Weekly Outlook WC 24/04/2023
Is there a ‘Sell in May and go away’ set-up shaping up? Here is a little look back and look forward with some key points to consider for the week ahead.
Last week’s re-cap – the mood around the banking crisis again brightened, it’s now perceived as a localised set of failures caused in part by risk management within the firms. However the shock may still have repercussions on lending tightness, the Fed’s Senior Loan Officers Opinion Survey (SLOOS) will confirm whether this is the cause, but unfortunately it lands after the next Fed meeting.
The Empire State Manufacturing Survey had a surprising jump and beat expectations (+10.8 vs -18 consensus). Breaking this down, the new orders and shipments were at 12 month highs. With rates being at their highest and supposedly credit conditions tightening, the expansion in new orders is somewhat surprising.
There was a comment made by a Fed official who said “the economy works just fine with rates at this level” and with figures like this it is pretty hard to argue with that. However later in the week the Philadelphia Fed Survey showed a worsening picture (-31.3 vs -19.2 expected). There are differences in the makeup of the respondents but it highlights the mixed picture for the US.
Initial jobless claims also showed a weakening picture – printing its worst figure (239k) since 23 Nov 2022 (240k).
Something which may show a worsening picture is the hours worked in the US. There is a strong negative correlation between hours worked per week and the initial jobless claims. This is logical as an employment would likely rather reduce hours than completely lose a member of staff in the early stages of a slowdown. Just something to watch going forward.
However, both service and manufacturing PMIs rose MoM with manufacturing closing the gap to services slightly. The composite reading came in at 53.5 which is an 11 month high. Importantly, this survey showed an increase in input and output prices (inflation) which further strengthens the probability of a rate hike – and to add to the cloudy picture, employment also ticked up in the PMI surveys.
FedWatch – the hike in the May meeting is almost completely priced in – but there is a growing divide for the June meeting – will they or won’t they pause? – there is a lot of data between now and then.
| MEETING PROBABILITIES | ||||
| MEETING DATE | 450-475 | 475-500 | 500-525 | 525-550 |
| 03/05/2023 | 0.0% | 10.9% | 89.1% | 0.0% |
| 14/06/2023 | 0.0% | 8.0% | 68.6% | 23.4% |
| 26/07/2023 | 1.4% | 18.5% | 60.8% | 19.3% |
The bulk of PMIs were released on Friday – I have already mentioned the US, but this was really standalone in that they showed an expansion in manufacturing. AUD, French, German, GBP and Eurozone (as a whole) all showed sub 50 manufacturing while services all continued to remain strong. Overall, the Global composite rose to 53.4 which is a 9 month high.
Elsewhere last week, The RBA minutes were out following their recent pause. They noted that a hike was considered but the stronger case was to pause – they noted the risks and their commitment to reassess following data. If inflation doesn’t cool or the labour markets strengthens then hikes could be back on the table.
In the UK – there were mixed signals. Firstly the employment figures for claimant count rose and greatly missed the expectation (28.2k vs -2.5k expected) potentially causing the chances of a cut to rise, but counter to this the CPI came in at 0.8% MoM which is a YoY still over 10% (10.1%).
I mentioned several weeks ago about my weekly shop being noticeably higher – the opposite has actually happened this weekend, and there have been several announcements by major supermarkets announcing they are cutting prices on things like milk and eggs.
With the next BoE meeting scheduled for the 11 May, there are a couple of key releases in the run up to the such as the BRC Shop Price Index and Retail Sales – this is usually a low impact release, but it is the one closest to this rate announcement and may give a good indication on which way the BoE will go.
NZD printed a lower CPI figure QoQ, which is the lowest since April 2021 – this also does not take into account the impact of the recent rate hike – which was a bit of a surprise. With CPI beginning to trend lower I cannot see the argument for hikes to remain, but again, there is a lot of data between now and the decision point.
The Week Ahead
JPY – BoJ Core CPI on Monday and then Tokyo Core CPI on Friday may give clues – recently I mentioned that the ‘Shunto’ which is the method wages are set in Japan was set very high (here’s a good article on the impacts and a bit of background:HERE) – there is potential that this, along with leading companies beginning to restructure how they pay employees, could cause a wage/price spiral boosting inflation towards the BoJ target and in turn paving the way for a normalisation of policy. Although we are a long way off that, strong inflation figures would certainly increase bets on this happening. However, there will be a lag in the impact of the wage negotiations as it filters into people’s salaries and is then spent + the reporting lag. This may be something to watch in H2.
There may be clues in YCC ‘tweaks’ or longer term policy changes in the BoJ Policy Statement and Outlook report on Friday – Ueda currently seems to be holding Kuroda’s stance at least in the short term.
US CB consumer confidence, this is a household level survey which includes labour availability. This on the ground report might be a good signal on potential hard survey results in coming weeks ahead of the May and more importantly June meeting. Thursday also sees the weekly employment which is expected to tick up continuing that upward trend. Friday is Core PCE.
If unemployment hasn’t gone through the roof, the household survey is good and Core PCE on Friday shows sticky high inflation, then this sets up nicely for a standard “sell in May . . “ rally seen in the dollar seasonality.
You can see there is a tendency for the USD to rally from beginning to mid May.
(https://charts.equityclock.com/us-dollar-index-futures-seasonal-chart)
AUD CPI is released on Wednesday – The RBA held rates steady at the beginning of the April – this will be a good indication on how the current level of rates is impacting inflation. If inflation ticks down then this should suppress any argument for restarting hikes. Might be a good set-up vs the USD.
The Eurozone sees a range of data released on Friday – this is all pretty timely data with a mix of flash and prelim releases for the major economies. Strong reading may swing the ECB towards that 50bps which has been hinted at by members.
Supporting:
DXY: sitting below the daily 55 and 200 ema as well as the weekly 55ema. Price is supported by the 101 level, with resistance at 103 level that also holds the EMA cluster above that. To the downside, 99 is the next support level that also has the weekly 200EMA in the same area.
EXY
There is a little bit of overhead resistance, with the weekly 200 and the resistance level around 111.50 area. The recent swing high at the 109 level, then the EMA cluster below may offer support.
Oil – filled the gap left by the OPEC announcement – currently back within the trading range that started in Nov ‘22. No clear momentum but there are a lot of geopolitical factors. Also, the price cap set for Russian oil exports is $60/barrel if China and other countries are seeing increased demand – and are on friendly terms with Russia, what does this mean for the global oil price and where is the demand likely going to be serviced?
S&P
Price is coming up to a resistance level at 4150. There is an EMA cluster around 4000 then the level below that is the 3800 level.
