The Australian dollar depreciated past $0.722 on Friday amid a wider risk-off sentiment, while traders braced for a more aggressive tightening by the Federal Reserve. The US central bank is set to meet on Jan. 25-26, and although it is not expected to move rates, an increasing number of Fed officials indicated readiness for a faster path towards policy normalization. The aussie reversed course from the previous session when it hit a high of $0.7276 on stronger-than-expected employment numbers, which raised expectations of an early hike on the official cash rate. Meanwhile, the Reserve Bank of Australia has repeatedly insisted that a hike in domestic rates is not likely until 2023, or until inflation pushes sustainably within its 2-3% target range. The RBA also lagged behind other major central banks in dialing back pandemic-era stimulus, but is set to decide whether to end its bond-buying early this year at its Feb. 1 meeting.
Comment:
Three central bank meetings; three 25 basis-point rate hikes.
Against consensus, the Reserve Bank of Australia (RBA) surprised markets early last week, increasing its Official Cash Rate (OCR) by 25 basis points to 3.85%, with many desks now pricing in a 4.1% terminal rate. This followed the previous meeting where the central bank kept rates on hold and marks the eleventh-rate hike overall since May 2022. Unsurprisingly, market volatility increased following the announcement, adjusting to the recent surprise, with AUD/USD aggressively rallying and the ASX 200 seeking lower levels.
Wednesday was also a big day for the markets. As widely expected, the Fed hiked the Federal Funds target rate by another 25 basis points to 5.0%-5.25%. This represents the tenth-rate hike since March 2022. I noted the following in previous writing (italics):
The FOMC statement communicated a less hawkish tone in its language used, noting that it is ‘determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time’, marking a change in language from the prior FOMC statement where it communicated that it ‘anticipates that some policy firming may be appropriate’. This echoes a vibe of a possible pause at the next meeting scheduled for 14 June; markets are also now pricing in a strong possibility of a rate pause.
Thirty minutes after the announcement, Fed Chairman Jerome Powell took to the stage and struck more of a hawkish tone. Key points were that Powell reaffirmed the change in language in the FOMC statement as ‘meaningful’, changing from ‘anticipates’ to ‘determining’. Powell added that inflation is far above the central bank’s target of 2% and that the Fed is ‘prepared to do more’; decisions from June will also be driven by incoming data—meeting by meeting. He also noted that the labour market remains tight, the economy is likely to face headwinds and communicated that the ‘banking system is sound and resilient’.
Thursday welcomed the European Central Bank (ECB), which increased all three main policy rates by 25 basis points. This marks the seventh consecutive rate increase since mid-2022 and represents 375 basis points of tightening. I also noted the following in recent writing (italics):
As of writing, markets are pricing in the possibility of about another two rate hikes before the ECB looks to hit the pause button. In her post-announcement presser, Christine Lagarde—the President of the ECB—also communicated the possibility of additional rate hikes to combat inflation. Euro area headline inflation slightly increased to 7.0% in April (from March’s 6.9%), essentially snapping a five-month period of slowing price increases. The current inflation rate remains more than three times higher than the central bank’s target. So, overall, the job is not done at the ECB, and the central bank is likely to continue its policy-firming schedule in 25 basis-point increments.
US non-farm payroll data was also released on Friday. Headline non-farm payrolls revealed that 253,000 new payrolls were added in April, comfortably north of the median consensus of 180,000 and nearer the upper end of the forecast range (265,000). While this is indeed a hot labour print, markets are pricing in the possibility of a pause for the next FOMC meeting on 14 June, with a small chance of another 25 basis-point hike. However, things may—and likely will—change before the event; we have two inflation releases, one of which is this week on Wednesday and one a day ahead of the FOMC meeting on 13 June, and, of course, we have another jobs release on 2 June.
Against consensus, the Reserve Bank of Australia (RBA) surprised markets early last week, increasing its Official Cash Rate (OCR) by 25 basis points to 3.85%, with many desks now pricing in a 4.1% terminal rate. This followed the previous meeting where the central bank kept rates on hold and marks the eleventh-rate hike overall since May 2022. Unsurprisingly, market volatility increased following the announcement, adjusting to the recent surprise, with AUD/USD aggressively rallying and the ASX 200 seeking lower levels.
