European markets had a much more positive bias yesterday, helped by more resilience in the US, which finished the day strongly higher after the release of the latest US Federal Reserve minutes. This positive finish took a bit of a knock after the close, as another disappointing set of earnings numbers, this time from Nvidia, prompted US futures to slide back a touch, nonetheless it isn’t expected to translate into too much of a headwind for today’s European open. Asia markets are broadly mixed, with European markets expected to see a modestly cautious open later this morning.
The minutes showed the Fed make a modest adjustment to estimates for 2022 PCE inflation, which were adjusted slightly higher to 4.3%, and then a steep fall to 2.5% in 2023, while at the same time officials discussed the prospect of more aggressive moves. So, wWhat did last night's Fed minutes tell us that we didn’t already know? The answer is not much, which is probably why there was little in the way of market reaction, with the Nasdaq 100 and S&P 500 finishing the day higher.
Markets have already become comfortable with the idea of further 50bps rate rises in June and July, with more rate rises to come, along with discussions about the prospect of moving rates beyond neutral to help constrain above-target inflation. None of this is new, but it’s also not particularly instructive given that not one FOMC member has the same measure of where the neutral rate actually is. Market pricing of where the Fed funds rate is likely to be at year end is at 2.5%, which could well be where the neutral rate is, however various policymakers have differed about where the real level actually is, probably because they don’t know.
Kansas City Fed president Esther George has suggested 2.5% as a starting point, while St. Louis Fed president James Bullard put it lower earlier this year at 2%, while calling for rates to rise to 3.5% by year end. We’ve also seen some signs in the last few days of some modest cracks in the hawkish consensus, after recent comments from Atlanta Fed president Raphael Bostic, who suggested a September pause might be appropriate. He has also floated the idea of a neutral rate of between 2% and 2.5%.
In summary there was little in the minutes to scare the horses, with today’s latest US Q1 GDP expected to be adjusted upwards to -1.3%, with personal consumption set to be nudged higher to 2.8%, with the focus expected to be on tomorrow’s April PCE numbers. The surprise -1.4% contraction a few weeks ago has raised concerns that the US economy could be heading towards a stagflationary style slowdown and possible recession, despite low levels of unemployment. There have been attempts to play down the extent of the slowdown in Q1, with the citing of slower inventory rebuilds after Q4 which saw a significant pull forward for Christmas. Net trade contributed to a -3.2% drag, while inventories saw a -0.8% decline, on the back of supply chain disruption. Personal consumption was fairly resilient; however, this will face challenges in the months ahead due to higher prices.
We also have the latest set of weekly US jobless claims numbers which have started to edge back up over the last few weeks. They hit a 50-year low at the start of April at 167,000, however they’ve started to move higher and back above 200,000, hitting 218,000 last week, a two-month high. Today’s claims are expected to come in at 215,000, with continuing claims remaining steady at 1.31m.
It’s also been speculated that UK chancellor Rishi Sunak will today announce some emergency measures to help the most vulnerable UK households to help alleviate the strain on their finances because of the surge in energy prices. The package, which it is said is expected to be in the region of £10bn, is also likely to be a welcome distraction for the government in the wake of the furore over the Sue Gray report over gatherings and parties at Number 10 and the Cabinet Office.
The big question is how it will be paid for, with speculation that we could see the announcement of a windfall tax of some description, in a move that while politically popular, could have wider unexpected and negative consequences further down the line, when it comes to encouraging business to invest in the UK. It would also be seen as a political win for the opposition parties who have been campaigning for such a move for weeks now. Either way, it would be the latest example of a government reacting to events, rather than shaping them.
EUR/USD – the failure at the 1.0750 area has seen the euro slide back, with resistance also at the 50-day MA. We also have trend line resistance from the February highs, just above that. We currently have support at the 1.0530 area.
GBP/USD – finding support at the 1.2470 area and the lows this week. While this holds, we need to see a move beyond the 1.2630 area to argue a short-term base is in. Below the 1.2470 area, argues for a move to the 1.2320 area. Above 1.2630 argues for a return to the 1.2830 area
EUR/GBP – held below the resistance at the 0.8600 area, and has since slipped back, below support at the 0.8520/30 area, with further support at the 0.8480 area.
USD/JPY – continues to hold above the 50-day MA, with a break potentially opening a move towards the 123.00 area. We currently have resistance at the 128.30 area.