US non-farm payrolls – 01/04 – The most recent US payrolls report was by all accounts a fairly decent one, although the number was of lesser importance given that we already knew that the Fed was going to raise rates come what may when they met in March. Nonetheless the headline number smashed expectations of 415k, coming in at 678k, while January was revised modestly higher to 481k. During that same week the ADP payrolls report saw a huge revision from -301k to 509k, an 810k swing from negative to positive, altering the picture for the US labour market substantially. The unemployment rate also fell back, slipping to 3.8%, while in an extremely encouraging development the participation rate rose to 62.3%, its highest level since March 2020, when we were at 62.7%. This trend needs to continue if we are to get back to the 63.4% level we saw in February 2020. The only cloud on an otherwise positive report in February was a slide in the average hourly earnings data from 5.5% to 5.1%, which at a time of rising inflation is probably not what you want to see if you are concerned about the rising cost of living. This week’s payrolls report for March is expected to another strong month for hiring patterns. Vacancy levels still remain high at over 10m jobs, while weekly jobless claims remain close to 50-year lows. As such expectations for this week’s payrolls report are for another 450k jobs to be added, while ADP is forecast to see another 400k jobs. The unemployment rate is forecast to fall to 3.7%, and average hourly earnings to move higher, up from 5.1% and back towards 5.5%. US Consumer Confidence (Mar) – 29/03 – US consumer confidence has been on a downward track for several months now; however, it’s not been particularly reliable indicator of consumer spending patterns. The last two months have seen a sizeable rebound in US retail sales yet little of that has been reflected in consumer confidence surveys, while forward inflation expectations have gone up. Quite simply while US consumers may be spending more, their concerns about the economy are rising due to surging energy prices. In February we saw consumer confidence slide back to 110.5 from 111.10 and is expected to fall further to 107.80 in March, on the back of continued sharp rises in energy and food prices. US Core PCE Deflator (Feb) – 30/03 – As expected we saw the Federal Reserve raise rates by 25bps at their March meeting, however some people on the FOMC like St. Louis Fed President James Bullard wanted to go faster and harder when it comes to tightening monetary policy. In a recent post on the St. Louis Fed website Bullard argued that the Fed funds rate needed to be at 3% by year end due to core PCE being over 4% higher than the Feds target rate of 2%. While he is probably in a minority on this point the Fed has indicated it wants to see another 6 rate rises this year, and that at least one of these is likely to be a 50bps move, probably in May. A strong core PCE is likely to increase the odds of this happening. In January we saw the PCE Deflator rise from 5.8% to 6.1%, while core PCE rose to 5.2% from 4.9%. This weeks February numbers are expected to see a further increase in underlying prices with PCE Deflator set to rise to 6.4% and PCE Core Deflator to rise to 5.5%. US Q4 GDP final - 30/03 – The most recent revision to US Q4 GDP saw the US economy bounce back strongly after a fairly disappointing Q3. A rebound in hiring has certainly helped, as well as a strong recovery in both manufacturing and services activity, despite the end of the year Omicron disruption, which saw weekly jobless claims rise sharply. It appears that US companies used Q4 as an opportunity to front run potential problems around supply chain shortages and disruption, by ordering early and front running demand and rebuilding their stock ahead of the Thanksgiving and Christmas period. As such we can expect to see this week’s final iteration of Q4 GDP to get revised higher again, from 7% to 7.1%, despite weak personal consumption rates. Global Manufacturing PMIs (Mar) – 01/04 – After a weak finish to 2021 economic activity in Germany picked up in the first two months of this year, with both manufacturing and services activity performing well. This doesn’t chime with some of the industrial production and factory gate prices, which has been weak, and with input costs surging since the end of last year, one has to question how reliable some of this latest PMI data actually is. The latest factory gate prices for February showed...

