Markets
The US dollar staged a remarkable comeback during US trading hours last Friday. It’s hard to pinpoint one single trigger to the move, but there are quite some suspects. First, US stocks opened feeble and failed to turn the corner throughout the session. Main indices ended up to 0.85% lower dampening general risk sentiment. Second, US eco data continued their stellar run with the Chicago PMI at the strongest level since 1983, an upward revision for the final Michigan consumer confidence and an unseen increase in personal income (fiscal stimulus). The Fed’s favorite price indicator – PCE core deflator – jumped as expected to 1.8% Y/Y, equaling the mid-2019/early 2020 high. A third possible USD-driver was weakness on the oil market, with Brent crude slipping from around $68/b to $66.5/b. Suspect number four is more technically inspired as the trade-weighted greenback broke with the April, downward trend channel. DXY close at 91.28 from a 90.62 open. EUR/USD failed to complete a sustained break above 1.2103 resistance, returning to the low 1.20 area. Dallas Fed President Kaplan was the dollar’s final possible inspiration. This year’s non-voting FOMC member broke ranks with his colleagues by releasing the tapering genie. As FOMC Chair Powell after the Fed policy meeting, he point to excesses and imbalances in markets. Unlike Powell, he draws the conclusion that “at the earliest opportunity, it will be appropriate for us to start talking about adjusting those purchases”.
Dollar strength was at odds with more muted action on fixed income markets. Although some of the above-mentioned forces worked against each other – in theory at least – you might expect the context to favour somewhat higher rates. US yields declined by up to 1.7 bps last Friday with the belly of the curve outperforming the wings. The German yield curve showed a similar pattern with yields dipping up to 1.5 bps. 10-yr yield spread changes vs Germany widened by up to 2 bps (Greece/Italy).
It’s hard to draw conclusions from overnight Asian dealings with Japan and China closed. European trading will be in thin volumes as well with the UK enjoying May Day Holiday. Action will thus center around the US with April US manufacturing kicking off the data-heavy week. Apart from (stronger) data, we are eager to find out whether other Fed governors resonate Kaplan’s message. A combination of both could further help the US 10-yr yield rebounding away from 1.6% support. The jury is still out for the dollar as the previous batch of good news (excluding last Friday) didn’t really support the greenback. Quite on the contrary… UK investors will be counting down to Thursday’s Bank of England meeting, which should be able to safeguard EUR/GBP 0.87 in the run-up.
News headlines
Germany’s Greens have surged past Merkel’s center-right bloc in four polls in the past week with one putting them six points ahead at 28%. The most recent poll on Sunday confirmed the trend, showing Merkel’s bloc falling to a 14-month low of 24% and the Greens losing 1 ppt to 27%. It was a first gauge of voter intent after all parties nominated their candidates, including Baerbock for the Greens. Baerbock is seen as a force of renewal after 15 years of CDU/CSU. Merkel’s successor Laschet on the other hand has been struggling to gain support, even from within own ranks.
Indian PM Modi’s Bharatiya Janata Party lost an election in a key state he regularly visited before the current corona wave thwarted his campaign. The BJP only took 77 seats of the 292 up for grabs, way less than the more than 200 Modi predicted himself last month. The party of the incumbent Chief Minister Banerjee on the other hand won about 72%. Modi’s opponents also won in the southern states of Tamil Nadu and Kerala, in further signs of a backlash to his handling of the pandemic. USD/INR gapped higher to reach 74.3 at some point before paring gains to 74.16 currently.