Wednesday was also a big day for the markets. As widely expected, the Fed hiked the Federal Funds target rate by another 25 basis points to 5.0%-5.25%. This represents the tenth-rate hike since March 2022. I noted the following in previous writing (italics):
The FOMC statement communicated a less hawkish tone in its language used, noting that it is ‘determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time’, marking a change in language from the prior FOMC statement where it communicated that it ‘anticipates that some policy firming may be appropriate’. This echoes a vibe of a possible pause at the next meeting scheduled for 14 June; markets are also now pricing in a strong possibility of a rate pause.
Thirty minutes after the announcement, Fed Chairman Jerome Powell took to the stage and struck more of a hawkish tone. Key points were that Powell reaffirmed the change in language in the FOMC statement as ‘meaningful’, changing from ‘anticipates’ to ‘determining’. Powell added that inflation is far above the central bank’s target of 2% and that the Fed is ‘prepared to do more’; decisions from June will also be driven by incoming data—meeting by meeting. He also noted that the labour market remains tight, the economy is likely to face headwinds and communicated that the ‘banking system is sound and resilient’.
Thursday welcomed the European Central Bank (ECB), which increased all three main policy rates by 25 basis points. This marks the seventh consecutive rate increase since mid-2022 and represents 375 basis points of tightening. I also noted the following in recent writing (italics):
As of writing, markets are pricing in the possibility of about another two rate hikes before the ECB looks to hit the pause button. In her post-announcement presser, Christine Lagarde—the President of the ECB—also communicated the possibility of additional rate hikes to combat inflation. Euro area headline inflation slightly increased to 7.0% in April (from March’s 6.9%), essentially snapping a five-month period of slowing price increases. The current inflation rate remains more than three times higher than the central bank’s target. So, overall, the job is not done at the ECB, and the central bank is likely to continue its policy-firming schedule in 25 basis-point increments.
US non-farm payroll data was also released on Friday. Headline non-farm payrolls revealed that 253,000 new payrolls were added in April, comfortably north of the median consensus of 180,000 and nearer the upper end of the forecast range (265,000). While this is indeed a hot labour print, markets are pricing in the possibility of a pause for the next FOMC meeting on 14 June, with a small chance of another 25 basis-point hike. However, things may—and likely will—change before the event; we have two inflation releases, one of which is this week on Wednesday and one a day ahead of the FOMC meeting on 13 June, and, of course, we have another jobs release on 2 June.
Comment:
SHORT SELLS ARE STILL OPEN
Comment:
Australian business confidence figures failed to impress this morning. Stable labor costs and rising purchase costs will be red flags for the RBA
Comment:
The NAB Business Confidence Index increased from -1 to 0 in April versus a forecasted +1. While the headline figure drew interest, the sub-components also needed consideration. Focal points included Labor costs, purchase costs, final product costs, and retail prices. However, forward orders also drew interest.
According to the April survey,
Business conditions slipped by 2 points to +14. Despite the downward trend, the Index remained above average.
Leading indicators disappointed, with forward orders down from +3 to +1 and CAPEX falling by 2 points to +6.
However, it was a mixed set of price and cost Indexes.
Labor costs held steady at +1.9, while purchase costs increased from +1.9 to +2.3.
Final Products Prices slipped from +1.3 to +1.1, with retail prices falling from 1.7 to +1.4.
Despite the fall in final product prices, stable labor costs and rising purchase costs will likely draw the RBA’s attention.
Last week, the RBA noted that wage growth was pushing inflation higher. An upward trend in wage growth and softer inflation, albeit moderate, would improve household disposable income and support a pickup in household spending.
Other Australian economic indicators included building approvals, which slipped by 0.1% in Mach versus a forecasted 3.0 increase. In February, building approvals jumped by 3.9%.
AUD/USD Reaction to the Australian NAB Business Confidence Survey
Before the business confidence numbers, the AUD/USD rose to a high of $0.67552 before falling to a pre-stat low of $0.67399.
However, in response to the business confidence figures, the AUD/USD rose from $0.67452 to a post-report high of $0.67543.
This morning, the AUD/USD was down 0.02% to $0.67485.
According to the April survey,
Business conditions slipped by 2 points to +14. Despite the downward trend, the Index remained above average.
Leading indicators disappointed, with forward orders down from +3 to +1 and CAPEX falling by 2 points to +6.
However, it was a mixed set of price and cost Indexes.
Labor costs held steady at +1.9, while purchase costs increased from +1.9 to +2.3.
Final Products Prices slipped from +1.3 to +1.1, with retail prices falling from 1.7 to +1.4.
Despite the fall in final product prices, stable labor costs and rising purchase costs will likely draw the RBA’s attention.