Asia markets are opening g soft on the back of Covid concerns in  Shanghai as the city goes into semi-lockdown from today, with potential disruption across tech/EV supply chains.  Weaker bond markets are setting records with the benchmark UST indices, which are the worst on paper at this stage in data going back to 1972. Barring an end-of-month rally, Q1 2022 will underperform the weakest quarter on the record set in Q1 1980. The cross-asset reaction to higher yields has been a collective shoulder shrug in sharp contrast to the equity market drawdowns seen earlier this quarter Significant month and quarter-end rebalancing following the steepest YTD drawdowns in bond markets in decades could push implied rates and equity market volatility higher this week and next. But with CPI inflation yet to peak in the major economies, higher highs in yields look set to follow in Q2 beyond any near-term rallies.   Oil Oil fell at the NYMEX open as China's worsening virus resurgence raised concerns about demand in the world's biggest crude importer. Global markets seem to be a bit nervous about the effectiveness of China's zero-tolerance policy towards covid and the potential for more demand and supply chain disruptions as we might be only dealing with the tip of the iceberg. Oil prices remain supported in part because of the unexpected disruption to crude flows via the CPC export terminal in Kazakhstan. Severe weather caused damage to two of the terminal's three mooring systems, and the resulting halt to loadings impacts around 1mb/d of crude flows – significant in the context of already-tight markets. Repairs will reportedly take at least one month, adding to near-term supply uncertainty and supporting oil prices. More companies are committing to a 'private sector embargo,' including total winding down purchases by year-end, with many companies not willing to ink new deals. Public opinion and government coercion make it difficult to envision these companies restarting purchases. Although March vessel loadings of Russian crude and products may be little changed, reflecting deals struck in February, the disruption to April loadings and pipeline exports could be significant relative to the market's current state expectations.    Gold The offsetting narrative of lower oil and a coronavirus surge in China ( inflationary impact of a supply chain disruption) has seen relatively neutral but with a soft sell bias at the open of gold trade.  With war rather than peace looking more likely for the foreseeable, gold remains well supported on dips. And with oil prices more likely to stay higher for longer, inflation and the real possibility of stagflation hitting the global economy continues to support gold.  Hence, gold investors may still think the Fed's "whatever it takes" moment is more bark than bite, so they continue to buy gold in dips.    Forex  USDCNH is testing 6.3900 this morning in Asia after a spike in covid cases reported in China. The surge raises the chances that the PBoC will need to cut interest rates more aggressively than priced. This creates an obvious policy divergence trade between the PBoC vs the FED 

“An afternoon wobble shows that nervousness remains, but equities have moved through the week without giving back too much ground.” Rally continues, despite growing scepticism “The recent bounce from the lows is still going intact, if it has taken a knock in afternoon trading, although the darker global economic outlook means that many are wondering whether these gains can be sustained. Investors keep waiting for the other shoe to drop, but as yet stocks are not giving people the trigger to begin selling once again. This caution is perhaps the best foundation for more gains, since it doesn’t appear to be accompanied by too much euphoria, but with the Fed now openly talking about 50 basis point hikes it is sensible to ask whether valuations can keep rising even as the prospect of weaker growth looms ever larger.” Oil moves up even as US ponders new reserves release “Oil seems impervious to any potential bad news, with today’s move higher coming despite news that the US is pondering another release of petroleum from its strategic reserve. But such releases offer temporary respite from rising oil prices, much as the cut in fuel duty on Wednesday did for UK consumers. OPEC’s next meeting is perhaps the only near-term hope for a change in direction.”

Gold and oil prices surged on Friday, as markets reacted to the news that there was an attack on Saudi Aramco’s facilities in Jeddah.   Reports claimed that missiles and drones were fired at the facilities, near the port city, resulting in huge explosions.  A Yemeni based Houthi group took responsibility for the attacks, which came days before a Formula One event was to be held in Jeddah. Following the attack, Saudi Arabia refused to  bear responsibility for any global oil shortages, as a result of the attacks on its oil facilities. WTI crude hit a high of $115.74, whilst XAUUSD peaked at $1,964 for the day.  Meta marginally higher, following U.S/EU data transfer pact  Meta was trading marginally higher on Friday, as it was reported that the EU and U.S. had agreed on a new data sharing pact. Several huge tech companies in the U.S. the likes of Meta and Google, were considering their options in Europe, as both were uncertain about how changes in legislation would affect data flows. Today’s pact will see the formation of a new framework for cross-border data transfers, which will replace the old “privacy shield”. Speaking on Friday, President Biden said that, “This framework underscores our shared commitment to privacy, to data protection, and to the rule of law”. Both Meta and Google shares were higher on the news.

