Major markets are stuck in a period of consolidation. This is shown across forex majors, commodities and indices, with Treasury yields drifting and almost daily fluctuations on the US dollar.
Equity markets are broadly no higher today than they were a month ago, whilst gold has become increasingly sticky around the $1700 area. However, are we close to the next policy shift from major central banks?
Negative interest rates were touted and possibly “whatever it takes” by the Reserve Bank of New Zealand overnight (something that has hit the Kiwi this morning). Whilst the more traditionally hawkish members of the FOMC (Loretta Mester yesterday) continue to talk down the concept of negative rates from the FOMC, yesterday’s weaker than expected Consumer Price Index inflation data from the US open the prospect of increasingly dovish policy.
Fed chair Powell has a speech today and all eyes will be on the potential for further dovish moves from the Fed. Negative rates may not be on the agenda yet, but yield curve control is realistic. The US 2 year yield is drifting lower and is only 17 basis points above zero now. The US dollar was hit by the CPI print yesterday and if Powell talks about yield curve control then there would be a dollar hit that could begin to break these consolidations on major markets. Early this morning, we have had UK GDP which has come in higher than expected. March’s decline of -5.8% was higher than the expected -8.0% and leaves the UK’s Prelim Q1 GDP at -2.0% (-2.5% exp). The ONS has said though that the difficulty in compiling the data will leave it open to significant revisions, so perhaps it is best not to get too positive about this. GBP has nodded higher nonetheless.
Wall Street closed strongly lower last night with the S&P 500 -2.0% at 2870. With futures just a shade higher (E-mini S&Ps +0.4%) this leaves a negative skew this morning. Asian markets were mixed to lower (Nikkei -0.4%, Shanghai Composite +0.2%) whilst European markets are under pressure (FTSE futures -1.0%, DAX futures -1.2%).
In forex, there is a basis of consolidation on USD, although there is outperformance of GBP after the UK GDP positive surprise, and underperformance of NZD after the dovish outlook from the RBNZ discussing “whatever it takes”.
In commodities, there is an ongoing consolidation on gold, whilst silver is slightly higher today. Oil remains stuck ranging, with a shade lower in early moves.
Eurozone Industrial Production is the first real data of note on the economic calendar at 1000BST. Consensus is expecting a -12.1% monthly decline for March, which would drag the year on year data down to -12.4% (after -1.9% in February). Into the US session, the focus will again be on deflationary signals, with US PP (or factory gate inflation) for April at 1330BST. Consensus forecasts expect headline US PPI to decline to 0.2% on the year (after being at +0.7% in March). Core US PPI is expected to slip back to +0.9% (from +1.4% in March). EIA Crude Oil Inventories are at 1530BST and are expected to show yet another build of +4.3m barrels (after +4.6m barrels last week) which would be the 16th consecutive weekly build.
There will also be a key speech by Fed chair Jerome Powell today at 1400BST.
There has been a significant shift in sentiment out of the yen in recent sessions, which shows throughout the forex crosses. There has been a significant rally seen on Euro/Yen, but is it just another chance to sell? The late April breakdown below 116/117 (which was an historic floor throughout 2019) seemed to be a key outlook changer. Previously this had been the basis of support, but a failure suggested a new more negative outlook was taking hold. Despite a spike rally to 117.75, the bulls have been unable to sustain recoveries and rallies continue to be used as a chance to sell. The latest four session rebound has unwound the market to hit a six week downtrend (today at 116.70) and a bull failure candlestick yesterday leaves the market very much in the sell-zone of the old 116/117 band (now a basis of overhead supply).
RSI has unwound towards 50 again, where previous rallies have faltered in the past six weeks. It means that how the market reacts around these resistance levels in the next couple of sessions could be key for whether downside momentum renews to retest 114.40 once more. The rally needs to clear 117.75 resistance to really shift the outlook towards sustainable recovery.