The more the BoJ waits, the more they risk losing credibility

Just one week after posting its worst weekly loss over a year, and after a week of unfavourable economic data for both the US economic outlook and Federal Reserve (Fed) expectations, we saw the S&P500 record its best performance since October 2023. Yes, the S&P500 gained nearly 3% last week, while Nasdaq 100 gained more than that, as last week’s sour combo of slowing US growth but rising inflation was offset by the better-than-expected earnings from Microsoft and Google, and a surprise jump in Tesla shares despite earnings miss. By the way, Elon Musk went on a surprise visit in China this weekend and Tesla revealed a partnership with Baidu on maps (addressing a significant obstacle in the implementation of self-driving capabilities in China) on hope that when China is good, everything else will follow suit.

Zooming out, Friday’s higher-than-expected core PCE print didn’t weigh much on investor sentiment, as most of the price action due to the inflation disappointment happened after Thursday’s GDP report.

All in all, last week ended on a positive note; the technology stocks did the heavy lifting while Exxon Mobil and Chevron reported weak results in the Q1 because of subdued nat gas prices. This week, two more Magnificent 7 companies – Apple and Amazon – will report their Q1 earnings, along with many other big names including MicroStrategy, Super Micro Computer, Qualcomm, Mastercard and Shell.

Is there anyone out there?

The USDJPY flirted with the 160 level this morning on thin market volatility due to local Japan public holiday, following the lack of a much-expected intervention - or at least an announcement - from the Bank of Japan (BoJ) last Friday. The yen bears are testing the Japanese officials’ patience and wondering why no one does or says anything to stop the bleeding. And the more the BoJ waits, the more they risk losing credibility. At the current levels, an intervention could pop anytime, but the medium term impact of a currency intervention is not a given, if the intervention is not backed by a more hawkish policy stance.

Elsewhere

The dollar index starts the week under selling pressure ahead of a series of jobs data from the US and the Fed’s latest policy decision. The Fed is not expected to make any changes to its policy this week, nor in June, nor in July, nor in September… To be honest, with such a visible U-turn in US inflation towards the undesired direction, the Fed should not act anytime soon. If they can’t pass this message this week, I will be questioning the Fed’s credibility and intentions… Therefore, risks in the US dollar remain tilted to the upside, especially if inflation elsewhere continues to fall, as it is the expectation for the Eurozone. Due this week, the Eurozone countries will be revealing the April inflation reads and core inflation in the Eurozone is expected to ease to 2.6% from 2.9% printed a month earlier. A softer European inflation will be yet another confirmation of diverging inflation dynamics between the US and the Eurozone, back an upcoming June rate cut from the European Central Bank (ECB), at a time the Fed is no longer seen cutting its rates more than just once this year. The Fed/ECB divergence should limit the EURUSD’s potential into the 1.08 level, which includes the 50 and 100-DMA and the major 38.2% Fibonacci retracement on ytd decline.

Ceasefire?

US crude begins the week with a minor slide with hope that Antony Blinken’s efforts to convince Israel to cease fire in Gaza could pay off, as White House announced Sunday that Israel has agreed to hear out its concerns. The barrel of US crude could see support near the $82pb as besides the tense geopolitical landscape in the Middle East, the reflation trade – that relies on softer central bank policies and narrow supply due to OPEC’s efforts – remain favourable for an extension of the rally. Yet a hawkish Fed message this week is a downside risk to this positive outlook – especially if the US finally convinces Israel to cease fire in Gaza.