Last week, the RBA noted that wage growth was pushing inflation higher. An upward trend in wage growth and softer inflation, albeit moderate, would improve household disposable income and support a pickup in household spending.
Other Australian economic indicators included building approvals, which slipped by 0.1% in Mach versus a forecasted 3.0 increase. In February, building approvals jumped by 3.9%.
AUD/USD Reaction to the Australian NAB Business Confidence Survey
Before the business confidence numbers, the AUD/USD rose to a high of $0.67552 before falling to a pre-stat low of $0.67399.
However, in response to the business confidence figures, the AUD/USD rose from $0.67452 to a post-report high of $0.67543.
This morning, the AUD/USD was down 0.02% to $0.67485.
Comment:
US Inflation Data Release to Impact Markets
On Wednesday, the United States is scheduled to release its consumer price inflation data for April. This report could offer more insight into interest rate changes. It is widely anticipated that the U.S. Federal Reserve will stop increasing rates, and this data could confirm those expectations. Additionally, traders will closely monitor various Chinese economic indicators this week. This includes trade, inflation, lending, and money supply figures for April. This will help market participants evaluate the economic recovery of the world’s second-largest oil consumer. As a result, crude prices may continue to benefit from the upward momentum.
On Wednesday, the United States is scheduled to release its consumer price inflation data for April. This report could offer more insight into interest rate changes. It is widely anticipated that the U.S. Federal Reserve will stop increasing rates, and this data could confirm those expectations. Additionally, traders will closely monitor various Chinese economic indicators this week. This includes trade, inflation, lending, and money supply figures for April. This will help market participants evaluate the economic recovery of the world’s second-largest oil consumer. As a result, crude prices may continue to benefit from the upward momentum.
Comment:
Fed says banking sector looks set to weather recent turmoil
"The Federal Reserve is prepared to address any liquidity pressures that may arise and is committed to ensuring that the U.S. banking system continues to perform its vital roles," the Fed said.
While the central bank noted there were spillover concerns following the failures of Santa Clara, California-based SVB and New York-based Signature, it maintained that the issues that sank those regional banks do not appear broadly across the banking sector, calling them "outliers" in terms of heavy reliance on uninsured deposits.
Those firms, as well as First Republic Bank, which was closed by regulators earlier this month and sold to JP Morgan Chase, also were grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure.
The Fed noted in its report on Monday that more than 45% of bank assets reprice or mature within a year, suggesting there is not heavy exposure to less valuable securities for long periods of time. But while the amount of uninsured deposits at banks is declining, they still remain above historical averages after an influx of deposits spurred by the COVID-19 pandemic. In aggregate, it said banks remain well-capitalized.
DEBT LIMIT CONCERNS
The Fed released the report shortly after a separate central bank survey found banks were tightening credit standards amid weaker loan demand.
Beyond banks, the Fed said pressures on various market sectors remained within historical norms. However, it noted that valuations on commercial real estate remain high, which suggests there could be a "sizable" correction in property values should telework trends remain strong. The Fed found that banks hold about 60% of commercial real estate loans, with two-thirds of those at smaller lenders with less than $100 billion in assets.
The Fed's report also found that nearly half of its respondents identified the U.S. debt limit as a salient risk, after not appearing as a top concern in the previous report in November. U.S. Treasury Secretary Janet Yellen said the limit could be reached in June, but Democrats and Republicans are still sparring over what conditions, if any, should be attached to an increase.
Banking sector stresses were identified as a risk by more than half of respondents, up from 12% in the November report.
"The Federal Reserve is prepared to address any liquidity pressures that may arise and is committed to ensuring that the U.S. banking system continues to perform its vital roles," the Fed said.
While the central bank noted there were spillover concerns following the failures of Santa Clara, California-based SVB and New York-based Signature, it maintained that the issues that sank those regional banks do not appear broadly across the banking sector, calling them "outliers" in terms of heavy reliance on uninsured deposits.
Those firms, as well as First Republic Bank, which was closed by regulators earlier this month and sold to JP Morgan Chase, also were grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure.
The Fed noted in its report on Monday that more than 45% of bank assets reprice or mature within a year, suggesting there is not heavy exposure to less valuable securities for long periods of time. But while the amount of uninsured deposits at banks is declining, they still remain above historical averages after an influx of deposits spurred by the COVID-19 pandemic. In aggregate, it said banks remain well-capitalized.
DEBT LIMIT CONCERNS
The Fed released the report shortly after a separate central bank survey found banks were tightening credit standards amid weaker loan demand.
