The recent equities decline accelerated - the S&P500 down 0.9% - and commodities fell. The US dollar rose against all the majors, bond yields rose. Markets may have been ruffled initially by the recent plunge in cryptocurrencies, and then by the FOMC minutes which indicated that some members expected tapering discussions at upcoming meetings.
The FOMC minutes mostly reiterated the April meeting policy statement and Chair Powell's press conference comments: "the economy was still far from the Committee's longer-run goals. Moreover, the path ahead continued to depend on the course of the virus, and risks to the economic outlook remained. Consequently, participants judged that the current stance of policy and policy guidance remained appropriate to foster further economic recovery as well as to achieve inflation that averages 2% over time and longer-term inflation expectations that continue to be well anchored at 2%."The minutes did highlight the improvement in the economy and the expectation that annual inflation would rise near term due to base effects. The surprise element came from "a number of participants" indicating that "if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchase." This contrasts with Powell’s recent comments that they were “not even thinking about thinking about tapering”.
FOMC member Quarles said he expects a temporary increase in prices as the economy reopens, but the Fed understands how to tackle unwelcome inflation if it proves to be lasting: “The Federal Reserve has the tools to address inflationary concerns should they prove to be more durable and higher than we currently analyse them to be”
Commodities, Brent crude oil futures fell 3.0% to $66.65, copper fell 3.4%, and gold fell 0.1%, while iron ore fell 4.3% to $213.45.
Overnight Currency Ranges
AUD/USD 0.7710 0.7797
EUR/USD 1.2160 1.2245
GBP/USD 1.4100 1.4200
USD/JPY 108.57 109.33
NZD/USD 0.7152 0.7246
USD/CAD 1.2053 1.2143
USD/CNH 6.4203 6.4412
AUD/JPY 84.06 84.95
AUD/NZD 1.0759 1.0791
AUD/USD holds lower ground near 0.7725-30, after posting the heaviest losses in a week the previous day. In doing so, the Aussie pair justifies the risk-aversion wave, which propelled US Treasury yields and triggered US dollar bounce, near the weekly bottom amid early Thursday morning in Asia.
Fed fuels the risk-off…
Following a few days of mixed catalysts and rejection to tapering, the US Federal Reserve (Fed) officials are finally talking tapering. Be it St. Louis Fed President James Bullard or the Federal Open Market Committee (FOMC) Meeting Minutes, the latest market movers were from the Fed suggesting that the board members are concerned about the exit from easy money, despite portraying economic optimism. It should, however, be noted that the signals to start talking the tapering and doing it has a large gap between and hence this can trouble the markets in the meantime.
Elsewhere, the US-Russia tension renews and the fears of Indian covid strain also amplified, exerting additional downside pressure on the market sentiment. At home, Westpac Consumer Confidence dropped to negative in May and Wage Price Index for Q1 couldn’t impress bulls. Alternatively, vaccine optimism and signals of further US stimulus keep markets troubled.
Against this backdrop, market sentiment turned pessimistic and weighed on the Wall Street benchmarks, despite day-end bounce. Also portraying the risk-off mood could be the US dollar index (DXY) bounce from late February and a 3.4 basis points (bps) of a jump in the US 10-year Treasury yield.
While chatters concerning the Fed’s tapering and US dollar moves will be the key to watch, Aussie Consumer Inflation Expectations for May, expected 3.6% versus 3.2% can offer immediate direction ahead of the key jobs report for April. Forecasts suggest, headline Employment Change to drop from 70.7K to 15.0K but the Unemployment Rate is likely to remain unchanged at 5.6%.
AUD/USD was sold heavily on the back of the positive FOMC minutes but still managed to hold the technical support at 0.7700 while topside resistance remains at 0.7815/20.
Event Risk Data Today
Australia: Several factors will be at play in the April labour force survey. On the positive side is the robust jobs vacancies data and surging employment indicators pointing to strong demand for labour. On the negative side is the ending of JobKeeper and the languishing of tourism and hospitality industries in the CBDs in particular. Add to this, those industries that are growing are finding it hard to recruit labour. We are looking for a 10k rise in employment, and if the participation rate is flat at 66.3% this will see the unemployment rate holding at 5.6%. Ahead of the May update, MI inflation expectations have held below pre-Covid levels.
New Zealand: Budget 2021 will show a dramatic improvement in New Zealand’s fiscal position compared to the Half- Year Update. Essentially, the Covid hit to the Government’s books has been significantly less than anyone feared and particularly so for the Treasury. Tax revenue and the operating balance tracks will show large upward revisions, and with a sharply lower debt track, Treasury will pare back bond issuance plans. While banking some of this upside surprise, the Government has also indicated that it will dial up its spending and investment plans.
US: Like many recent regional surveys, the May Philly Fed Index should show a strong rise in activity and input prices (market f/c: 41.0). Initial jobless claims hit another pandemic low last week, and the downtrend is set to continue (market f/c: 450k). The April leading index will be supported by improving jobless claims and ISM new orders (market f/c: 1.3%). The FOMC’s Bullard, Quarles and Bostic will speak.