The markets are unsettled. It is not so much in the magnitude of
moves as the breadth of the move.
The nearly 1% rally in gold is a tell, but also the inability of equity market
to follow the lead of the US markets, where the S&P 500 and NASDAQ set new
records. US yields are softer, and the yen
is the strongest of the major currencies, up 0.7% against the greenback.
Sterling is on the other side of the spectrum. It is off 0.5%
near $1.2880. The Telegraph reported the Manchester terrorist might have distributed other explosive
devices. Separately, or at least a difficult connection, the latest YouGov poll, the first since the terrorist
attack, have tightened, with the Tories lead down to five percentage
points. A week ago, the polls showed
a nine-point margin, which itself was already halved from levels seen in some
polls last month.
There are three economic stories today to note. Reports suggest
that the PBOC has informed local banks that it is changing the way it sets the
daily fix. It says it will add a “counter-cyclical factor.” It
is not exactly clear what this means. There are a couple of possibilities. It could be an explicit way to
dilute market forces This seems unlikely. Why make it
explicit? An alternative explanation is that it will formalize what
is already taking place. The fix is a bit of a black box, and
participants have long recognized a subjective element. The process of
defining it also would seem to limit it.
The yuan initially built on yesterday’s gains. According to
Bloomberg, the dollar fell to CNY6.8465, its weakest level since January.
It recovered late back to CNY6.8640. The greenback has slipped against
the redback for the third consecutive week, the longest streak in four
months.
The second economic story today comes from Japan. It reported
its April inflation. Consumer prices ticked up. Headline CPI rose
to 0.4% from 0.2%, which was precisely
what was expected. Fresh food
prices rose sharply, and when then
excluded to get to what is the BOJ’s core measure, prices rose 0.3%. It
was expected to rise a bit faster after 0.2% in March. In addition to
fresh food, energy, which the BOJ says rose 4.5%, also contributed to the
headline increase. Excluding both fresh food and energy, Japan’s CPI was
flat after falling 0.1% in March. Separately, Japan that rising
advertising, hotels, and construction lifted producer service prices 0.7% from
a year ago, down from 0.8% in March.
Third, oil prices (both Brent and WTI) posted key reversals yesterday
when OPEC delivered precisely what was expected, a nine-month extension of their
six-month program aimed at bringing inventory levels back to five-year averages.
Initially, there was a marginal extension
of yesterday’s dramatic drop, but prices have stabilized. The August
Brent futures are 0.6% higher (~$52.05) and puts
the weekly loss near 3.1%. The July light sweet futures contract is up
0.6% (~$49.20). It is off 2.9% this week.
The US dollar is nursing mostly small net losses as the week draws to a
close. Sterling was up slight on the week coming into today.
Momentum traders were already getting frustrated with the inability to
sustain the $1.30 level, let alone rise above the $1.3055 area. That
said, sterling may find a bid ahead of the recent lows. These are roughly $.1.2845 from May 12 and $1.2830 from
May 4.
At $1.1215 the euro is up less than 0.1% against the dollar this week,
that has been characterized by choppy trading back and forth around the figure.
The triangle/wedge/flag pattern that appears to be
traced is often seen as a
continuation pattern. Above the almost $1.1270 high seen earlier this
week, is the November election high of $1.1300. Next week, the eurozone flash May CPI will be released.
We suspect it will see both the headline and core softer, which might lend
credence to our suspicions that the market is getting ahead of itself on
changes in ECB policy.
The dollar is being pushed below
JPY111.00 in late-morning turnover in Europe. The week’s low is near
JPY110.85. A break of JPY110.70 could spur another leg lower toward
JPY110.25. On the other hand, a move back above JPY111.20 would likely
squeeze the intraday shorts.
The US session features a likely small upward revision to Q1 GDP, partly
on slightly better consumption, April durable goods orders and the University
of Michigan consumer sentiment and inflation expectations. The optics
of durable good orders may be poor (1.5% decline expected after a 1.7% revised
gain in March), but the details (and components that feed into GDP) may be more
constructive.