Weekly Market Update 1 May – Dollar slid slightly upon disappointing advance GDP data
Weekly Market Update 1 May – Dollar slid slightly upon disappointing advance GDP data
1. Dollar slid slightly upon disappointing advance GDP data. The dollar index slipped from 101.7 to 101.6 during the week. Due to the contradicting economic data points affecting the GDP and labour markets, there have been fluctuations within the dollar strength. However, due to the general decline in consumer confidence, it closed the week with a modest dip. The CB Consumer Confidence survey revealed weaker consumer confidence as markets are expecting the US economy to enter recessionary periods. Advance GDP q/q contracted more than forecasted, coming in at 1.1% instead of 2.0%. U.S. economic growth slowed more than expected in the first quarter as an acceleration in consumer spending was offset by businesses liquidating inventories in anticipation of weaker demand later this year amid higher borrowing costs. Unemployment claims fell by 16,000 to 230,000, the Labour Department reported Thursday. This figure suggests a tight labour market, which may contribute to prolonged wage inflation, which in turn causes price inflation. Hence, fuelling the narrative of rate hike from the Fed. The core PCE Price Index m/m met expectations at 0.3% growth in consumer spending, as an increase in outlays on services was offset by a decline in goods. The Employment Cost Index (ECI) for the previous quarter came in higher at 1.2% as opposed to the expected 1.1%. As ECI is a trailing indicator, many dollar bears expect slowdown in wage inflation. Therefore, markets can look forward to conclusive economic data on JOLTs jobs opening and non-farm employment change later this week, which will clearly depict the condition of the US labour market. Markets can also anticipate the decision on the federal funds rate where most are expecting a 25bps hike.
2. The euro rallied higher against the dollar to end the week at $1.10, as markets took in the flurry of economic data last Friday. The eurozone avoided a recession in the first quarter by growing 0.1%, partly helped by a mild winter which dampened the effects of rising energy costs. France, Italy, and Spain all returned positive GDP growth for the first quarter, with France posting 0.2% and the latter two posting 0.5%. Germany’s economy stalled, with exports and investment dragged down by weak spending by the government and consumers. However, data showed a mixed picture of eurozone inflation, coming in lower than expected in Germany and Spain, at 0.4% and 4.1% each, while accelerating in France to 6.9%, more than forecasts of a pause at 6.7%. While markets remain split between a 25bps and 50bps hike, analysts are calling for a 25bps hike by the ECB later this week.
3. The pound sterling climbed to $1.25 against the dollar, a new high since June 2022, on the back of the weakening dollar. While UK factory orders continued contracting as stocks of finished goods grew, the CBI’s survey of realised sales showed a rise in sales volume. Services and construction PMI is due this week, with both sectors expected to expand. While the Fed is expected to implement its final rate hike this week, the BoE is still grappling with stubborn inflation, which might provide support for the pound in the short-term.
4. The commodity currencies were a mixed bag last week, with the Aussie weakening, the Loonie flat, and the Kiwi strengthening against the dollar. The Aussie dollar fell below $0.66 briefly, as q/q core CPI fell more than expected to 1.2%, below last quarter’s 1.7% and market forecasts of 1.4%. This data is crucial, given the RBA’s rate hike decision this week. The Loonie pared losses to end the week flat, with USD/CAD trading at $1.35. Traders digested the weaker-than-expected GDP data last Friday, with the Canadian economy falling short of expectations to grow by 0.1% instead of 0.2%, while also much below last month’s reading of 0.6%. Later this week, not only will BoC Governor Macklem discuss the Canadian economic outlook, the unemployment rate and employment change data are also due. Markets anticipate a weakening labour market, with employment growth slowing and the unemployment rate ticking up. The Kiwi dollar rose to just shy of $0.62, as investors weighed the RBNZ’s intention to ease mortgage loan-to-value restrictions by 1st June. New Zealand’s main trading partner, China, experienced a contraction in manufacturing last month, adding to concerns about economic demand. Employment data is out this week, while RBNZ Governor Orr is expected to speak about financial stability as well.
5. Brent crude continued its slide downwards to touch $77 per barrel before recovering to test $80, as Russian oil exports remained constant on a 4-week basis despite threats of output cuts. The initial gains from OPEC+’s surprise reduction in early April have evaporated, in the face of weak economic growth in the US and a contraction in Chinese manufacturing activity. Coupled with the expected rate hikes by the Fed and ECB this week, oil could see further short-term selling pressure. Gold continued consolidating above $1980 per ounce last week, supported by the continued turmoil in the US financial sector. With the Fed nearly done with its tightening cycle, the price of gold could continue to see further upside.
