Federal Reserve (Fed) Chair Jerome Powell reiterated yesterday that the Fed is not in a rush to cut rates but that it will cut sometime this year and that the recent jump in inflation didn’t ‘materially’ change their policy outlook. The latter was enough to send the market higher with joy.
On the data front, however, the data painted another picture. The ADP printed 184’000 new private job additions in the US – higher than expected, while the ISM non-manufacturing activity expanded – with however lower-than-expected employment and price components (supportive of dovish Fed). Yet, earlier this week, the ISM’s manufacturing index jumped into the expansion zone and prices accelerated faster, and the Atlanta Fed’s GDPNow forecasts points at a first quarter growth of 2.8%.
The Fed may not feel in a hurry to cut rates, but investors think that it should be if it doesn’t want to be part of the November’s election story. So the challenge is big: either the Fed will cut by early summer and take the risk of seeing inflation pick up further into the year-end, or it will wait until after the election and take the risk of imposing an otherwise unnecessary pressure on the economy. To make things easy, we will say that the data will decide. But the markets don’t react fully to the data when the Fed members continue to keep the dovish talk on the table. And those who tell otherwise go unheard. Fed’s Raphael Bostic said that he expects just one rate cut this year – after the election. Did anyone hear that?
The US 2-year yield eased yesterday as Powell stressed out that the recent rise in inflation doesn’t ‘materially’ change the way the Fed sees things – three rate cuts this year as per their latest dot plot – and the {23705|10-year yield}} eased to 4.36%. The US Dollar Index sharply retreated and the S&P 500 rebounded. Semiconductors came under pressure after a strong earthquake hit Taiwan and brought Taiwan Semiconductor Manufacturing (NYSE:TSM) to halt its operations on the island. But TSM said it will resume operations quickly as their critical tools have not been damaged.
Up next, investors will be watching the weekly jobless claims and job cuts as they wait for Friday’s jobs data.
Euro, Sterling Bears Bulldozed by Fed Doves
The sharp decline in the US dollar sent the EUR/USD sharply higher yesterday. The pair made a quick move to 1.0845 after testing the 1.0740 level at the start of the week/quarter. But fundamentally, the data was supportive of the euro bears. Inflation in the Eurozone eased more than expected and the unemployment rate remained steady at 6.5% versus an improvement to 6.4% expected by analysts. The data clearly cemented the expectation of a June rate cut from the European Central Bank (ECB), but couldn’t give the euro bears enough leverage to fight back the US dollar shorts.
Across the channel, the Bank of England (BoE) doves are also gaining the upper hand on the Fed. According to Bloomberg, the probability of a BoE rate cut stood at 67% yesterday, versus just 57% for the Fed. But you couldn’t see that pricing on Cable chart, where the pair rebounded in a sharp move due to the US dollar weakness. But keeping the economic data in perspective, it makes more sense selling the tops in both the euro and sterling against the greenback than buying the dips.
Oil, Gold Gain
US crude’s rally accelerated after clearing the $85pb level, the barrel of US crude traded at $86.50pb after OPEC confirmed to maintain supply cuts in place. The US oil inventories on the other hand jumped more than 3 mio barrels last week. Note that we could’ve seen a test of the $85pb resistance and a correction because the extension of OPEC cuts were already made public, and because US oil inventories rose more than expected, but the market decided to carry the oil rally higher, confirming that the trend is strongly on the bulls’ side. As such, oil rally certainly has more room to extend toward the $88-90pb range. We could see minor downside correction due to overbought levels.
In precious metals, gold exceeded the $2300 yesterday on the back of softer US dollar and the falling US yields. Some investors seek refuge in the safe-haven gold as the geopolitical scene remains tense and the sustainability of the equity rally is questioned. But note that trend and momentum indicators warn that gold has been bought too rapidly in a too short period of time and that the overbought conditions could trigger a minor downside correction. But the trend remains gold traders’ friend.