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I. Market focus:
At the beginning of Tuesday's session, the U.S. dollar showed a moderate growth against other major currencies, offsetting losses of the previous day. Support to the U.S. currency was provided by the increase in the U.S. government debt yields. Yesterday, the yield on 10-year Treasuries fell to a level of 3.05 percent, receding from the multi-year high of 3.125 percent reached on Friday, but the uptrend remains in effect, so the dollar is likely to continue strengthening in the near future.
The news background was rather limited at the beginning of Tuesday's session. There were no important reports at the beginning of the European session. The main theme of the previous day, namely, progress in the trade negotiations between the U.S. and China, has already been priced in by the markets, and the new ones have not yet appeared.
Today’s session will not be very busy with macroeconomic reports, so the large-scale movements could be caused only by unplanned events. Among the scheduled events of Tuesday, the comments of the Bank of England’s (BoE) officials, who will testify on inflation before the UK Parliament’s Treasury Committee at 9:00 GMT, may be the most important ones.
II. The market highlights are:
The Chicago Federal Reserve announced on Monday the Chicago Fed national activity index (CFNAI), a weighted average of 85 different economic indicators, rose to +0.34 in April from a revised +0.32 in March (originally +0.10), pointing to a slight acceleration in economic growth. Economists had expected the index to come in at +0.14 last month. At the same time, the index’s three-month moving average moved up to +0.46 in April from +0.23 in the prior month. According to the report, three of the four broad categories made positive contributions to the CFNAI last month. The production-related indicators contributed +0.27 to the CFNAI in April, up from +0.19 in March, while the sales, orders, and inventories category made a contribution of +0.02 to the CFNAI last month, down from +0.08 in March. The employment-related indicators contributed +0.10 to the CFNAI in April, down from +0.04 in March, and the personal consumption and housing category contributed to the CFNAI -0.05 in April, down from +0.02 in the prior month.
Minneapolis Federal Reserve Bank President Neel Kashkari worried that the Fed might move too quickly with interest-rate hikes, pushing the economy into recession. "Let's not overdo it," Kashkari urged his colleagues. According to him, the slow growth of wages in the U.S. indicates there is still slack in the labor market. "If we see wages pick up, we can always respond then," Kashkari added. He also noted the need to watch the yield curve closely, since its inversion was the "very best predictor of recession."
Philadelphia Federal Reserve Bank President Patrick Harker stated he currently supports two more interest rate hikes this year but might consider the possibility of a third increase in case of an acceleration of inflation. “I do think it is prudent to continue to move away from the zero lower bound when we can,” Harker said, adding that inflation “does seem to be moving toward 2 percent... and there is not much slack in the labor markets, so I think it’s appropriate to continue to move rates up judiciously.” According to him, the next rate increase “could be as early as June.”
Atlanta Federal Reserve Bank President Raphael Bostic said that the Fed is close to achieving its employment and inflation goals. “I view the economy as on track and believe we are close to mandate-consistent outcomes for both inflation and employment,” Bostic said, adding: “Given that measured inflation is already effectively on target, I won't be surprised to see a modest overshoot of our longer-run target. In fact, my own forecast is that, even with further gradual removal of monetary policy accommodation, inflation is likely to run a bit above 2 percent for a while.” But even despite the growing conviction that inflation steadily returns to 2 percent, Bostic does not see signs that wages are growing much faster. Bostic continues to see the economy growing above potential this year, around 2.5 percent, and slowing to its longer-run growth rate of around 1.75 percent over the medium term.
III. Market Situation
The currency pair EUR/USD resumed its decline after yesterday's growth, which was caused by the weakness in the U.S. currency in response to a fall in the 10-year Treasury yield, as well as a temporary reduction in political risks in Italy. Yesterday, Italy's two populist parties decided to nominate a law professor with zero political experience Giuseppe Conte as prime minister. Conte’s appointment is to be confirmed by President of Italy Sergio Mattarella. However, the recovery of the euro was short-lived, as political risks in Italy have not gone away. At the same time, the rise in oil prices should support investors’ confidence in the U.S. economy more than in the European currency. With an almost empty economic calendar in the Eurozone and the U.S. ahead, traders will focus today on the dynamics of the U.S. currency and the general market sentiment toward risky assets. Tomorrow, the Fed will publish the minutes from its latest meeting, which may provide new hints on the interest-rate hikes. Resistance level - $1.1997 (high of May 14). Support level - $1.1717 (low of May 21).
