Weekly Market Update 17 April – Dollar pares some losses after surprisingly hawkish comments by Fed official Waller
Weekly Market Update 17 April – Dollar pares some losses after surprisingly hawkish comments by Fed official Waller
1. The greenback pared some losses against a basket of peers, bouncing back up from a low of 100.8 to end the week at 101.5. Fed Governor Waller remarked on Friday that financial conditions remained loose, while inflation remained high and the jobs market remained resilient, hence his support for further tightening. His remarks contrasted with his colleagues Goolsbee and Bostic, who were cautious about raising rates beyond May. Meanwhile, the University of Michigan’s preliminary consumer sentiment gauge came in above expectations, at 63.5 instead of 62. Inflation expectations also rose to 4.6% from 3.6%, in another survey by U-M. This account tallies with the inflation data, as core inflation held above headline inflation for the first time in over 2 years, with core y/y inflation at 5.6% compared to headline y/y inflation at 5%. While consumers remain upbeat about the economy, they are tightening their belts, as both core and headline retail sales fell by -0.8% and -1% respectively, worse than expected. While both headline and core PPI surprised markets to contract by -0.5% and -0.1% respectively, the PCE index could remain high, as wage growth is still positive. Markets are hence expecting another 25bps rate hike by the Fed this month, as current economic conditions do not give much reason for the Fed to pause or even cut rates. The dollar is hence likely to remain supported in the near-term. Multiple Fed officials are expected to speak this week, which could give further clues as to the Fed’s next rate decision. Unemployment claims data is also out on Wednesday.
2. The euro continued climbing higher against the dollar, touching a high of $1.10 before paring some gains. That high was last breached in April 2022. Investors were optimistic of the European region’s economic performance, after Thursday’s industrial production numbers grew by 1.5% m/m, beyond expectations of 0.9%. However, ECB officials sent out mixed signals on the rate path ahead, with Guindos and Nagel highlighting that the ECB’s task is price stability and talk of a pause is premature, while Villeroy was convinced that most of the rate hikes are “completed”.
3. The pound sterling ended the week flat at $1.24 to the dollar, after the US dollar’s strength erased earlier gains. Inflation is expected to remain elevated, as double-digit inflation persists due to labour shortages and a reliance on imported energy. The economy stalled in March, with GDP growth stalling below an anticipated 0.1%. Markets expect one final rate hike from the BoE, which coupled with a new hawkish MPC member Greene, could see the pound continue strengthening. Inflation data is due this Tuesday, which would indicate whether the BoE needs to continue hiking rates.
4. The commodity currencies turned in mixed performances, with the kiwi dollar weakening while the Loonie and Aussie strengthened against the dollar. The Kiwi touched highs of $0.63 to the dollar, before sliding to $0.62 to close the week, after markets took in the hawkish comments from Fed policymaker Waller, the robust US consumer sentiment and rising inflation expectations in the US. The New Zealand manufacturing sector also experienced a first decline after the previous 2 positive readings, which could have added to fears about the economy’s strength on top of the previous jumbo half-point hike that took markets by surprise. CPI data is due on Thursday, which would indicate how likely the RBNZ is to raise rates by 25bps next month. The Aussie also gave up gains to end the week slightly up at $0.67 to the dollar, after the Australian economy exceeded expectations to add 53k new jobs and keep unemployment constant at 3.5%. Elsewhere, the Loonie hovered near a two-month high of $1.33, even after the BoC decided to stand pat on its rates last Wednesday. Markets read it as a hawkish pause, as BoC Governor Macklem made clear that no cuts were expected this year. The Canadian economy also performed better than expected in the first quarter, providing support to the Loonie. CPI data is due Tuesday, which could show whether there remains further room for rate hikes.
5. Brent crude rallied higher after gaining for the past 4 weeks, touching $87 per barrel in the week before closing at $86. The International Energy Agency released a report laying out expectations of higher prices ahead, after OPEC+’s surprise production cuts, dwindling American stockpiles and supply disruptions from Iraqi Kurdistan. Gold prices ranged to end the week flat at $2006 per ounce, after an increase in US inflation expectations and hawkish remarks from the Fed caused investors to worry about further rate hikes. Gold could see temporary selling pressure until markets have a clearer picture on the Fed’s rate hike decision in May.
