Stocks rise, US dollar drops as Fed soothes the markets

What a week! European stocks are heading higher at the end of a volatile week. Despite today's gains, bourses are set for weekly declines after US inflation jitters and falling commodity prices unnerved investors.

Today, concerns over runaway US inflation have been offset by signs that the labour market recovery is still on track and reassuring Fed speakers. The Fed continues to drum home the message that it's too soon to talk about tightening monetary policy, and the market is listening again. Fed speakers have been out in droves over the past few days, hoping to get the message across to the market: the Fed is not planning on moving on policy anytime soon.

Overnight, Governor Christopher Waller was the latest to join the chorus, insisting the Fed would need to see many more months of above-target inflation to raise interest rates.

The market is showing all the signs that it's taking on board the Fed's supportive message – treasury yields are falling, the US dollar weaker, and equities are higher. However, that resolve could be tested this afternoon with the release of US retail sales data.

Expectations are for retail sales to rise 1% month-on-month in April after surging an upwardly-revised 9.7% in March, thanks to the Federal stimulus programme. There's a good chance this month's retail sales number could come in ahead of forecasts as households continue spending those stimulus cheques.

US futures are heading higher ahead of the retail sales release, putting the bullish uptrend firmly back on track. With investors keen to buy the dips, the sell-off earlier this week is looking increasingly like a natural correction within the ongoing uptrend rather than anything more sinister.

Dollar weakens as labour market recovery eases inflation fears

The US dollar is slipping lower despite strong factory-gate inflation data and an upbeat jobs report in the previous session. Jobless claims hit a new pandemic low with 473k initial claims made last week. Meanwhile, producer price inflation rose 0.6% month-on-month in March, twice the expected value. On an annual basis, PPI surged 6.2%, which is the largest jump since the data started being tracked in 2010.

The improving labour market data appears to have calmed inflation fears. Concerns over labour shortages following the weak non-farm payroll have exasperated inflation fears this week, as this would put upward pressure on wages. Signs that the labour market recovery is still on track is helping the mood in the market and easing inflation concerns. This, combined with the Fed singing loudly from its dovish hymn sheet, is sending the greenback lower.

Attention will now turn to retail sales and consumer confidence data.

The softer tone surrounding the US dollar is supporting other G10 currencies. The euro is outperforming its major peers as investors look ahead to the release of the minutes from the latest European Central Bank meeting.

Oil set for weekly losses

Oil is extending losses following a steep sell-off in the previous session. Oil prices dived around 3% on Thursday, putting the black gold on track for 1.5% losses across the week.

This week has been a week of two halves for oil. At the start of the week, oil prices were supported by the ransomware attack on Colonial Pipeline and reopening optimism in the West. However, the second half of the week has seen oil prices come off as the pipeline returned to operation and the India Covid crisis hit fuel demand.

Looking further out, the demand outlook for the second half of this year not only remains solid but has also been upgraded by OPEC. This should keep losses in oil capped and the longer-term bullish trend in play.

Gold rises on Fed reassurance

The yellow metal is extending gains for a second session thanks to falling US treasury yields and a weaker US dollar. Gold found support in the previous session following upbeat US jobless claims and strong PPI inflation data, a sharp turnaround from Wednesday's steep drop off following the surge in CPI inflation. Plenty of soothing words from the Fed appear to be sinking in.

Inflation itself is not necessarily bad for the precious metal. In fact, it can be a positive, as gold is seen as a hedge against inflation. The drag on gold amid rising inflation is associated with the remedial action that the Fed may take to rein in inflation.

For now, the constant reassurance from the Fed that inflation is transitory is working its magic, and gold has climbed back above USD1830. However, the upbeat mood in the equity market could keep the yellow metal's upside capped.