Market Briefing: Directional position-taking fades into central bank decisions
North American equity futures are setting up for a mixed open, Treasury yields are ticking lower, and the dollar is steady as market participants remain sidelined before decisions from the Federal Reserve and European Central Bank later in the week.
The Australian dollar was the clear outperformer in currency markets overnight, up almost a full percentage point against the greenback after central bankers delivered a surprise interest rate hike. The Reserve Bank of Australia unexpectedly increased its cash rate target to 3.85 percent and said “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”. The move - coming after most market participants had factored in a long pause - suggests that the perceived downside risks associated with continuing the fight against inflation have diminished somewhat over the last month, making growth tradeoffs more palatable.
The hike should act as a warning for those market participants who are betting on global rate cuts in the latter half of the year, but we’re not sure whether there’s a clear read-across from the Australian central bank to other majors in the short term - the Bank of England, European Central Bank, and Federal Reserve are all expected to follow through on consistently-hawkish messaging in the next few decisions anyway. There might, however, be a parallel in Canada, where economic slack remains minimal and price pressures are still running well above target. A surprise rate hike from the Bank of Canada in the months ahead cannot be ruled out.
Core inflation in the euro area slowed last month, making a downshift at Thursday’s European Central Bank meeting more likely. With highly-volatile food and energy costs excluded, consumer prices climbed 5.6 percent year over year in April, down from 5.7 percent in the prior month. The data come after a lending survey showed credit standards “tightened further substantially” and net loan demand from European firms declined by the most since the global financial crisis in the first quarter, helping magnify the impact of prior rate hikes, and lessening the need for another half-point move. Markets expect a quarter-point hike on Thursday, paired with messaging that points to at least two more in the months to come as the central bank catches up with its global counterparts.
The Job Openings and Labor Turnover Survey for March, out at 10 am, is expected to show the number of vacant positions falling to 9.7 million in March from 9.9 in the prior month. Underlying demand for workers has remained strong even as the country’s largest businesses have pivoted from complaining about labour shortages to announcing job cuts on earnings calls. The Quits rate is likely to remain far above pre-pandemic levels.
Data released at the same time could show factory orders climbing 1.3 percent from April, lining up with previously-reported strength in sentiment across the manufacturing sector - but yesterday’s drop in the new-orders component of the Institute for Supply Management’s index could portend some weakness.
Overall stress measures continue to trend lower even after yesterday’s debt ceiling warning from Treasury Secretary Janet Yellen, suggesting that market participants remain convinced an 11th-hour resolution will avoid default. Reaction in currency markets has been practically non-existent thus far, and the volatility surface is showing no signs of kinking around the June-to-July time period. House Speaker Kevin McCarthy has reportedly agreed to meet with Joe Biden to discuss the issue next Tuesday.
We remain convinced that tomorrow’s Fed decision - likely to feature a quarter-point rate hike and some hawkishly-biased pause-and-hold messaging from Chair Powell - is almost fully priced into financial markets, with Friday’s non-farm payrolls report looming as the most meaningful potential volatility catalyst on the week’s calendar. We could be wrong though - last week’s Bank of Japan decision, in which Governor Ueda articulated a widely-anticipated steady-as-she-goes message, seems to have shaken investors, and has led to a sustained drop in the yen.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Job Openings and Labor Turnover Survey, March
EUR Unemployment Rate, March
USD ADP Employment Change, April
USD S&P Global US Composite Purchasing Manager Index, April Final
USD Department of Energy Weekly Inventories
USD Federal Reserve Rate Decision
USD Federal Reserve Press Conference
BRL Central Bank of Brazil Rate Decision
CNY Caixin China Purchasing Manager Index Composite, April
EUR S&P Global Eurozone Composite Purchasing Manager Index, April Final
EUR European Central Bank Rate Decision
USD Weekly Jobless Claims
USD Trade Balance, March
EUR European Central Bank Press Conference
AUD Reserve Bank of Australia, Statement on Monetary Policy
USD Non-Farm Payrolls, April
CAD Employment, April
USD Baker Hughes Weekly Rig Count