[Market Review].
The dollar saw its first gain of the week. The dollar index rose 0.4% to near 90, the first gain of the week. Recent comments from a number of Fed officials have reflected a shift in the Fed’s attitude. And yesterday another Fed official, Quarles, said he was optimistic about the economic outlook and that a reduction in easing may be discussed at future meetings.
Meanwhile, the recent Federal Reserve overnight reverse repo operation volume is increasingly approaching a record high. The market is starting to worry about the excess cash in the U.S. funding market and whether it will force the Fed to take action to avoid continued downward pressure on short-term interest rates. These have strengthened investors’ expectations for the Fed to taper easing, causing both U.S. bond yields and the dollar to rebound from their lows.
Gold fell below the 1900 mark. Next, let’s focus on gold. Gold prices have failed to stabilize their previous gains and have now fallen below the $1,900 mark.
The U.S. 10-year inflation-protected bond break-even ratio fell back to 2.4%, but remains at historically high levels, suggesting that bond investors’ inflation concerns have eased, and the dollar rallied as gold prices came under pressure to the downside.
In addition, the 5-year U.S. bond auction demand is strong but failed to push up Treasury prices, coupled with the implied volatility of medium- and long-term U.S. bond yields also fell slightly, suggesting that the bond market remains in a wait-and-see mode in the near term, and is not expected to see much volatility before the release of the U.S. core PCE data on Friday, which will not be too detrimental to gold prices.
Silver fell more than 1% during the day. Silver. Like gold, silver also saw a decline. Silver prices fell from $28 to near $27.50, down more than 1% intraday.
The euro fell below the 1.22 handle. Let’s look at non-U.S. currencies again. Against the backdrop of a strong dollar rally, the euro plunged more than 50 points against the dollar, falling below the 1.22 handle.
The British pound was under pressure to the downside. Like the euro, the pound was also under pressure to the downside. The pound fell more than 20 points against the dollar during the day, hitting a low of 1.4091.
The New Zealand Fed released a hawkish signal to support the New Zealand dollar surge. Then turn your attention to the New Zealand dollar. The New Zealand dollar rose on news that the New Zealand Federal Reserve announced at Wednesday’s interest rate resolution that it left rates unchanged and expects to raise the official cash rate from the second quarter of 2022. At one point, the New Zealand dollar rose 1.2% against the U.S. dollar to 0.7316, the highest level since February.
The New Zealand Fed is the second major central bank after the Bank of Canada to turn towards withdrawing loose monetary policy. The change prompted traders to expect a change in tone from other monetary authorities as well.
U.S. oil is trading sideways. Finally, taking a look at the oil market, U.S. oil closed slightly higher, though still hovering near $66, after a big drop of 1.662 million barrels in EIA crude inventories strengthened expectations of improved demand ahead of the summer driving peak, overriding concerns that a possible resumption of supply from Iran would lead to oversupply. In the short term, we can continue to monitor the U.S.-Iranian negotiation process.
[Risk Warning].
Rising inflation causes concern Fed fears rate hike early next year
Morgan Stanley believes that rising inflation is starting to cause concern in the market, and more and more people are starting to think that this could be a more structural long-term goal. If that is the case, the Fed will have to raise interest rates at some point. The bank expects the Fed to start raising rates as early as early next year, while it will begin tapering quantitative easing at the end of this year.
If stock market volatility is high gold will be supported
Some analysts say that rising inflationary pressures will continue to support gold prices, but this is only one of the factors supporting higher gold prices, while another factor is how stock market valuations will be affected by inflation.
Continued rising input costs and wage pressures will both affect many companies’ budgets for the rest of the year. Investors will get a clearer picture of the impact of inflation on stock market valuations during this summer’s earnings season. In addition, market expectations for the progress of the economic recovery and inflation are beginning to change slightly.
Stock market volatility has been low since the beginning of the year as stock prices have climbed to record highs. However, volatility in the market is currently expanding. As long as volatility remains at its current higher level, it will be favorable for the safe-haven asset gold.
If the ECB bond purchases remain unchanged or limit the euro’s recent gains
Mitsubishi UFJ said that long-term European bond yields have fallen since last week when ECB President Lagarde again reiterated that he was keeping a close eye on Treasury yields, implying that the ECB is uncomfortable with the recent rise in European bond yields.
The bank previously believed that the improved outlook for eurozone growth and an accommodative financing environment would lead to a small reduction in the size of the ECB’s bond purchases. Therefore, if the ECB decides to maintain the original pace of bond purchases at the June rate meeting, it may limit the euro to move sharply higher against the dollar in the short term.
Key Forecast]
20:30 U.S. initial claims or continue to go lower
First of all, to focus on the United States will be released initial jobless claims. In recent weeks, the number of initial claims released by the United States continued to move downward, last week’s release of data was 444,000, the lowest value since the week of March 14, 2020. Some agencies commented that the further decline in U.S. initial jobless claims for the week suggests that job growth has accelerated this month, but companies still urgently need workers. Jobless claims are expected to fall further in coming weeks as states announce they are pulling out of their unemployment assistance programs next month. Citigroup economists, meanwhile, said the labor force participation rate is likely to increase in the June nonfarm payrolls report.
Currently, the market expects that the U.S. initial jobless claims for the week to May 22 will be 425,000. If the published value is much higher than expected, the dollar index may come under pressure; conversely, if the published value is less than expected, the dollar index may strengthen.
The market generally expects that the number of initial jobless claims will gradually decrease, which will have some support for the dollar index.
20:30 US Q1 GDP may be revised up
Next, let’s take a look at the first quarter GDP data that will be released in the US. In the third quarter of last year, the U.S. GDP recorded 33.1% and slipped to 4.1% in the fourth quarter. By last month, the preliminary annualized quarterly rate of U.S. real GDP for the first quarter was recorded at 6.4%. The analysis points out that economic activity will start to boom in 2021 as the U.S. economy gradually picks up thanks to widespread vaccinations and help from government spending. In the first quarter of this year, U.S. gross domestic product grew at an annualized rate of 6.4 percent. This GDP growth is the second highest since the third quarter of 2003. This indicates that the economy is up and running and that this will be a prosperous year. It is clear that the U.S. consumer is powering the economy and that businesses are investing heavily.
The U.S. Department of Commerce noted that this GDP growth indicates an increase in personal consumption, residential and non-residential fixed investment, and federal and state government spending. However, the growth was partially offset by declines in private inventories and exports and an increase in imports. The report shows that consumers accounted for 68.2 percent of the economy this quarter. Consumer spending on goods rose 23.6 percent, while spending on services, the weak link in the economic recovery, also rose 4.6 percent.
Currently, the market expects the first quarter U.S. real GDP to be revised at an annualized quarterly rate of 6.5%. If the published value is better than expected, it may be positive for the dollar index; conversely, it may be negative for the dollar index.
Overall, the U.S. GDP data is expected to be positive, which may increase the market’s expectations for the Fed to tighten monetary policy, which in turn will support the dollar index.
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