Intraday Market Thoughts Archives

As the focus broadens on inflation in the developmed markets space, some EM natios are already tightening. Rate decisions from the central banks of the UK and Mexico highlighted the ongoing debate on inflation risks. GBP lagged in G10 FX but the big mover was MXN, which benefited from a surprise rate hike. All currencies are higher against the US dollar, except for GBP. Kiwi and CHF are in the lead. The week concludes with top-tier US data, including the PCE report and consumer sentiment (more on core PCE below).  

The BoE pushed back on speculation that higher inflation will lead to rate hikes in their rate decision. Rates were held unchanged as expected but the central bank also warned against “premature tightening” in a sign that they're in no rush to hike. The line and Andy Haldane's departing comments underscore the difference of opinion on how transitory inflation will be.

Mexico's central bank also entered the debate with an unexpected decision to raise rates to 4.25% from 4.00%. There was speculation they could hint at a future hikes, but the move remained a surprise, leading to a sharp jump in the peso. At the same time, the Banxico itself said risks were now balanced in a sign they see this as more of an insurance move than the start of a cycle.

All attention in the months ahead will be on the developments in inflation. This includes today's release of May US PCE report. The consensus is for headline inflation at 3.9% (from 3.6%) and core at 3.4% (from 3.1%). Upward surprises in CPI have failed to sustain rallies in the dollar with the market mostly siding on the 'transitory' debate but if numbers continue to beat, that will change.

The consumer will also be in focus with spending forecast up 0.4% in the PCE report. That will be followed by the UMich final sentiment report for June. The consensus is 86.5. One Fed speaker to watch will be Mester, who generally aligns with the FOMC leaders.

The Fed is increasingly resembling the chorus in the market with opposing views on the inflation risk, only there is a key difference. The kiwi was the top performer on Wednesday while the yen lagged. US jobless claims and durable goods orders are due up next. GBP is the weakest of the day after the BoE kept its vote on asset purchases at 8-1, with Haldane--the lone hawkish not having an impact as he leaves the BoE this month. Keep an eye on Fed's Williams speech at 11 am EST (4 pm London) 

This week has been all about Fed talk and the debate about signaling rate hikes sooner rather than later. Atlanta Fed President Bostic weighed in saying he was one of the dots forecasting a hike in 2022 and two more in 2023.

It's important to note though that he won't be a voter in either of those years. Much of the hawkish commentary has been led by regional presidents while the 6 Fed governors along with permanent voter NY Fed President Williams are on the patient side. Powell will govern on consensus but there's little chance of the FOMC being bullied. In addition, Biden will presumably nominate another dove to fill a Fed vacancy later this year.

The market generally treaded water Wednesday but the Australian dollar did rise back above the key 200-dma. One asset that is struggling to find traction after the rout is gold, which isn't benefiting at all from the ebb in rate-hike fears.

Looking ahead, the economic calendar remains busy headlined by the May prelim durable goods orders report. There is little question about the strength of the sector and that was underscored again by the record in the Markit manufacturing PMI on Wednesday. The only issues it outlined were difficulties in finding workers and raw materials.

What looked like a technical collapse in crypto prices on Tuesday turned into an improbable turnaround with bitcoin finishing higher. In FX, last week's US dollar rally continued to unwind with a growing chorus of Fed speakers underscoring patience before making any moves on a taper. Ashraf cautions us to watch the renewed outperformance of Tech stocks vs cyclicals --which could mean yields may not be rebounding above 1.53/4% anytime soon, raising questions about growth and inflation. Ashraf also reminds us of the persistent higher lows in percentage daily changes of Bitcoin in the chart below, as well as this possible development.

Even by the wild standards of the crypto market, Tuesday's move was impressive. It looked grim for bitcoin early in New York trade as it broke through $31,000 and then cascaded down to $28,800 in a quick but orderly move.

As headlines flashed that it had wiped out all the gains for 2021, it came back to life. Evidently there were buyers waiting for a dip below $30,000 and they pounced. That was followed by a FOMO rally that took it to $34,200 at the time of writing.

The pain elsewhere was larger and the bounces haven't been as impressive. That may be a hint that flows are traveling from alt coins into bitcoin. If that's the case, it may only be a temporary respite. That said, price action can turn into its own fuel for a rally.

Overall, the breaks of some key support levels throughout the market aren't a great sign. There is a chance for a false breakout and reversal here but that would be a rare feat. We will be watching very closely and staying nimble in the days ahead.

One slight tailwind for crypto has been the continued decline of the dollar. We're watching AUD/USD very carefully as it re-tests the break of the 200-day moving average and the prior lows of the year, which are now resistance.

A central bank turning hawkish is undoubtedly one of the great currency buying signals, and recent USD price action has sent that same kind of signal, but are we jumping the gun?  DXY stopped at its 55-WMA but remains well above its 200-DMA. Do NOT forget Powell will testify on the economy Tuesday at 2 pm Eastern. US 10 yr yield respected its 3-mth trendline support, while XAUUSD did the same at 1763/5.

The Fed decision was undoubtedly a surprise last week. The dots moved further than nearly anyone anticipated but it wasn't just that. After all, the dots have a poor track record of predicting rate moves and have been too hawkish since they were introduced. What also changed was that Powell went from a wait-and-see mode on data to anticipating strong jobs numbers while beginning to fret about higher prices.

On Friday, St Louis Fed President (and noted hawk) Jim Bullard underscore the Fed messaging by saying the Fed needs to be ready to taper and that inflation data has been more intense than expected.

What may have been less appreciated was how he benchmarked his rate hike on economic data. He said that strong inflation of 2.5-3.0% through 2022 would meet the framework for justifying a rate hike.

That's still a high bar.

Many market watchers are declaring the current round of high inflation as the overshoot that the Fed wanted but that's not the case. Even Fed hawks haven't abandoned 2022 inflation as that period.

Ultimately, the market will fall back on looking at inflation and prices rising as high as Bullard is forecasting is far from a sure thing. Some of the bottlenecks pushing up prices now – used cars for instance – will create disinflation pressure in the year ahead, assuming that they unwind.

So while we have seen some impressive moves that have no doubt been exaggerated by short covering, we're probably not yet at the big turn in markets. The question through is how far to ride this move and when to fade it.

Monday's price action will offer plentiful hints.