The currency pair GBP/USD traded little changed, remaining near the new low of 2018, set the day before. Investors are awaiting the hearings on inflation in the British parliament, which could significantly affect the market expectations regarding the chances of a rate hike by the Bank of England (BoE) at its August meeting. Later this week, the UK will publish a lot of important statistics, including the consumer price index (CPI) and retail sales for April, as well as a revised GDP estimate for the first quarter, which will help to identify the causes of the recent slowdown in country’s economic activity. Resistance level - $1.3665 (high of May 2). Support level - $1.3331 (low of December 21, 2017).
The currency pair AUD/USD traded near the opening level, as investors took a breather after the yesterday's rally in the pair, which was caused by the broad weakening of the U.S. currency and eased U.S.-China trade tensions. The ANZ bank’s weekly report on consumer confidence in Australia also had a slight influence on the pair’s performance. The report showed the consumer confidence index rose to 121.6 last week from 120.8 in the preceding week, reaching the highest level since the end of January, when the world stock markets reached the peaks. The result indicates a sixth consecutive weekly increase of the reading. This suggests that, despite the numerous problems associated with the prospects for consumption, te Australian households are currently quite good. Some of the recent improvement in consumer confidence can be attributed to the reduction in income tax, announced earlier this month. Resistance level - AUD0.7620 (high of April 24). Support level - AUD0.7488 (low of May 18).
The currency pair USD/JPY traded slightly lower, as the yen was impacted by the comments by the Bank of Japan (BoJ) governor Haruhiko Kuroda and the BoJ deputy governor Masazumi Wakatabe, who is known as a vocal advocate of aggressive easing. Kuroda said that “Japan’s economy is expanding moderately”, but “the momentum toward achieving the price stability target of 2 percent is maintained but is not yet sufficiently firm.” He also noted “uncertainties concerning the outlook for economic activity and prices warrant careful attention,” adding: “Under such circumstances, it is appropriate for the Bank to pursue the current powerful monetary easing with persistence in order to achieve the price stability target at the earliest possible time.” Wakatabe said that BoJ can achieve the inflation target “with the current policy”. Though, “if conditions change and our current policy becomes inappropriate, we may need to change policy,” he added. Resistance level - Y111.39 (high of May 21). Support level - Y110.03 (low of May 16).
U.S. stock indexes closed solidly higher on Monday, supported by comments from the U.S. Treasury Secretary Steven Mnuchin, who said on Sunday that the U.S.-China trade war was put "on hold" as the countries agreed to drop their tariff threats while they work on a wider trade agreement.
Asian stock indexes closed mostly lower on Tuesday, despite a solid lead from Wall Street overnight. Hong Kong stock market was closed for Buddha’s Birthday. The Australian stock market dropped, dragged down by the banking sector as well as mining companies in response to a fall in iron ore prices. The Japanese equity market also went down, as a resumed strengthening of the yen against the U.S. dollar, put pressure on the Japanese large export-oriented companies.
European stock indexes are expected to trade mixed in the morning trading session.
Yields of US 10-year notes hold at 3.05% (-1 basis points)
Yields of German 10-year bonds hold at 0.52% (0 basis points)
Yields of UK 10-year gilts hold at 1.48% (0 basis points)
Light Sweet Crude Oil (WTI) futures traded higher. Crude oil for delivery in June settled at $72.61 (+0.36%). The crude oil prices rose moderately, helped by weaker U.S. dollar. In addition, investors assessed the situation in Venezuela after re-election of Nicolas Maduro as president of the country for a second term and continued to respond to signs of easing tensions in trade relations between the U.S. and China. Market participants are now awaiting data on oil inventories in the U.S. Today, the American Petroleum Institute (API) will publish its weekly data on the U.S. crude oil stockpiles. Tomorrow, the focus will be on official report on crude inventories in the U.S. from the U.S. Energy Information Administration (EIA).
Gold traded at $1,290.90 (-0.15%). Gold prices fell slightly, on the back of partial profit-taking after yesterday's growth. However, the further fall in prices was limited by the dynamics of the U.S. currency. The index, measuring the value of the U.S. dollar relative to a basket of six major currencies, dropped 0.12 percent to 93.57. Since gold prices are tied to the dollar, a weaker dollar usually makes the precious metal cheaper for holders of foreign currencies.
IV. The most important scheduled events (time GMT 0)
MPC Member Vlieghe Speaks
Inflation Report Hearings
CBI industrial order books balance
Richmond Fed Manufacturing Index
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