FOMC minutes show Fed still on track to tighten, but not so soon

FOMC minutes show Fed still on track to tighten, but not so soon The minutes of the April FOMC meeting contained no significant surprises for the market. They showed that the Committee viewed the weakness in Q1 growth as largely due to the exceptional weather and the port strike and expect it to be followed by stronger growth in the future. However, the Committee will want to see that confirmed by the data in coming months, so a June rate hike is effectively off the table and whether they hike in September depends on whether the data justifies such a move by that point. (In theory they could hike in July too, but there is no press conference scheduled after that meeting so the market assumes it’s less likely.) There was nothing notably new on the outlook for inflation.
Given the market’s doubts about the strength of growth, this was interpreted as making no change in the likelihood of a rate hike this year and Fed funds rate expectations were unchanged out to November. The dollar strengthened against most of the G10 currencies, the exception being CHF, GBP, CAD and SEK, which rose slightly vs USD. This may have been due to confirmation that the Committee remains determined to tighten. Apparently though the view was that degree of tightening over the longer term would be less and expectations at the long end of the Fed funds futures retreated modestly, down 3.5 bps. This boosted EM currencies, which mostly gained, and those gaining the most included some of the most troubled countries, such as TRY, BRL and ZAR. The reason is probably that a slower rise in US rates would cause less disruption to EM economies.
The market still has very, very different expectations than the FOMC does. October Fed funds were unchanged yesterday at 0.235%, at which level they are pricing in about a 45% chance or a rate hike by September. Dec 2017 is at 1.71%, which implies even chances that the Fed funds target range is either 1.50%-1.70% or 1.75%-2.00%. This compares with the median FOMC estimate of 3.63% and weighted average of 3.18% for the same time. Fed Chair Yellen (and the minutes) have emphasized the high level of uncertainty about the outlook for the neutral real rate moving higher over the next several years, so perhaps the Committee’s expectations for a rapid rise are somewhat overdone. Nonetheless their expectations seem likely to remain well above the what the market is pricing in, which seems more consistent with a much lower sustained neutral rate estimate and even the risk that the Fed has to return toward zero interest rates at some point. Now it’s true that the Fed has a surprisingly poor record of economic forecasting. Nonetheless, I believe the market is being overly pessimistic here. So long as the economy continues to expand, which seems likely, I believe they are determined to gradually bring interest rates back to a more normal level. That implies an adjustment to market expectations and a stronger dollar over time.

China PMI rises but below expectations; Japan does better China and Japan launched today’s round of May manufacturing purchasing manufacturers’ indices (PMIs) with mixed results. In China, the closely watched HSBC China Manufacturing PMI rose to 49.1 from 48.9. While this was an improvement, it was a bit below expectations of 49.3 and still shows that manufacturing is slowing. Moreover, the comments by Markit’s economist were rather shocking: after discussing the “further deterioration in operating conditions,” “softer client demand” and “further job cuts,” she turned to what she said was the good news:
On a positive note, deflationary pressures remained relatively strong, with both input and output prices continuing to decline, leaving plenty of scope for the authorities to implement further stimulus measures if required.

The “positive note” is that “deflationary pressures remained relatively strong”! Yet Shanghai stocks were up 1.3%, presumably on expectations that the authorities would come riding to the rescue eventually. I believe this expectation is overblown and Chinese investors are likely to be disappointed at some point. With deflationary pressures likely to depress commodity prices further, I remain bearish on AUD.
In contrast, the Japan Markit/JMMA manufacturing PMI rose to 50.9 from 49.9, moving into expansionary territory and beating expectations of 50.3. This was good news for Japan following yesterday’s so-so Q1 GDP data, which showed an economic expansion based largely on an unsustainable rise in inventories.
Today’s highlights: Thursday is a PMI day. Following China and Japan, we get the preliminary manufacturing and service-sector PMI data for May from several European countries and the Eurozone as a whole. The expectations are for the manufacturing PMIs to decrease a bit, in contrast to the recent positive signs that the Eurozone economies are gathering steam. This could prove EUR-negative somewhat. EU consumer confidence will also be released in the afternoon.
The ECB releases the minutes of its April 15 policy meeting. As the Council left rates unchanged and are not expected to change policy for some time, these minutes are not likely to attract as much attention as the Fed’s or Bank of England’s have.
In the UK, retail sales for April are due to be released. A strong figure could add to sterling’s gains.
In the US, the Markit PMI is expected to show manufacturing expanding at an accelerating pace. Initial jobless claims for the week ended May 16 are expected to rise a bit but the overall trend is expected to remain consistent with an improving labor market. The Philadelphia Fed business activity index for May is forecast to increase a bit, while Conference Board leading index for April is expected to accelerate from the previous month. Existing home sales for April are expected to rise, in line with the good housing starts and building permits released Tuesday. All told, if the indicators all come out largely as expected, they should go some way to confirming that the weakness in Q1 is coming to an end and that activity did indeed pick up in Q2. That should be supportive for the dollar.

