Serenity Now
- USD is holding on to most of its recent solid gains. US Treasury yields are up. Crude oil prices are edging lower.
- Stock markets in Asia are rebounding. European and US equity futures are also in the green.
- Quiet data day ahead. ECB President Christine Lagarde speaks. The Chicago Fed March activity index and the Eurozone April consumer confidence indicator are the data highlights.
Three themes are driving financial markets:
(i) Worries over USD strength. Last week, finance ministers of Japan and South Korea acknowledged “serious concerns about the recent sharp depreciation of the Japanese yen and the Korean won”. Bank Indonesia intervened to stabilize its slumping currency. The People’s Bank of China warned against one-sided moves in the yuan. A few ECB officials leaned against expectations of widening ECB-Fed policy divergence as it could derail the ECB’s progress on inflation.
(ii) Fed officials dialling-up the hawkish rhetoric. Two Fed officials (Williams and Bostic) floated the possibility of rate hikes last week and all, including Powell, urged patience before easing policy.
(iii) US economic data keep beating expectations. Retail sales was much stronger than forecast in March and the prior month was revised higher underscoring the resiliency of the US consumer.
Overall, as long as US economic activity remains solid, the cyclical USD uptrend is intact. The US preliminary April PMIs (Tuesday), Q1 GDP (Thursday) and March Personal Income and Outlays report (Friday) are expected to back American economic exceptionalism. Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.
Rising US delinquency rates for auto loans and credit cards are a downside risk to the US growth outlook. However, the US household sector balance sheet is sound suggesting vulnerability from household debt remains moderate. Indeed, the Fed’s April Financial Stability Report points out that “household debt-to-GDP ratio continued to decline, while the aggregate household debt service ratio remained flat. Homeowners have solid equity cushions, and many households continued to benefit from lower interest rate payments associated with refinancing or home purchases several years ago.”
The Chicago Fed reports its March National Activity Index today (1:30pm London). Headline is expected at 0.09 vs. 0.05 in January. If so, the 3-month moving average would rise to -0.13 vs. -0.18 in January and move further from the -0.7 threshold that signals recession.
EUR/USD is range-bound around 1.0660. We doubt ECB President Christine Lagarde will offer new policy guidance during her lecture later today (4:30pm London). Meanwhile, the Eurozone consumer confidence indicator is expected to rise slightly to a two-year high at -14.5 in April from -14.9 in March (3:00pm London).
GBP/USD is trading sideways near 1.2380. UK housing market activity continues to improve. The UK Rightmove national asking price rose 1.1% m/m in April to be up 1.7% y/y, a twelve-month high. The swaps market still price-in over 90% odds of an August Bank of England rate cut. The UK CBI April industrial Trends Survey is up next (11:00am London).
