In the forex markets, the Australian dollar overtook the euro the weakest major currency last week as markets responded negatively to the budget. The Aussie's weakness dragged down Kiwi too. Canadian dollar, on the other hand, was firm as data showed inflation climbed back to BoC's target. The Sterling was the strongest currency after BoE minutes showed some policy makers leaned towards rate hike.The euro stayed soft as a string of economic data solidified the case for ECB to loosen monetary policies further in June. Overall, the greenback was firm except versus Sterling while the Japanese yen was mixed. In other markets, stocks staged strong rebound with S&P 500 closed above 1900 for the first time on Friday. The Dow also defended the 55 days EMA again to close the week slightly higher. US yields recovered but we didn't see any sustainable momentum yet. Gold struggled in tight range around 1300 handle while crude oil extended recent rebound to 104.39.
To recap some of the major events, The FOMC minutes for the April meeting contained little change from the post-meeting statement. Policymakers attributed weakness in the first quarter GDP growth mostly to extreme weather. Therefore, while they revised lower the growth outlook for 1H14, the full year forecast stayed unchanged. The members in general expected economic growth to pick up continuously, yet gradually. They believed slack capacity remained elevated while inflation was still low. Concerning the normalization of monetary policy, the central bank discussed tools such as overnight reverse repo facility, IOER and term deposits. More in Fed Started Planning for Normalization of Monetary Policy.
euro zone PMI manufacturing unexpectedly dropped to 52.5 in May versus expectation of 53.2, services PMI rose to 53.5 versus expectation of 53.0. German PMI manufacturing dropped to 52.9 versus expectation of 54.0 but PI services rose to 56.4 versus consensus of 54.5. French PMIs, however were quite disappointing. PMI manufacturing dropped to 49.7, services PMI dropped to 49.2. Both were below consensus and were back in contraction region. Markit Chief economist Williamson noted that "deflationary pressures remain a major issue…and the continuing fall in average prices charged for goods and services adds to the likelihood of the ECB taking action to boost the economy at its June meeting." German Ifo business climate dropped to 110.4 in May versus expectation of 110.9. It's also the lowest reading this year. Current assessment gauge dropped to 114.8 versus consensus of a rise to 115.4. Expectations gauge dropped to 106.2 versus expectation of 106.5. Ifo President Hans-Werner Sinn commented that "a lull was seen in the German economy in May." And, current business situation was "no longer as favorable as in April". "Companies are also less optimistic about future business developments."
The BOE minutes for the May meeting unveiled that while members voted 9-0 for no change in policy, maintaining the Bank rate at a record low of 0.5% and the asset purchase program at 375B pounds, some were getting closer to support a rate hike as economic activities gathered momentum. Yet, in the meantime, all members agreed that 'it would be necessary to see more evidence of slack reducing before an increase in Bank rate would be warranted'. More in Some BOE Members Leaned Towards Rate Hike, Debated On Pace Of Spare Capacity Elimination, UK CPI also came in stronger than expected. CPI accelerated to 1.8% yoy in April versus expectation of 1.7% yoy. Core CPI rose to 2.0% yoy versus expectation of 1.8% yoy. Retail sales rose strongly by 1.3% mom in April versus expectation of 0.4% mom.
The BOJ announces after its June meeting that it would continue to expand the monetary base at a pace of 60-70 trillion yen per year. Policymakers raised its assessment on capital expenditure. Despite soft inflation, the central bank should reiterate its stance on achieving the 2% inflation target in a year’s time. The chance of further easing appeared to have lowered as the economic recovery seemed to have weathered the sales tax hike, for now. Japanese yen should strengthen after the statement as hopes of further easing dampened. More in BOJ Raised Capex Outlook, More Confident over Economic Developments.
The RBA minutes for the April meeting contained little surprise. In short, policymakers viewed that the slowdown in world growth in 1Q14 was expected to be temporary while growth in Australia's major trading partners would be around its long-run average in 2014 and 2015. GDP growth has picked up, although growth was expected to be 'somewhat slower over the next few quarters' as the recent 'especially strong growth of exports' was unlikely to be sustained. The slowdown in inflation in 1Q14 was after a 'surprisingly high outcome' in the previous quarter. Inflation was still expected to be consistent with the 2-3% target over the forecast period. On employment, the RBA indicated that forward indicators pointed to 'relatively moderate employment growth' in coming months, although the 'improvement … was expected to be relatively protracted'. More in RBA Minutes Affirms Neutral Policy Stance. Consumer Confidence Signals Impacts Of Budget Negative.