US equities recovered their footing and then some yesterday, and US treasuries rallied all along the yield curve after they came under early pressure. That pressure was applied by core EU sovereign bonds selling off heavily on stronger than expected Eurozone Q1 GDP data and especially German CPI data yesterday.
The German CPI surge was remarkable, with the flash headline CPI coming in at 2.1% year-on-year versus 1.7% expected, with travel and energy costs the chief contributor to the rise. The bund sell-off in response to the data was mostly erased by the European market close, so we’re not yet talking about a move that sticks in any meaningful way to the rate outlook. But euro bears were caught the wrong way around, and anyway, the euro speculative positioning was vulnerable to a short-term squeeze risk given that the good news for the single currency arrives just after an important range break in EURUSD.
The US-China trade negotiations remain a possible sword of Damocles over markets as the US side is expressing some frustration with the length of the process and a supposed willingness to walk away if a deal not done soon. Don’t know if this is a weak PR attempt to add a bit of leverage as another round of talks is set to get under way in Beijing, but the mention of hoping to get something done inside of two weeks provides hope that we can soon know something one way or another.
– All stop levels on USD longs violated save for AUDUSD – going flat on USD for now.
– Leaves us long EURSEK with raised stops not far below 9.60
– Long GBPCHF a way to express sterling resurgence, CHF weakness
Ahead of tonight’s Federal Open Market Committee Trump’s political limitations on Fed appointments becoming clearer as some GOP senators have now announced that they will not support his baldly political nominee Stephen Moore to the Fed.
The USD has suffered a technical reversal in several pairs – most importantly in EURUSD, and tonight’s FOMC meeting should be the decider for whether the reversal sticks and extends or whether this was a mere squeeze, with the USD set to regain its footing. I’m not sure what this meeting can bring on the dovish side beyond what March already accomplished on that front. There are some who believe the Fed will have to cut the IOER rate (interest on excessive reserves) a few basis points to regain control over the effective Fed funds rate, but the market may not know what to with such a move.
Otherwise, the usual place to look for surprises are changes to the policy guidance in the statement or in Powell’s press conference that the Fed is second guessing its long term policy target forecasts. But the June FOMC is more likely to provide firmer hints on the Fed policy outlook.
The US April Chicago PMI missed badly yesterday, at 52.6 vs. 58.5 expected. The other regional US manufacturing surveys were on the weak side of mixed, so we could be looking at a weak ISM Manufacturing today.
EURUSD has reversed above 1.1200, but needs to prove that it can hold above here and higher through the rest of this week’s event risks to point to an unfortunate return (for momentum traders, at least) back into the 1.1200-1.1500 swamp.