The market review]
The Fed announced its interest rate resolution early Thursday morning. The Fed kept interest rates unchanged as expected, and kept the monthly bond purchase size unchanged. Although the Fed acknowledged that the U.S. economy has improved, but Fed Chairman Jerome Powell said in a subsequent press conference that it is not the time to start discussing tapering the size of bond purchases. He believes that the temporary rise in inflation this year does not meet the criteria for a rate hike.
After the resolution was announced, market bets on the Fed tightening in 2022, fell somewhat. European dollar futures show that the market continues to fully reckon with the possibility of the Fed raising rates for the first time in March 2023, while the likelihood of a rate hike in December 2022 is over 90%.
Meanwhile, the U.S. 10-year Treasury yield briefly advanced to 1.66%, a fresh intraday high, but then dipped to near 1.6%.
The dovish Fed hit the dollar hard. The dovish Fed also hit the dollar index hard. The U.S. index fell from an intra-day high near 91.1 to near 90.4. Regarding the follow-up, we have to keep an eye on Biden’s long-term stimulus plan in addition to the Fed’s attitude on monetary policy.
After the announcement of the infrastructure plan, Biden started to disclose details about the family plan again. The plan is said to include about $1 trillion in investments and $800 billion in tax cuts for American families and workers. This will cover areas such as education, childcare, paid leave and sick leave. The plan is partially funded by a $1.5 trillion tax hike on the wealthiest Americans. The proposals are still under discussion and we will continue to monitor them.
Gold is approaching the $1,790 mark. Next, let’s focus on gold. Buoyed by the falling dollar and U.S. bond yields, gold rallied nearly $20 from its intraday low at one point late in the day and is now approaching the $1,790 mark.
Silver fell and then rose. Silver’s gains were no less impressive. Earlier in the day, silver fell to $25.80 before rebounding to near $26.40.
The euro made a strong move above 1.21. Let’s look at non-U.S. currencies again. The Fed’s dovish statement also boosted the euro a bit. After rising more than 70 points, the euro continued to climb against the dollar and has now risen to around 1.2150. Regarding Europe’s economic recovery, ECB President Lagarde said it was too early to say whether the worst economic effects of the new crown crisis were over. However, she sees signs of improvement in PMI data and high-frequency data, and a strong economic rebound is likely to occur in the second half of the year. Lagarde stressed that the economy still needs monetary policy and fiscal policy stimulus. It seems that the ECB’s current attitude is similar to that of the Fed.
U.S. oil continues to shake up. Finally, a look at the oil market. U.S. oil continues to shake higher. U.S. refined oil inventories fell sharply last week and refinery production activity accelerated to its highest level in more than a year, boosting hopes for rising fuel demand in the world’s largest oil consumer. In addition, the U.S.-Iran negotiations are the focus of recent attention. If the U.S. lifts restrictions on Iran, Iran will provide more crude oil to the global market. This may further drag down oil prices.
[Risk Warning].
Crude Oil: No major positive oil market for now U.S. oil is expected to fluctuate narrowly
Oil prices continued to rise after OPEC+ agreed to skip a ministerial-level meeting on Wednesday. Analysts said the outlook for crude demand across Europe has improved significantly, supporting OPEC’s decision to stick to its plan to increase production, despite a hit to crude demand in India and Japan. Considering the current Ramadan holiday, the oil market is not very surprised by OPEC’s decision. US oil is expected to continue to oscillate in a narrow range, pending broader risk appetite.
Euro: Euro short-term bias to the upside but expected to be difficult to break above 1.23
Morgan Stanley remains neutral on the euro trend, though still sees near-term risks to the upside as more European countries announce plans to reopen their economies for the summer and as vaccination rates in Europe continue to rise. However, the bank also noted that the pair will not test the January highs again at 1.23. The latest ruling by the German Constitutional Court clears a key obstacle to the launch of the EU recovery fund. But Morgan Stanley believes that the amount of the fund’s first outlay will slip between the March and April quarters. This is expected to be difficult to support a significant strengthening of the euro.
British pound: the positive gradually dissipate the pound fears to turn down
JP Morgan is inclined to short the pound at current price levels, as the optimism generated by vaccines has reached its upper limit for the pound. As the vaccination gap between the U.S. and the eurozone closes, investors are reassessing the merits of holding long positions in the pound U.S. Currently, the positive April seasonality for the pound is turning into May negativity. In the past 15 years, there have been 13 years in which the pound was in a down month in May.
[Key Outlook].
20:30 US Q1 Real GDP Preliminary Annualized QoQ: expected to move higher
Let’s look at the GDP data first. Last year, the U.S. fourth quarter GDP data recorded 4.3%. The data reflects growth in exports, nonresidential fixed investment, consumer prices, residential fixed investment and private inventory investment, the U.S. Bureau of Economic Analysis said. As the U.S. accelerates vaccinations, a series of recent data releases have performed better than expected, which means that GDP figures for the first quarter of the year could move higher.
The market expects the preliminary annualized quarterly value of U.S. real GDP in the first quarter to be 6.1%, which may be positive for the dollar if the published value is better than expected; conversely, it will be negative for the dollar.
Goldman Sachs expects the U.S. GDP growth rate to peak in the second quarter. The investment bank said that because fiscal stimulus and economic reopening may have the biggest impact on the U.S. in the second quarter, it expects U.S. GDP growth may peak in the second quarter, perhaps with a sharp increase of 10.5%, while the second half of the year is expected to grow 7%, while core PCE will be temporarily above the Fed’s 2% target.
20:30 U.S. Q1 Core PCE Price Index Preliminary Annual Rate: Or a nice performance
Just in time, the first quarter of the U.S. core PCE price index annual rate will also be released at the same time. The figure was recorded at 1.4% in the fourth quarter of last year. With the introduction of fiscal stimulus in the United States and the reopening of the economy, the market has gradually raised inflation expectations. The Federal Reserve has also repeatedly indicated that inflation may move higher temporarily.
The market expects the preliminary annualized core PCE price index to be 2.4% in the U.S. in the first quarter. If the published value is better than expected, it may be positive for the dollar; conversely, it will be negative for the dollar.
Investors need to pay attention to the follow-up of the Fed’s attitude towards higher inflation, as well as the market’s reaction. If the Fed continues to say that higher inflation is only temporary and there is no rush to tighten monetary policy, then the dollar index is expected to gain support.
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