The pause that refreshes: Are currency markets hesitant to run with US data?

Recent American economic results have been exceptional. Payrolls, Retail Sales, and even Initial Jobless Claims, show recovery in full swing.  But the dollar topped out against the euro and the yen two weeks ago even as US data has blossomed.  Has the Fed's reluctance to endorse the rise in Treasury rates stalled the greenback's ascent? Join senior analysts Valeria Bednarik, Yohay Elam, and Joseph Trevisani for a look at the market in transition.

Yohay Elam: US retail sales smashed estimates by 9.8%, jobless claims tumbled to 576,000 and inflation remains tame with Core CPI hitting 1.6% in March. Is this a Goldilocks scenario? Or is there is something beneath the hood that we should watch out for?

Valeria Bednarik: I have enough of conspiracy theories, to be honest. No need to look beneath the hood. The US economy is recovering no doubts.

Joseph Trevisani: 10-years yields are off 5 points today to 1.59%. I agree, I don't think there is anything unstated here...

Yohay Elam: Not conspiracies, but perhaps some core figures that somehow balance the picture.

Joseph Trevisani: I look around NYC and especially the suburbs and there are help wanted signs everywhere.

Yohay Elam: So we also have anecdotal evidence about the recovery of the US. Will that bring the Fed closer to tapering? Powell mentioned that on Wednesday.

Joseph Trevisani: First quarter retail sales are serious. They will and have given employers a reason to hire. I don't think the Fed or Powell will move or hint at moving until employment is back or close to pre-pandemic levels.  Can the economy continue to add 1.6 million jobs a quarter?

Joseph Trevisani: Yes.

Valeria Bednarik: 1.6 million jobs a quarter sounds impressive, but it's actually not a good number if we think there are still some 20 million to recover, mainly considering the Fed repeats ad exhaustion that the focus is on actual employment recovery. A big question is when will the dollar run on self-strength? For how long risk-related trading will persist?

Yohay Elam: I think the actual number of missing jobs is "only" 8.4 million, but I certainly agree with your point. I think that the dollar dropped when the CPI dog did not bark, but may now rise with this big bulk of strong data.

Joseph Trevisani: Just on NFP rolls it would take until mid-August to be fully recovered at the first-quarter rate. The interesting reaction this morning to the sales figures is in the dollar and credit markets. Treasury rates are down and the dollar has not improved...now we can say the second was due to the first...but that doesn't change the questions. Has the bond market been cowed by the Fed's reluctance to speak to the recovering economy on rates?

Yohay Elam: I think the reaction is a result of hype – buy the rumor, sell the fact. The "whisper numbers" were huge.

Valeria Bednarik: Agreed Yohay. It's there.

Yohay Elam: Similar to the reaction to CPI – PPI pumped expectations higher.

Joseph Trevisani: Could be but the bond market at least had not positioned in advance of sales, the drop in rates has been going on for a few weeks. The top in the 10-year was March 31...

Yohay Elam: Perhaps the move since March 31 was a much-needed correction, bargain-seekers buying bonds. Do you think it will continue, dragging the dollar down?

Joseph Trevisani: Yes, the dollar's most important link this year has been US rates.  That is also the historic first mover for currencies. It is, I think a sign of returning market normality.

Valeria Bednarik: At some point, the dollar will start to rise. Market's attention will diverge from yields. It's not just yields, is the Fed that won't raise rates whatever happens with yields.

Joseph Trevisani: I think the question for the next few months, background perhaps, but not to the credit market, will be inflation or rather, will the enormous deficit spending in DC spark consumer inflation?. I agree, the Fed in a rhetorical corner on rates, but it can give permission for the yield curve to steepen.  That is what it had done but now seems to have pulled back.

Valeria Bednarik: Guess investors got bored of speculating on something the Fed keeps saying it won't do.

Joseph Trevisani: Yes, I think you are right.

