Fed struck a dovish tone in April minutes

• The minutes of the April FOMC meeting show that some members were willing to discuss a plan for tapering QE at “upcoming meetings” if the economy continued to make progress. The FOMC also discussed shortages of materials and labour which could slow the rate of recovery and push PCE inflation “temporarily” above 2%.  Some FOMC members had already noted in April – before the latest US CPI reading – that some supply shortages may not be resolved quickly and that inflationary pressure could remain high into next year. Overall though, the FOMC noted that longer-run inflation expectations remained well anchored and that it would be some time before the economy made substantial further progress in achieving the Fed’s employment and inflation goals. 
• UK inflation rose to 1.5% y/y in April, more than double the March inflation rate, in-line with consensus estimates. The main driver was higher energy prices as well as the low base of last April’s CPI. The BoE has already indicated it considers higher inflation over the next few months as transitory.
• Eurozone inflation rose to 1.6% y/y in April, in line with the flash estimate, but the core rate was revised lower to 0.7% y/y.
• In the UAE, the government’s press office confirmed that foreigners opening companies in the UAE would not require a local partner from 1 June 2021.  The change in the commercial companies law had been approved in late 2020 and will take effect at the start of next month.  The move is one of a series of new measures to boost investment in the UAE by making it easier and cheaper for foreigners to start a business. Some sectors remain exempt from the 100% foreign ownership rules, including defence and oil & gas.

Today’s Economic Data and Events

16:30 US initial jobless claims (15 May) forecast 450k

16:30 US continuing claims (8 May) forecast 3630k

Fixed Income

• Minutes from the Federal Reserve’s April FOMC meeting helped to sink US Treasuries late in the session as the market seized on a line that several FOMC members thought it may be time to “begin discussing a plan” for the tapering of asset purchases. The idea that the Fed is talking about talking to start tapering helped to push yields up across the curve with 2yr UST yields back up above 0.15% and the 10yr yield rising 3bps to 1.671%.
• Fed officials did note the shortages affected the economy at the moment with the potential for price rises to occur at the same time as a drop off in activity but in general the minutes showed the Fed is still inclined toward dovish policy.
• Emerging market bonds had a relatively quiet day with yield moves holding to a narrow range. Regional primary markets remain quiet.

FX

• The dollar managed to take a break from its recent selling with the DXY index up nearly 0.5% and moving back above the 90 level. Much of the gains came late in the session on the back of the FOMC minutes which helped UST yields rise. The dollar trading roughly flat in early trade today.
• EURUSD fell 0.4% to 1.2175, driven lower by the FOMC while USDJPY added 0.29% to 109.22, again showing some whipsaw movement late in the day.
• Sterling fell more than 0.5% despite a bump in inflation to 1.5% in April and nudging markets to think the Bank of England could pull back on stimulus. Elsewhere commodity currencies were off sharply thanks to a general risk off tone permeating markets..   

Equities

• Global equity markets were roiled by the cryptocurrency volatility yesterday, with losses almost across the board amongst major indices. While US markets did recover some of the losses seen earlier in the day, all three benchmark indices still ended the session down compared to Tuesday. Surprisingly perhaps the tech-heavy NASDAQ was this time the index which dropped the least, closing almost flat, while the S&P 500 dropped -0.3% and the Dow Jones -0.5%. The selling has continued in Asia so far this morning, with all major indices there dropping today so far.
• In Europe, Germany’s DAX was the biggest loser, down -1.8%, followed by Germany’s CAC (-1.4%), while the UK’s FTSE 100 lost -1.2%.
• Within the region, the DFM was one of the few gainers yesterday, adding 0.2%. The ADX’s rapid climb this week came to an end as it lost -0.2%, while the Tadawul closed down -0.5%.

Commodities

• Oil prices were off by the most in a single day since the start of April as the market focused on the potential for a revived Iran nuclear deal. Brent futures fell further away from USD 70/b to USD 66.66/b, down 3% overnight while WTI was off 3.25% at USD 63.36/b and Murban fell 2.9% to USD 65.55/b.
• Iran’s nuclear negotiator noted that there were still issues to be worked out with the US but hoped that a deal could be reached by next week.
• EIA data showed a modest build in commercial stocks of 1.3m bbl last week, offset by a draw in gasoline and distillate stocks. Weekly EIA data will likely be distorted in the next several weeks by the disruption to the Colonial Pipeline earlier in May. Oil production was steady at 11m b/d while product supplied moved up strongly to 19.3m b/d, up 1.8m b/d week/week.

• The recent rally in gold prices was stopped short by the market interpreting the FOMC minutes as leaning toward pulling back on accommodative policy. Spot gold closed flat at USD 1,869/62/troy oz, falling post FOMC minutes. The general risk-off tone helped push industrial metals prices lower as well with copper forwards holding just above USD 10,000/tonne.

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