MARKET WRAP – 18th May 2022
Stocks were firmer Tuesday (SPX +2%, NDX +2.6%, DJIA +1.3%, R2K +3%) with a pro-risk bias after hot US retail sales data and industrial/manufacturing production data added to the positive COVID tone out of Shanghai.
US RETAIL SALES – Headline retail sales rose by 0.9%, although slowed from the prior revised 1.4%, in line with analyst expectations, the ex-autos beat at 0.6% (exp. 0.4%) but slowed from the prior revised 2.1%
The Australian dollar marched forward but faces solid resistance around the 0.7040-50 area and retreats towards the 0.7010s, amidst a positive market sentiment session that weighed on the greenback, which remains soft on Tuesday, despite higher US Treasury yields. At the time of writing, the AUD/USD is trading at 0.7030
High-beta currencies outperformed, with the DXY down over 75bps, Treasuries bear-flattened (2s30s -6bps) as hawkish ECB (Knot touted a 50bps hike; Bunds saw heavy losses) and China optimism was complemented by the strong US data and a net hawkish Powell and Kashkari.
Powell largely echoed prior comments but the Fed Chair was a touch more resolute in his stance that the Fed would not be pausing hikes at neutral if inflation hadn’t shown “convincing evidence” of coming down
Oil prices were ultimately lower as earlier strength out of Europe was unwound amid reports of a proposed global cap on Russian oil prices and that the US is set to approve negotiations with producers and Venezuela.
The Dollar was notably lower on Monday, hitting lows of 103.230 in contrast to early highs of 104.230. For the Buck, albeit not resulting in a market reaction, there was strong retail sales and industrial production data, as well as a slew of Fed speak, with the highlight being Chair Powell.
On this, Powell said broad support on FOMC for having on table for 50bps at next two meetings, and if there is a need to move above neutral, they would not hesitate as they will continue raising rates until there is “convincing evidence” inflation is coming down.
Nonetheless, the Dollar weakness appeared to be a function of the GBP and EUR strength on the back of supporting factors, as opposed to any notable negative headlines for the Buck.
Antipodes were firmer with AUD boosted by less-dovish RBA talk after the RBA Minutes noted a 40bps hike was among the options the central bank considered earlier this month, and highlighted an argument for 40bps increase could be made given the upside risks to inflation and current very low level of interest rates.
Additionally, the Antipodes were boosted on broad Dollar weakness and commodities higher amid easing of COVID lockdowns, as the APAC region’s COVID situation improves. AUD/USD and NZD/USD hit highs of 0.7040 and 0.6375, respectively.
Euro was the next best performer and firmed about a percent against the Greenback. The first catalyst for the single-currency strength was comments from ECB hawk Knot, as while he said a 25bps hike in July is realistic, he appeared to be the first ECB member to discuss a 50bps move. On this, he added a 50bps rate hike should not be excluded if data in the next few months suggests that inflation is broadening and accumulating.
TODAY’S KEY RISK EVENTS
The Australian Wage Price Index on its quarterly and annual readings, is expected at 0.8% Quarter on Quarter and 2.5% annually which is behind the RBA target of 3%
The RBA pricing has been declining over the past couple of weeks when you compare the purple curve to the green where nearly 2 full hikes have been priced out of the curve for Dec ’22. Given we have Wage Price Index this morning, a print over 1% q/q could potentially cement the path for a 40bp hike in June as we saw yesterday from the RBA’s plan of scenarios kept that option open on the table.