Watching out for strong US data which could drive a dollar breakout this week

Macro Commentary

Markets will be observing a game of FOMC tennis over the coming months. It may not be especially fun, but hawkish and dovish rhetoric is likely to result in an increasing amount of toing and froing as the year progresses. However, as they do battle it may be advisable to bypass much of the noise and instead focus on one key aspect, the economic data. On Friday, Loretta Mester served up a continued hawkish trend (admittedly she is a non-voting member in 2015), to suggest that holding rates too low for too long would impact on Consumer Confidence and could create a self-perpetuating cycle of low rates. However Bill Dudley (a voting consistent dove) hit back by pointing out the risks of hiking too soon which outweighed the risks of hiking too late. The market seemed to pay little attention to either, instead moving on a slightly disappointing set of Pending Home Sales. Unless someone on the FOMC dramatically changes stance, the comments will likely do little to sway the market which will be focusing instead on what really matters, the economic data. Janet Yellen’s testimony last week seemed to confirm this to be the case and that the removal of “patient” from the FOMC statement would turn the game into one of data dependence. A strong Non-farm Payrolls report on Friday could be the catalyst.

Must watch for: US Non-farm Payrolls

Impact: Last month’s Non-farm Payrolls report was extremely strong. Beating expectations and equally importantly average hourly earnings grew by 0.5% for the month which was the best month since November 2008. On the coming months the market will be increasingly data dependent on the strength of the dollar and every payrolls report that passes successful will add fuel to the fire for the dollar bulls. Consensus is expecting a 12th consecutive month above 200,000 on payrolls which could be a catalyst for gains on Treasury yields and the next dollar breakout.

Foreign Exchange

There was a notable change in reaction to the US economic data in the wake of Janet Yellen’s Congressional testimonies. Despite the US falling into deflation territory, the core CPI remained solid at +1.6% and the dollar rallied hard. The market looks set to become increasingly data dependent as we move towards the middle of a year where anticipation is that a Fed rate hike in likely in H2. The amount of tier one US data released this week could therefore drive volatility in the majors. Volatility will also be ramped up by the fact that four of the eight major central banks announce monetary policy this week. There is no expectation of any changes to policy in the UK so close to a General Election in May, whilst the ECB has already gone all in, and although the Bank of Canada slashed rates last month but is not expected to repeat the trick again. The real fun could come with the Reserve Bank of Australia. The consensus changes depending upon your source (Reuters suggests another 25 bps rate cut to 2.00%), but it is interesting that Terry McCrann, the respected RBA watcher who called the unexpected rate cut last month, believes that the bank will “sit on its hands on Tuesday”.

WATCH FOR: Forex markets could be the place for volatility this week with the manufacturing PMIs on Monday, Services PMIs on Wednesday, monetary policy from four central banks (RBA, BoC, BoE and ECB) and rounding off the week with focus on the US labor market with of course Non-farm Payrolls on Friday.

Indices

With significant hurdles being removed the German DAX has been freed to go on a bull run. With a reduced impact of conflict in Ukraine and a potential “Grexit” from the Eurozone being put on the back burner for at least the next four months, markets can concentrate on what will really pull the DAX higher, €1.1 trillion of ECB QE. The FTSE 100 has been dragged reluctantly to an all-time high, but continues to underperform and the progress is slow and painful. With almost 30% weighting in basic resources and oil majors, perhaps the shackles will be removed if the PMIs and payrolls data muster positive surprises. With the influence of Wall Street earnings season all but over, we turn to macro growth factors to drive markets forward this week. The S&P 500 found a boost from the marginally dovish outlook from Janet Yellen last week, but the Fed is going to be increasingly data dependent moving forward. That means that the tier one economic data this week will have a lot of attention. Risk sentiment will be guided by the Chinese PMIs, whilst the US ISM manufacturing has fallen for the past 3 months and the bulls will be hoping for this trend to be halted.

WATCH FOR: Attention turns to the growth drivers with the manufacturing PMIs early in the week sure to impact on sentiment. The US labor market becomes the focus in the latter part of the week with the ADP employment report will be an early indicator of Non-farm Payrolls on Friday.

Other Assets: Commodities & Bonds

The fact there seems to be little real dent coming n the US oil supplies has hampered the rebound in WTI in the past week. Instead of engaging a declining trend the EIA oil inventories climbed by a further 8.4m barrels. The price of WTI is clinging on to an improving outlook by the fingernails now and the spread between WTI/Brent has grown to over $12 which is the widest in over a year. There had been a suggestion that OPEC may hold an emergency meeting prior to June, but this seems to be increasingly unlikely with little desire for this to happen from Saudi Arabia.

A stable core US CPI resulted in US Treasury yields pushing higher and which continued into the weekend. Strong US economic data is increasingly driving investors out of Treasuries as the prospect of a rate hike at some stage in Q3 grows ever more likely. Core Eurozone sovereign yields remain well anchored at the prospect of ensuing quantitative easing, however perhaps it is a surprise that Greek yields have not yet pulled dramatically lower, despite the agreement between Greece and the Eurogroup. Perhaps this suggests the caution the market still views Greek debt with.

WATCH FOR: A raft of tier one data to drive US Treasury yields, whilst any suggestions that global growth (especially PMIs and Non-farm Payrolls) is beginning to find some support could help to support oil.