This week’s inflation and employment data highlighted monetary policy trends and their impact on economic growth.
Unfortunately for risk assets, this week’s data indicated a prolonged period of rising interest rates even amid signs of weak economic activity and only a marginal slowdown in inflation.
Safe-haven assets such as the Swiss Franc gained while “riskier” bets such as Bitcoin, Crude Oil, the New Zealand dollar and the Canadian dollar saw bearish trends during the week.
Notable economic news and updates:
China’s economy grew 4.5% on a quarterly basis in the second quarter against an estimated expansion of 4.0% and a previous growth figure of 2.9%, buoyed by the easing of COVID-19 restrictions.
The Reserve Bank of Australia meeting minutes revealed that policy makers considered raising interest rates in April
Canadian CPI for March: +0.5% m/m (+0.3% m/m expected) vs. +0.4% m/m prior; +4.3% yoy vs. 5.2% yoy in February
UK inflation surprises higher, with CPI rising 10.1% y/y in March vs. 9.8% expected and 10.4% in February, as households continue to deal with higher food and energy bills.
BTC/USD failed to sustainably breach the $30,000 level
New Zealand’s consumer price index for the second quarter fell from 1.4% to 1.2% qoq versus the expected increase to 1.5%, tempering the RBNZ’s hawkish hopes as energy prices tumble
European Central Bank meeting minutes showed that the majority of members favor a 50 basis point rate hike in March despite the concerns of the global banking sector.
Global Flash PMIs showed further weakness in manufacturing activity while the services sector strengthened:
- US S&P World Manufacturing Index for April: 50.4 vs. 49.2 previously; The services business activity index recorded 53.7, compared to 52.6 previously
- Eurozone HCOB Flash Manufacturing PMI for April: 45.5 vs. 47.3 prior: Services PMI at 56.6 vs. 55.0 prior.
- UK Manufacturing PMI for April: 46.6 vs. 47.9 previously; Services PMI improved to 54.9 vs. 52.9
Notable Feds speaking this week:
- St. Louis Fed President Bullard (non-voting member) doesn’t see a recession in the next six months; It makes the argument a 50 basis point hike to the 5.5% to 5.75% range.
- On Tuesday, Atlanta Fed President Bostick said he would like to see another rate hike before pausing and holding it above 5% “for a while.”
- Williams, Fed official: Inflation is still very high, so the Fed needs to work to bring rates down and it will likely take two years to reach the 2% target
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It was a slow start for the broad markets on Monday, at least until assets took their cues from the strong US Empire State manufacturing release during the US morning. US bond yields rose and the dollar rose pips against other safe-haven currencies such as the Japanese yen and the Swiss franc, and the Fed is likely to back the narrative of keeping interest rates higher for a longer period.
The dollar’s strength was also not helpful to bitcoin (BTC/USD) and the crude oil bulls, who saw a sharp drop on the day after being rejected at key technical levels.
The dollar fell and receded against risk on Tuesday after China’s GDP came out better than expected. RBA meeting minutes also showed that members seriously considered a rate hike (rather than pausing) earlier this month, meaning the central bank could be persuaded to break out of its bias of pausing rate hikes.
Bitcoin regained the $30,000 level, Asian and European stocks tracked Wall Street’s gains, and gold prices returned to $2,000.
Meanwhile, the British Pound and the Canadian Dollar saw intraday trends that reflected diverging monetary policy expectations, affected by the session with fresh economic updates from the UK and Canada.
A stronger-than-expected UK jobs report fueled speculation of a BoE rate hike and allowed the British Pound to remain near intraday highs after some profit-taking. On the other hand, the Canadian dollar easily returned to its bearish trend during the week after the weak Canadian CPI report supported the idea of a pause in interest rate hikes.
The British Pound got an extra boost on Wednesday after it surprised the UK with another double-digit inflation in March. The BoE’s hawkish outlook pushed the Pound to new highs for the week against its major peers.
Then everything changed when the Fire Nation attacked. And by “fire nation” I mean recession fears.
See, high inflation in Canada and the UK (still) has more traders believing that major central banks will keep interest rates higher for longer. Not good when some of the leading indicators show economic activity is already weak.
Concerns about viscous inflation, increasing central bank tightening and recession in some major economies have led to risk aversion.
Asian and European stocks closed in the red, bond yields reversed, oil extended its losses, and gold, which is considered a safe haven, returned to $2,000. BTC/USD even said goodbye to the $30,000 levels!
The risk aversion train continued to move on Thursday as recession fears gained momentum from the Asian opening. And it was during the US session where we saw higher-than-expected US weekly jobless claims, weak housing data, and a notable failure in the Philly Fed Manufacturing Index, supporting the notion of rising recession risks for the world’s largest economy.
It also didn’t help that Fed members didn’t seem overly concerned about recession risks. For example, Cleveland Fed Chair Mester said she expects monetary policy to move “more in constrained territory” and for rates to remain above 5% “for some time.” Meanwhile, Dallas Fed President Lori Logan’s pause in rate hikes is no guarantee that the Fed won’t raise rates again in the near future.
Combined, this likely prompted traders to reduce pivot bets in the session, which is characterized by declines in US stocks (which KAH-POW took additional from TSLA’s disappointing margin reports), US Treasury yields and oil.
Friday’s Asian session started slow as traders were probably waiting to see the latest business survey (a leading economic indicator) update from around the world. It didn’t take long for volatility to recover as the latest PMI updates continued to show weak manufacturing sentiment, while service sector sentiment reached higher levels of optimism.
Surveys have also indicated that rates continue to rise, albeit at slower rates, throwing a little cold water on the idea that rate easing may be just around the corner.
Based on the broad decline in risky assets after the European and UK PMIs, it appears that traders are focusing on the service sector component of the PMI reports, and they note that the employment and price components are still too strong for central banks to start talking monetary policy/interest rate pivot. at present.
Flash US PMI data shook sentiment slightly as it deviated slightly from the rest of the world. Both manufacturing and services components indicated rising optimism, which appears to have prompted traders to reduce some of their risk aversion bets heading into the weekend.