Market players have been all over the place this week as weak trade, bank jitters, and recession fears dominated price action in the first half of the week.
gold The Japanese yen displayed safe-haven strength while “riskier” assets such as stocks, crude oil and cryptocurrencies took a hit.
Then, price action caught fire as the Reserve Bank of Australia, Federal Reserve Bank, and European Central Bank published their latest monetary policy decisions.
While the three major central banks have raised interest rates, many traders still consider them “dovish”. Perhaps this is why risky assets finally recovered some of their losses during the week.
Notable economic news and updates:
🟢 Extensive arguments about market risk
Japan’s consumer confidence index improved from 33.9 to 35.4 in April from an estimated figure of 34.7, as the standard of living and overall income and employment growth picked up.
RBNZ Financial Stability Report: “The New Zealand financial system is well positioned to deal with an increasing interest rate environment and international financial market turbulence”
The RBA surprised the markets with a 25 basis point rate hike to 3.85%, citing “very high” inflation that it would take “two years” before returning to the target range. The RBA indicated that further tightening “may be required” to return inflation to target “within a reasonable time frame” – the 11th increase in a year, and the highest rate since April 2012.
US Nonfarm Payrolls for April: 253K (190K expected) vs. 165K in March; the unemployment rate fell to 3.4%; Average hourly earnings came in above 0.3% expected at 0.5%.
Extensive arguments for deflecting market risk
China’s official manufacturing PMI fell from 51.9 to 49.2 versus 51.4 estimated in April to reflect a return to manufacturing contraction.
China’s official non-manufacturing PMI fell from 58.2 to 56.4 versus the 57.0 estimate in April, indicating a sharper contraction in the sector.
Layoffs in the United States have grown to their highest levels since 2000; the smoking cessation rate fell to 2.5% (lowest in two years); Employment opportunities decreased from 10 million to 9.59 million
German retail sales fell -2.4% m/m in March vs. a downward revision of -0.3% in February, 0.4% expected
Shares of major US regional banks fell as the failure of the Federal Reserve shook confidence in the recovery of the banking sector
US job cuts in April 2023: 66.99k vs. 24.28k in April 2022 – Challenger, Gray & Christmas, Inc; This is the fourth month in a row that the number of cuts has been higher than the same month in the previous year
FOMC Chairman Powell stated that policy makers believe they are nearing the end of their tightening cycle but that a cut would not be appropriate given inflation trends.
China’s services Caixin PMI fell from 57.8 to 56.4 versus a forecast of 57.1 in April, as activity and new work reversed slower gains while input cost inflation rose to a one-year high.
Bank of Canada Governor MacClem says they’re not done raising interest rates, especially if inflation rises back above 2%
UBS is considering selling Credit Suisse after acquiring the troubled bank a few weeks ago, and may keep the investment arm while offloading the rest
Intermarket Weekly Brief
Dollar, gold, S&P 500, oil, US 10-year yield, bitcoin overlay Planned by TV
On Monday, volumes were as thin as a slice of pork, likely due to the Labor Day holiday, and things weren’t looking good for risk assets after China printed weak PMI reports.
Traders were also baffled by the news of JPMorgan’s takeover of First Republic Bank, wondering if this was the end of the banking crisis or just the beginning of a whole new disaster.
To make matters worse, U.S. officials have been in such a frenzy about the U.S. debt ceiling that Treasury Secretary Yellen warned that the U.S. could default as soon as June 1 if the ceiling is not raised.
Meanwhile, Biden has invited top players in Congress to the White House for a conversation on the debt issue, hoping to avert a full-blown global financial crisis if the US decides to default. Who knew Treasury news could be so exciting?
Therefore, risky assets were lower at the beginning of the week, most notably led by Bitcoin, which fell to the $27,700 level after being rejected at $30,000 over the weekend.
Crude oil benchmarks also fell below the penguin ice slide on recession fears, with WTI bottoming around the $67.00 handle.
The Reserve Bank of Australia (RBA) was in the limelight on Tuesday as it surprised the markets with a 25bp rate hike when everyone else and their mother paused. Turns out, RBA members weren’t too happy about the rate of slowdown in consumer prices.
Not surprisingly, the Australian dollar is higher across the board in the news. The New Zealand dollar also found some support from speculation that the Reserve Bank of New Zealand will soon say “twin!” and canceling a pause in favor of another rate hike.
The opposite trend was for the euro, which slid against safe havens such as the US dollar and the Japanese yen after weaker-than-expected euro-zone inflation figures supported the idea of a European Central Bank pause for the foreseeable future.
The US session saw complete risk aversion when regional bank stocks collapsed. Some even dropped 16% to 20% due to fears of infecting the banks!
Aside from US stocks (the S&P 500 fell below 4100), crude oil and Treasury yields also took a hit. The safe-haven gold breached the psychological $2,000 level before retreating while the BTC/USD pair traded from $28,300 to $29,300 in a few hours.
It was the US dollar’s turn to feel the pain on Wednesday after the Federal Open Market Committee shared its monetary policy decision for the month of May. As expected, the Fed raised rates by 25 basis points to a range of 5.00% – 5.25%, which is the “final rate” FOMC members set out in their March outlook!
In his press release, Fed Chairman Powell said:
- There was strong support among FOMC members for a rate hike
- The Fed will rely on data going forward
- They may be nearing the end of their stress cycle
- A moratorium on rate hikes was not discussed
- They felt a rate cut was “inappropriate” given inflation trends
- Credit tightening is the focus
Traders took it as a “peaceful rally” and dropped the dollar like a hot potato. Other assets also took a hit, with the S&P 500 hitting fresh weekly lows below 4070 and Crude Oil also falling. Safe havens benefited from gold trading strongly above $2,000 and the Japanese yen benefited from all of the risk aversion gains.
Markets generally took the pill on Thursday while the European Central Bank stole the spotlight in the US trading session. The central bank raised interest rates by 25 basis points (not 50 basis points as some traders expected) and promised to cut the asset purchase program (APP) in July.
Despite announcing the end of reinvestment in the APP, sharing that some members voted in favor of a 50 basis point increase, and the ECB chief saying “we’re not pausing, that’s very clear,” the euro fell in the event, likely due to a combination of from several ideas.
This may include the disappointment of only a 25 basis point hike, slowing inflation, and the latter Lending survey data Pointing to the slowdown in credit conditions, which indicates that the rise in interest rates is starting to put pressure on the eurozone economy.
On Friday, risk sentiment improved further, perhaps due to all the central bank hikes out of the way (and rhetoric leaning more dovish), but volatility was subdued ahead of Friday’s NFP report.
Volatility rebounded quickly with the release of higher-than-expected US employment figures adding to more risk-taking.
This reaction contrasts with the recent theme of “pricing in higher odds of Fed tightening on good economic news,” suggesting that traders may be starting to tinker pretty much that the economy is staying strong and inflation appears to be stabilizing, while That rising interest rates may be a close session.
We also saw a strong bounce in stocks during the session, which could lift risk sentiment, as regional bank stocks skyrocketed (perhaps profit-taking from this week’s aggressive sell-off in depressed names like Western Alliance, PacWest and Zions Bancorp).
Unfortunately for risk-averse traders, it wasn’t enough to bring risky asset stocks or oil back into the green, but there was a dip in bitcoin that benefited from renewed banking crisis fears this week.