Funda-FX wrap: never mind the FOMC minutes, UK/EZ data and Trump caused the volatility
|- Trade talks set off the risk-off tone, markets bounce back as Fed will let inflation run higher.
- ECB and BoE will need to wait for better economic performances.
From a fundamental perspective on FX today, the markets were waiting for the FOMC minutes to be released to confirm that a rate hike would occur again in June and probably again in September. However, most of the FX volatility for the day had already occurred over the European PMIs and UK CPI and Trump's disappointment with how trade talks were developing with China.
- EUR/GBP: soaking up the massive spot volatility after EZ PMI/UK CPI disappointments
- EZ PMIs: data arrives not as assumed; ECB to delay - Nomura
For a backdrop, on the political front, markets were also keeping an eye on Italy where an announcement was expected today as to who Italy's president, Mattarella, will appoint as premier to form a government.
- Italy's new Prime Minister, Guiseppe Conte: Will defend rights in European institutions
Sergio Mattarella Giuseppe Conte had been summoned for consultations today to see if the law professor tapped by the eurosceptic 5-Star Movement and League as their candidate for premier has what it takes to try to form a government. At the same time, Italy’s next economy minister was the one for investors to watch as the person to steer Italy’s finances matters more for the indebted country’s future.
The markets started out on the backfoot in a risk-off environment as trade continues to dominate the headlines where Trump, in Asia, made a statement that played down expectations for a China trade deal to be hatched soon.
“Our Trade Deal with China is moving along nicely, but in the end we will probably have to use a different structure in that this will be too hard to get done and to verify results after completion,” -
Trump tweeted earlier.
As far as the FOMC went, there was something for everyone. They were hawkish in the sense that all is on track for a rate hike in June and probably later in September to fulfil markets expectations of at least three hikes in 2018. However, they were dovish in the sense that they confirmed what we already knew from the statement, that the Fed will tolerate higher inflation and that gave a boost to the commodity sector and equities.
FOMC minutes:
The FOMC minutes could have been taken with a pinch of dovish salt, taking the bets for three rate hike off the table, confirming that the Fed is happy to let inflation run above the 2% target, (FOMC minutes: “modestly above 2 percent would be consistent with the committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations,”). However, it did sound like June was still on the table, "it would likely soon be appropriate for the Committee to take another step in removing policy accommodation", the minutes also read.
Market reactions
- Global market wrap: risk-off dominated - ANZ
As far as markets are looking in early Asia, Gold is higher by $2.00 at $1,293, the benchmark US 10-year yield suffered 6bbps to the downside to 3.00%, the S&P 500 closed higher by 6.5%, WTI lost almost half a buck to $71.72, the dollar ended at the higher end of the 93.5140-94.1880 range at 93.98 and the yen stays as the best performer while the euro consolidates as the worst performer, above YTD lows scored on the EZ PMI miss down at 1.1675.
- Yen outperforming in period of risk aversion - Scotiabank
Key headlines, (Source: LiveSquawk):
- Turkish lira rallies sharply after central bank lifts rates.
- Italian president Mattarella asks Conte to form new govt.
- Fed minutes show support for June rate hike.
- Fed's Mester: 'marginal' difference between 2 or 3 additional hikes in 2018.
- ECB's Makuch: ECB can afford to wind down asset buys.
- ECB's Coeure: ECB to assess Italian govt plans 'as they are published.
- JP Morgan pushes ECB rate hike forecast to June 2019 after EZ PMI fall.
- US pres. Trump blasts Mexico, Canada over NAFTA talks.
- UK Brexit withdrawal bill to return to house of commons early-mid June.
- Spain's govt secures parliamentary backing for 2018 budget.
- US manufacturing PMI at the strongest level since Sep 2014.
- Eurozone consumer confidence dips slightly in May.
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