BoE: To taper or not to taper

It first looked like a softer-than-expected ADP report would revive appetite in growth stocks, but the reflation winds returned quickly to the marketplace, forcing the US big tech to erase earlier gains and close the session 0.37% lower. Dow advanced 0.29%.  

The next big test for the market is Friday’s NFP figures. Yesterday’s ADP data was weaker than expected but still showed that the US economy added some 742K jobs in April, more than the previous month. And the expectation is a touch below a million nonfarm job additions during the same month. If nothing, the possibility of a strong NFP print should keep investors on track for more reflation until the revelation of the latest NFP number on Friday. 

More jobs, improved revenues, soaring raw material costs, global shortages, slow logistics all point at an acceleration in global inflation levels. The latter means a hawkish shift in global central bank expectations.  

We continue seeing a strong rise in oil and commodity prices. On the index level, that’s supportive of the energy-heavy FTSE, as firmer oil and commodity prices should provide a stronger case for consolidation and extension of gains above the 7000p level.  

US crude remains on track for a further advance to the $68 per barrel. The latest EIA data showed that the US crude inventories fell by 8 million barrels over the past week versus a 1.9-million-barrel decline expected by analysts hinting at a faster recovery in economic activity and energy consumption.  

Gold, on the other hand, looks poised to re-test the 100-day moving average resistance. The combination of soft yields and rising inflation expectations is supposed to be a blessing for the yellow metal. Would the fact that other commodity prices are hovering around a decade-high levels could finally drive some capital toward the good, old gold in prevention of higher inflationnary times? 

Stronger US dollar is also a side-effect of the reflation theme, as the rising hawkish Fed expectations give some material support to the greenback. Yet, gains remain on a slippery ground as the data says one thing, but Jerome Powell says another. Who, between the data and Powell would convince investors to go one way or the other is a million-dollar question.  A strong US jobs figure on Friday will certainly shaken Powell’s dovish positioning, and give some extra evidence of tighter financing conditions sooner rather than later. Therefore, we could see a stronger US dollar appetite at least until Friday’s data release.  

In this respect, a further retreat in EURUSD below the 1.20 mark is certainly on the cards. The next natural target for the euro bears stands at  1.1945, where the 50-day moving average meets the 200-day moving average for an eventual death-cross formation. 

Across the Channel, the Bank of England (BoE) is expected to stay pat on its own monetary policy today. It’s worth keeping an eye on the PMI figures to understand the impact of the business reopening on the UK’s growth prospects. Cable remains just below the 1.40 mark. The MPC has mixed feelings regarding whether to start tapering its massive bond purchases program now, or to wait until the summer before tightening the purse’s strings. It’s sure that the taper talk will need to happen at some point in the foreseable future, but some British policymakers will ask for patience until wee see the British economic recovery on the right track before taking a concrete action. That’s a real brain teaser for BoE officials, but the fact that the Fed remained quiet on the taboo taper talk could also encourage the BoE to stay quite for another month. It could be better to follow the US lead on the taper arena. A hawkish take from the BoE meeting, on the other hand, should send the GBPUSD above the 1.40 handle. Although, the USD strength could somewhat limit the upside potential for a couple of more days.