Beyond banks, the Fed said pressures on various market sectors remained within historical norms. However, it noted that valuations on commercial real estate remain high, which suggests there could be a "sizable" correction in property values should telework trends remain strong. The Fed found that banks hold about 60% of commercial real estate loans, with two-thirds of those at smaller lenders with less than $100 billion in assets.
The Fed's report also found that nearly half of its respondents identified the U.S. debt limit as a salient risk, after not appearing as a top concern in the previous report in November. U.S. Treasury Secretary Janet Yellen said the limit could be reached in June, but Democrats and Republicans are still sparring over what conditions, if any, should be attached to an increase.
Banking sector stresses were identified as a risk by more than half of respondents, up from 12% in the November report.
Comment:
USA: Debt ceiling – Loss of credit insurance costs explode
USA: Demand for credit default insurance is increasing
The mess has skyrocketed demand for euro-denominated US credit default swaps that are traded the most. These contracts for a default next year were traded on Wednesday at 166 basis points. They reached a record high and exceeded the levels reached during previous unrest over the US debt ceiling in 2011 and 2013.
Trading has picked up momentum due to the peculiarity of the derivatives market, which enables owners to achieve substantial returns in the event of a default. Your payment corresponds to the difference between the market value and the nominal value of the underlying asset – an attractive investment if long-term government bonds are traded particularly cheaply. According to Bloomberg calculations, the potential payout could exceed 2,400.
Emerging markets would be most affected
According to Simon Waever, an analyst at Morgan Stanley, the outstanding net nominal volume of US CDs with $ 5.5 billion is now comparable to many larger emerging markets. Ironically, emerging markets will be most affected by any impact on the overall market.
The anomaly is limited to one-year CDS. Five-year contracts, which are usually more liquid and better reflect the assessment of a country's longer-term credit risk, have also increased in the United States, but are still traded about 100 basis points below the one-year terms. This reverse curve indicates that the risks in the immediate future are considered to be higher than in the longer term.
The CDS price reflects the cost of insurance for a very large loan in a very small insurance market, said Charles Diebel, head of Fixed Income at Mediolanum International Funds
USA: Demand for credit default insurance is increasing
The mess has skyrocketed demand for euro-denominated US credit default swaps that are traded the most. These contracts for a default next year were traded on Wednesday at 166 basis points. They reached a record high and exceeded the levels reached during previous unrest over the US debt ceiling in 2011 and 2013.
Trading has picked up momentum due to the peculiarity of the derivatives market, which enables owners to achieve substantial returns in the event of a default. Your payment corresponds to the difference between the market value and the nominal value of the underlying asset – an attractive investment if long-term government bonds are traded particularly cheaply. According to Bloomberg calculations, the potential payout could exceed 2,400.
Emerging markets would be most affected
According to Simon Waever, an analyst at Morgan Stanley, the outstanding net nominal volume of US CDs with $ 5.5 billion is now comparable to many larger emerging markets. Ironically, emerging markets will be most affected by any impact on the overall market.
The anomaly is limited to one-year CDS. Five-year contracts, which are usually more liquid and better reflect the assessment of a country's longer-term credit risk, have also increased in the United States, but are still traded about 100 basis points below the one-year terms. This reverse curve indicates that the risks in the immediate future are considered to be higher than in the longer term.
The CDS price reflects the cost of insurance for a very large loan in a very small insurance market, said Charles Diebel, head of Fixed Income at Mediolanum International Funds
Comment:
Friday26.May is the Big Day of this week
US Stocks Lack Direction as Investors Eye Debt Ceiling and Inflation report
the yield on the US 10-year Treasury note rebounded from early losses to trade slightly higher at 3.7%, the highest since mid-March, as traders assess the monetary policy outlook and the debt ceiling impasse in the US. On Monday, Fed’s Kashkari said a June rate pause or hike is a close call and St. Louis Fed President Bullard said the Fed may still need to raise rates by another half-point this year. Last Friday, Fed Chair Powell mentioned that because of stress in the banking sector, it might be unnecessary to further raise rates to curb inflation. The likelihood of a pause in the rate hike cycle has been fluctuating, but currently, traders are assigning a 78% probability that the Fed will maintain the rates steady in June. Simultaneously, President Biden is scheduled to meet with House Speaker Kevin McCarthy on Monday to continue negotiations regarding the debt ceiling. This follows an unsuccessful meeting between key negotiators on Friday.