As for the speakers, BoE MPC member Martin Weale and Fed Vice Chair Stanley Fischer speak. BoE’s Weale is one of the two members who used to vote for a rate hike. It will be interesting to find out if he is likely to resume pushing for a tightening any time soon. That could be supportive for GBP. Separately, Fischer speaks at an ECB Conference in Portugal.

The Market

EUR/USD hits support slightly above 1.1045

EUR/USD traded lower on Wednesday and hit support near the 200-period moving average, slightly above the 1.1045 (S1) key hurdle. Although that move confirmed a lower low on the 4-hour chart, taking a look at our oscillators, I would expect the forthcoming wave to be positive. The RSI rebounded from near its 30 line, while the MACD has bottomed and could move above its trigger line soon. A break above 1.1145 (R1) would confirm that and perhaps challenge initially our next resistance of 1.1200 (R2). As for the broader trend, the break above 1.1045 (S1) on the 29th of April signaled the completion of a possible double bottom formation, something that could carry larger bullish implications. I would treat the 15th – 20th of May decline as corrective move, at least for now. I would talk about the resumption of the prior downtrend if I see a clear close below the psychological figure of 1.1000 (S2).
Support: 1.1045 (S1), 1.1000 (S2), 1.0925 (S3)
Resistance: 1.1145 (R1), 1.1200 (R2), 1.1280 (R3)

NZD/USD finds support near 0.7275

NZD/USD traded lower on Wednesday, but rebounded after hitting support fractionally above the 0.7275 (S1) barrier, a support defined by the low of the 18th of March. Today, during the early European morning, the rate is testing the 0.7330 (R1) line, where an upside break is likely to signal the continuation of the rebound and perhaps target the 0.7375 (R2) hurdle. Even though the rebound may continue for a while, the short-term picture stays negative in my view. As a result, I would treat the current rebound or any extensions of it as a corrective bounce before the bears pull the trigger again. Our short-term oscillators support further correction for now. The RSI rebounded from slightly above its 30 line, while the MACD has bottomed and could move above its trigger soon. On the daily chart, the declines of the last four days confirmed the shooting star formed last Thursday. However, I would like to see a clear close below the 0.7200 area before I start discussing the resumption of the prior longer-term downtrend.
Support: 0.7275 (S1), 0.7200 (S2), 0.7120 (S3)
Resistance: 0.7330 (R1), 0.7375 (R2), 0.7430 (R3)

GBP/JPY testing again the key resistance of 188.60

GBP/JPY traded higher after correcting lower and finding support at 186.00 (S2), and now is testing the key hurdle of 188.60 (R1). That move confirmed that the short-term trend remains positive, and that the decline towards 186.00 (S2) was just a pullback. A break above 188.60 (R1) would confirm a forthcoming higher high and perhaps challenge our next resistance at 189.80 (R2), defined by the peaks of the 5th and 8th of December. Our momentum indicators detect upside momentum and support the case that we are likely to see GBP/JPY trading higher. The RSI turned up again, while the MACD rebounded from near its zero line and crossed above its trigger line. On the daily chart, the rate is trading well above both the 50- and the 200-day moving averages, and this supports the continuation of the short-term uptrend. However, our daily momentum indicators give evidence of a possible correction as well. The 14-day RSI turned down within its overbought territory, while the daily MACD shows signs of topping.
Support: 187.25 (S1), 186.00 (S2), 184.45 (S3)
Resistance: 188.60 (R1), 189.80 (R2), 192.80 (R3)

DAX futures headed towards 11920

DAX futures surged on Tuesday and managed to overcome the resistance (turned into support) barrier of 11740 (S1). In my opinion, that move confirmed that the decline started on the 10th of April was just a corrective move and that the larger trend is back in force. On Wednesday, the index traded quietly, staying slightly below the resistance hurdle of 11920 (R1). A break through that is likely to target the next resistance obstacle at 12100 (R2). Our short-term oscillators reveal positive momentum and amplify the case for further advances. The RSI raced higher after crossing above its 50 line. It could move above 70 soon, while the MACD stands above both its zero and signal lines and points north. On the daily chart, the index rebounded from the long-term uptrend line taken from back at the low of the 16th of October. This keeps the longer-term path to the upside in my view.
Support: 11740 (S1), 11420 (S2), 11200 (S3)
Resistance: 11920 (R1) 12100 (R2), 12280 (R3)

Gold rebounds from slightly above 1200

Gold rebounded somewhat on Wednesday after it hit support slightly above the psychological figure of 1200 (S2). Now, the metal is trading fractionally below the resistance line of 1212 (R1), where a break is likely to signal the continuation of the rebound and perhaps challenge the next obstacle at 1220 (R2). Our momentum studies support the notion. The RSI turned up again and could move above its 50 line soon, while the MACD, just below its zero line, started bottoming. On the daily chart, Monday failed to close above 1226 (R3). I believe that a decisive close above that barrier is needed to turn the medium-term bias to the upside. For now, I will maintain my neutral stance as far as the overall picture of the yellow metal concerned.
Support: 1205 (S1), 1200 (S2), 1195 (S3)
Resistance: 1212 (R1), 1220 (R2), 1226 (R3)