Yohay Elam: I think the fact that both Powell and Clarida mentioned tapering yesterday is telling perhaps baby steps ahead of the first tapering signal, perhaps in June.

Joseph Trevisani: Agreed. The logic is inescapable.

Valeria Bednarik: Yups.

Yohay Elam: I think the Fed will hold back on raising rates as much as it can, but it has more room on QE.

Joseph Trevisani: Yes, and in fact, the fed funds are economically unimportant.

Valeria Bednarik: However, as you said, they need to take baby steps to prevent a market's reaction that could trigger again a rally in yields.

Joseph Trevisani: Credit markets will run on signals so the Fed has to do what it has been doing, two steps forward, one back.

Yohay Elam: The specter of 2013´s taper tantrum looms.

Joseph Trevisani: Aside from the Fed rhetoric, you have to wonder what other economic signals markets could be waiting for to gauge the US recovery, the three main, NFP, sales, and claims were all excellent. The fed, like all central banks, hates sudden moves.

Yohay Elam: Soft data has also been excellent. Today's Philly Fed Manufacturing Index is just the latest upside surprise.

Joseph Trevisani: Yes, my guess is Michigan will outperform tomorrow too.

Valeria Bednarik: That will be the cherry of the pie for sure.

Yohay Elam: A trio of excellent consumer figures this week.

Joseph Trevisani: Equities are having a party Dow is up 239 and the Coinbase IPO closed about $100 over offering yesterday.

Yohay Elam: Is it time for a downside correction in markets? Too many days of breaking records.

Joseph Trevisani: I think not.

Valeria Bednarik: I would not expect the bullish hype to suffer these days. Although, if Michigan disappoints, tomorrow, would be a great reason to take some profits out of the table ahead of the weekend.

Joseph Trevisani: Perhaps but the sentiment is not usually a market mover.

Yohay Elam: If taper fears cannot trigger a correction, perhaps a data miss, even though, I agree, it is not the biggest market mover. One of the winners of the recent data releases is gold, which is rising. However, it still below April's high of $1,758.

Joseph Trevisani: Q1 GDP is out on the 27th...

Yohay Elam: The Fed and GDP back to back.

Joseph Trevisani: That has potential, especially if it is a strong advance on Q4's 4.3%. Which is a distinct possibility.  This month's FOMC will encounter a quickly changing economy. How will they respond?

Yohay Elam: A sure bet is that Powell will repeat that the economy is at an inflection point. It is his latest phrase. I think that in response to a question about tapering, he will say something about the Fed exploring its options then signaling in June that tapering would happen at year-end.

Joseph Trevisani: Yes, I think that is likely.  But it will be easier if the yield curve continues to gradually steepen on its own.

Yohay Elam: The dollar seems a bit stuck against major currencies. EUR/USD is just under 1.20 and GBP/USD under 1.38 after both bounced it seems that currencies are waiting for something.

Joseph Trevisani: I wonder if this is the pause that refreshes for the markets. After the year-long drama of the pandemic and, at least in the states, its fade, markets haven't quite made the transition to other tacks.  Gold has had a modest gain recently but it is far below its August high and it has lost about half of its pandemic gain.

Valeria Bednarik: Yeah, totally. GBP/USD is a surprise, to be honest. The pound is weaker than one could think off.

Joseph Trevisani: I think all markets are waiting, except equities. But stocks have always been the exuberant child of the markets. Probably because they have the widest sway on the popular mind. Logic and economics predict higher US rates before Europe and certainly Japan, and that would benefit the dollar, but...

Yohay Elam: Europe has been doing a bit of catch-up in terms of vaccinations. That explains the euro's April bounce. Sterling has suffered from some profit-taking.

Joseph Trevisani: And the dollar form lack of continuing advance in US rates.

Yohay Elam: The moves are not huge and the next significant price action depends on the dollar.

Joseph Trevisani: There I think it depends on Treasury rates, they have been, so far, the story of the New Year. It may be that credit and currency markets are in the process of fully shifting from a pandemic focus to an economic one.