US stocks traded around the flatline on Monday, as investors remain concerned about the sustainability of US government debt. President Biden and House Speaker Kevin McCarthy are set to continue negotiations on the debt ceiling today following a failed meeting on Friday. Treasury Secretary Yellen said on Sunday that the likelihood of the Treasury paying all US bills by June 15th is quite low. Meanwhile, traders continue to follow comments from several Fed officials: Fed’s Kashkari said a June rate pause or hike is a close call and St. Louis Fed President Bullard said the Fed may still need to raise rates by another half-point this year. On the corporate front, shares of Micron Technology fell nearly 4% after China banned some Chinese tech manufacturers from using the company's chips. Stocks of Apple were also down about 1% after Loop Capital downgraded its stock to hold from buy. Meta stocks were also under pressure after the firm has been fined by European regulators.
US futures were around the flatline on Monday, as investors remain concerned about the sustainability of US government debt. President Biden and House Speaker Kevin McCarthy are set to continue negotiations on the debt ceiling today following a failed meeting on Friday. Meanwhile, Treasury Secretary Janet Yellen said on Sunday that the likelihood of the Treasury paying all US bills by June 15th is quite low. On the corporate front, shares of Micron Technology fell more than 4% in premarket trading after China banned some Chinese tech manufacturers from using the company's chips. Stocks of Apple were also down about 1% after Loop Capital downgraded the company’s stock to hold from buy. Meta stocks lost nearly 1% after the firm has been fined a record €1.2 billion by European privacy regulators.
US Stocks Lack Direction as Investors Eye Debt Ceiling and Inflation report
the yield on the US 10-year Treasury note rebounded from early losses to trade slightly higher at 3.7%, the highest since mid-March, as traders assess the monetary policy outlook and the debt ceiling impasse in the US. On Monday, Fed’s Kashkari said a June rate pause or hike is a close call and St. Louis Fed President Bullard said the Fed may still need to raise rates by another half-point this year. Last Friday, Fed Chair Powell mentioned that because of stress in the banking sector, it might be unnecessary to further raise rates to curb inflation. The likelihood of a pause in the rate hike cycle has been fluctuating, but currently, traders are assigning a 78% probability that the Fed will maintain the rates steady in June. Simultaneously, President Biden is scheduled to meet with House Speaker Kevin McCarthy on Monday to continue negotiations regarding the debt ceiling. This follows an unsuccessful meeting between key negotiators on Friday.
US stocks traded around the flatline on Monday, as investors remain concerned about the sustainability of US government debt. President Biden and House Speaker Kevin McCarthy are set to continue negotiations on the debt ceiling today following a failed meeting on Friday. Treasury Secretary Yellen said on Sunday that the likelihood of the Treasury paying all US bills by June 15th is quite low. Meanwhile, traders continue to follow comments from several Fed officials: Fed’s Kashkari said a June rate pause or hike is a close call and St. Louis Fed President Bullard said the Fed may still need to raise rates by another half-point this year. On the corporate front, shares of Micron Technology fell nearly 4% after China banned some Chinese tech manufacturers from using the company's chips. Stocks of Apple were also down about 1% after Loop Capital downgraded its stock to hold from buy. Meta stocks were also under pressure after the firm has been fined by European regulators.
US futures were around the flatline on Monday, as investors remain concerned about the sustainability of US government debt. President Biden and House Speaker Kevin McCarthy are set to continue negotiations on the debt ceiling today following a failed meeting on Friday. Meanwhile, Treasury Secretary Janet Yellen said on Sunday that the likelihood of the Treasury paying all US bills by June 15th is quite low. On the corporate front, shares of Micron Technology fell more than 4% in premarket trading after China banned some Chinese tech manufacturers from using the company's chips. Stocks of Apple were also down about 1% after Loop Capital downgraded the company’s stock to hold from buy. Meta stocks lost nearly 1% after the firm has been fined a record €1.2 billion by European privacy regulators.
Comment:
The Fed meets next week and expectations of another rate increase are rising, particularly given the growing hopes the U.S. economy is headed for a 'soft landing' after Congress's approval last week of a debt ceiling deal that averts U.S. default.
The Fed enters its traditional blackout period this week, but there is more data to digest, including the ISM services PMI later Monday, which is expected to point to a still solid rate of expansion.
The Fed enters its traditional blackout period this week, but there is more data to digest, including the ISM services PMI later Monday, which is expected to point to a still solid rate of expansion.
Finalized retail sales figures are also out on Tuesday. Revisions to prelim numbers would garner interest.