with recession in some places (like Europe). From a purely risk sentiment perspective, the dollar still wins hands down. Strangely, the risk this week is that US inflation starts to abate. We get wholesale sales and inventories today, with accompanying price data, and CPI on Wednesday. According to Trading Economics, the consensus forecast for CPI is 8.1% from 8.5% in March, with its own forecast at 8.2%. Is the top in or almost in? A drop in US inflation and/or inflation expectations is not necessarily anti-dollar, but it might cause some reconfiguration. Tidbit: In a section titled “Left Behind,” The Economist decries the loss of exports by small businesses. See the chart. We already knew Brexit would harm the UK economy and we are getting some serious data to measure it. This double chart show the UK is also getting more inflation, in part because of tariffs. Tidbit: You don’t have to be a screaming pinko to have some concern for income inequality, which can have lasting effects on trends in consumer spending, housing, indebtedness, and more. Here is a chart from the respected Pew Research Center. Notice the crossover around the same time as the 2007-08 financial crisis. The article points out that who did the best over the past 50 years are Asians and white men, and anyone with a college degree. Studies like this make you wish you knew more that demographics. As we see in Japan, with a near total ban on immigration and a contracting and ageing population, demographics can have a huge effect on the economy and financial markets.  Tidbit: On Friday, Euronews had a spendid video of Sweden building up its island of Gotland, which is halfway to Russia in the Baltic Sea. It has been repeatedly invaded by everybody since the early Middle Ages–Denmark, Russia–but has been disarmed since WW II. Now the Swedes are arming it again as they also contemplate joining Nato. Neighbor Norway...