A typical “risk off” profile to the FX market: CHF and JPY were the two best-performing currencies, while the commodity currencies were the biggest losers. The move was due to renewed concerns about US-North Korea relations after US President Donald Trump said that there’s a “very substantial chance” his proposed summit with North Korea’s Supreme Leader Kim Jong Un “won’t work out.” US stocks closed lower as a result.
Odd then that EUR was lower too. Peripheral European bond spreads tightened as doubts emerged that Italy’s President Sergio Mattarella would accept the 5 Star/League’s nomination for the next Prime Minister, Giuseppe Conte, after questions arose about whether he was entirely honest about his stated academic qualifications. It seems that EUR/USD is being driven more by global risk factors than the idiosyncratic European factors, and the conclusion must be that EUR is the “risk on” currency and USD the “risk off” currency. Mattarella is expected to announce his decision today.
Gilt yields rose and GBP gained slightly after Bank of England Governor John Carney told Parliament’s Treasury Committee that “it made sense to take a bit of time” to assess the economic outlook in light of the soft Q1 Gross Domestic Product (GDP), while noting that “it's more likely to have been temporary and idiosyncratic factors that slowed the economy.” His colleague on the Monetary Policy Committee, Gertjan Vlieghe said he sees one or two rate hikes a year for the next three years. Investors see only two hikes in the next four years.
First thing on the agenda is the preliminary purchasing managers’ indices (PMIs) for the Eurozone. The manufacturing PMIs are all expected to be down a little, confirming the loss of some momentum in the EU economy. The scale of the decline is modest though and the PMIs are at historically high levels, so even a small decline leaves them at levels indicating continued expansion.
The Eurozone composite PMI is expected to be unchanged at a relatively high level as the service-sector PMI, the main determinant of the overall PMI, is also expected to be unchanged. That suggests the EU economy is likely to continue to expand. However, the lack of any rebound following the recent decline also suggests that the scope for a material acceleration in growth is limited. This may make the European Central Bank (ECB) more cautious and convince them to delay the end of Quantitative easing (QE) to the end of the year and to wait longer after that before starting to normalize policy. In that respect, the figures could be negative for EUR.
Next up is the UK consumer price index (CPI). This is of course a major indicator for the UK, but there will be another one on the 13th of June 2018 ahead of the 21st of June 2018 Bank of England meeting. In any case while the headline inflation rate is forecast to remain the same, core inflation is expected to moderate slightly, as is producer price inflation, as the pass-through from a weaker sterling fades. The figure is therefore likely to be negative for GBP.
The US PMIs by contrast are expected to be unchanged (manufacturing) or higher (services), which suggests an acceleration in growth in Q2. This would confirm the upturn in growth that both the Atlanta Federal Reserve System (Fed) and New York Fed are estimating for Q2 (4.1% and 3.1% qoq SAAR, respectively, vs 2.0% in Q1). Given the mounting questions about ECB policy against the background of sluggish growth and policy uncertainty in Italy, It is expected that signs of accelerating growth in the US would tend to reassure investors about the Fed’s intentions and therefore could be positive for the dollar.
US new home sales are expected to be down modestly, as are existing home sales (due out tomorrow). It’s a little worrisome as springtime is the peak period for home buying. The problem is that a) the inventory of homes for sale is relatively low, and b) mortgage rates are now at a five-year high. The big question is whether sales are being held back by low inventory or by high mortgages. The former is a neutral factor but the latter could have some impact on Fed thinking.
The release of the minutes from the May 2018 Federal Open Market Committee (FOMC) meeting is one of the major events of the week. The statement following the meeting was considered rather hawkish, because they changed their wording to show more confidence in inflation. As a result, the likelihood of four rate hikes this year increased following the meeting (see graph).
In reading the minutes, the focus will be on what they were thinking when they changed their statement from inflation “continued to run below 2%” to “moved close to 2%.” Any specific discussion of the data is likely to be somewhat stale however after average hourly earnings growth slowed in April 2018 and the rate of increase in the core CPI was unchanged.
We should also look out for discussions about the flattening of the yield curve. This has been a big issue, since of course a flat yield curve is a necessary precursor to an inverted yield curve, and an inverted yield curve normally heralds a recession. Some FOMC members have argued the Fed should be cautious in raising rates further lest the yield curve invert, which in my view confuses cause (recession) with effect (inverted yield curve).
Later in the evening, the garrulous Minneapolis Fed President Neel Kashkari has yet another moderated Q&A session.
Overnight, New Zealand announces its trade figures. While the balance is forecast to flip from a small deficit to a small surplus, it’s not enough of a surplus to stop the 12-month moving average from declining further. Furthermore, the improvement is expected to come from lower imports, not higher exports, which are forecast to remain unchanged. This could be negative for NZD.
And finally, early in the European day, Germany will announce the second estimate of its Q1 GDP. Usually there’s no revision, but rather we get the detailed breakdown of the data.The Fundamental Analysis is provided by Marshall Gittler who is an external service provider of Claws and Horns (Cyprus) Limited, an independent analytical company. Any views and opinions expressed are explicitly those of the writer. Any information contained in the article, is believed to be reliable, and has not been verified by STO and is not guaranteed to be accurate. References to specific products, are for illustrative purposes only and are not a form of solicitation, recommendation or investment advice. Past performance is not a guarantee of future performance.