- Fed Chair Jerome Powell said in comments that pointed to an aggressive set of Fed actions ahead, that a half-point interest rate increase will be on the table when the Federal Reserve meets on May 3-4 to approve the next in what are expected to be a series of rate increases this year. Powell said that with inflation running roughly three times the Fed's 2% target, it is appropriate to be moving a little more quickly, adding that "Fifty basis points will be on the table for the May meeting." His comments appeared to pin down an expected rate path much steeper than projected at the Fed's March meeting. Powell acknowledged the Fed was walking a sensitive line between taming inflation and pushing the economy into a downturn. Until recently, the Fed had expected inflation to ease with some outside help, as the reopening of the economy from the pandemic allowed the flow of goods around the world to move back to normal. Instead, new lockdowns in China and the war in Ukraine have threatened a new round of bottlenecks, higher energy costs, and uncertainty. Powell said the Fed no longer expects any help but will count on tighter monetary policy to curb demand for goods and services, and prompt businesses to reduce the demand for workers in what he termed an "unsustainably hot" job market.
- The number of Americans filing new claims for unemployment benefits fell moderately last week, with initial claims for state unemployment benefits declined 2,000 to a seasonally adjusted 184,000 for the week ended April 16, suggesting that April was another month of strong job growth. The report from the Labor Department on Thursday also showed unemployment rolls shrinking to the lowest level in 52 years in the first week of April, reinforcing the tightening labor market conditions. An acute shortage of workers is keeping layoffs low, helping to fuel inflation, and forcing the Federal Reserve to adopt a restrictive monetary policy stance. Claims, which have dropped from a record high of 6.137 million in early April 2020, will be closely watched for signs of whether rising borrowing costs are curbing demand.
- IMF Managing Director Kristalina Georgieva said on Thursday that a prolonged slowdown in China would have substantial global spillovers but added that Beijing has room to adjust policy to provide support. Georgieva said China's actions to counter its economic slowdown are vital for the global recovery. At the same venue where Georgieva was speaking, the Boao Forum for Asia, China's President Xi Jinping said China's economy is resilient and that its long-term trend had not changed. The IMF on Tuesday cut its growth forecast for China this year to 4.4%, well below Beijing's target of around 5.5%, on the risks of widespread COVID-19 lockdowns and supply chain disruptions.
Today’s Economic Data and Events
10:00 GB Retail Sales (MoM) (Mar) Forecast -0.3%
11:30 EU German Manufacturing PMI (Apr) Forecast 54.5
12:30 GB Composite PMI (Apr) Forecast 59.7
12:30 GB Manufacturing PMI Forecast 55.2
12:30 GB Services PMI Forecast 62.6
16:30 CA Core Retail Sales (MoM) (Feb) Forecast 0.1%
17:00 EU ECB President Lagarde Speaks
18:30 GB BoE Gov Bailey Speaks
Fixed Income
- US Treasury yields punched higher as Fed chair Jerome Powell firmed up expectations for a 50bps hike at the May FOMC and potentially another one in June. Yields on the 2yr UST rose almost 11bps to close out at 2.6822% while the 10yr added 8bps to close at 2.9095%.
- European bond markets closed lower as expectations of the ECB hiking rates aggressively are also increasing. ECB president Christine Lagarde noted overnight that markets shouldn’t be focused on a specific time frame for hiking rates in the eurozone but rather the bank will let the dataflow determine when to begin normalizing policy. Bund yields rose 9bps to close at 0.943% while in the UK, the 10yr gilt rose above 2% for the first time since 2015.
- Moody’s affirmed their ‘B2’ rating on Bahrain and changed the outlook to stable from negative while Fitch affirmed their ‘B+’ rating on Egypt and kept the outlook stable.
FX
- After reversing course a day earlier, currency markets resumed their strong dollar trajectory with the greenback rising against all peers. EURUSD dropped almost 0.2% to 1.0834 while GBPUSD fell 0.29% to 1.3030. The yen weakened again overnight after a seeming one-off gain a day earlier. USDJPY rose 0.4% to 128.38.
- Commodity currencies weren’t spared the dollar strength with USDCAD closing up 0.66% at 1.2581 even as markets price in an aggressive hiking path from the Bank of Canada. AUDUSD fell 1% to 0.7374 while NZDUSD dropped the same amount to 0.6737.
Equities
- US markets were weighed down by Jerome Powell’s comments yesterday, with all three major indices closing lower. The NASDAQ, always the most sensitive to the prospect of more rapid tightening, lost -2.1%, while the Dow Jones and the S&P 500 dropped -1.1% and -1.5% respectively.
- The day had started more positively in Europe, where the DAX added 1.0% and the CAC 1.4% as investors began to see a greater likelihood of no change at the top in the upcoming second round election. The UK’s FTSE 100 closed flat.
- Locally, the DFM added 0.4% and the ADX 1.2%, while the Tadawul dropped -1.0%.
Commodities
- Oil markets closed higher overnight but by the standards of recent weeks have been more or less treading water. Brent futures added 1.4% to USD 108.33/b while WTI gained 1% to USD 103.79/b. Both are sliding in early trade today. Oil markets need a clear catalyst, either positive or negative, to set up the next sizeable move with an announcement of an EU embargo on Russian oil or China easing its Covid-19 restrictions likely to set up a near-term bullish case.
- Rising UST yields, both nominal and real, along with a more hawkish Fed helped to push gold prices lower overnight. Spot gold settled down 0.3% at USD 1,951.62/troy oz while silver, platinum and palladium all showed larger declines.
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