According to the Office for National Statistics, retail sales in the UK decreased by 0.3% in February, as opposed to market expectations of deceleration to 0.6% from 1.9% growth in January. Moreover, sales excluding fuel fell 0.7% in March and missed market projections of 0.5%. As for the US dollar has pared some of its intraday losses by drawing some support from rising bets on a 50 bps rate hike by the Fed in May. Bears await a decisive break below the ascending flag support, as fundamental news prompted downward pressure on the GBP/USD pair. The rest of the day is expected to be dominated by Fed officials' speeches, which may reinforce the hawkish stance and offer more support to the dollar. Technical view The pound has exhibited a bearish flag against the US dollar on the four-hour chart, struggling with the 50-bar EMA. Sterling is currently trading in a range market, fluctuating between 1.32242 and 1.31526, corresponding to a 23.6% Fibonacci retracement of the prior downtrend. As it turns out, sellers tend to violate this key support area at the confluence of 50 EMA, lower flag line, and 23.6% Fibo level. Yet, there are still no signs of a bearish trend, and we will need a clear break out before we can pinpoint a direction. The bearish scenario could play out if sellers break below the 1.31526 hurdles and drag the 1.31377 level into the spotlight. Continuing below this level can push the pair towards 1.31142. If the negative momentum continues, GBP/USD can then move lower towards the 1.30882 barriers. By contrast, if 1.31526 holds, the pair will likely remain sideways, aiming for the range top at 1.32242. Breaking this barrier could lead to buyers reclaiming 1.32463, which is in line with the 38.2% Fibonacci level. In the event of a breach of this latter, the move toward 200-bar EMA could speed up. The short term momentum oscillators paint a mixed picture. The RSI is floating in a neutral region with no apparent direction. Also, momentum has drawn a sideways movement attached to the 100-baseline. Similarly, MACD bars are positive but shrinking towards zero, indicating fading directional momentum.

GBP/USD Cable holds in a choppy and directionless mode for the second straight day and remained resilient despite downbeat UK retail sales data for February. Weaker dollar in European trading on Friday helped sterling ahead of pivotal support at 1.3150 (50% retracement of 1.3000/1.3298, reinforced by 10DMA), after the action was already rejected at this zone on Thursday. Technical studies on daily chart lack clearer direction signal as bullish momentum is rising but stochastic is heading south and 10/20DMA’s are in mixed mode. Watch the action around 1.3150, as firm break here would encourage sellers and risk test of Fibo supports at 1.3114 and 1.3071 (Fibo 61.8% and 76.4% of 1.3000/1.3298 respectively) which guard key 1.30 level. At the upside, initial barrier lays at 1.3245 (Fibo 38.2% of 1.3642/1.3000) followed by 1.3298 (Mar 23 recovery peak), violation of which would bring bulls back to play. Res: 1.3245; 1.3282; 1.3298; 1.3321. Sup: 1.3150; 1.3114; 1.3071; 1.3034. Interested in GBP/USD technicals? Check out the key levels

Outlook: Markets would really prefer to be more risk averse but who can stomach the returns on cash and fixed income assets when inflation is so high? The tension in the air can be cut with a knife. Morgan Stanley notes the sell off in Treasuries has resulted in “flattening the 5s30s curve to 14b p, a new low since 2007.” This observation does not pass the “So What?” test. Fed chief Powell advised we look at the short-end of the curve only. Bloomberg today has the 3 month at 0.49%, the 6-month at 0.94% and the 2-year at 2.16%--nicely normal. Yield-seekers are glad about central banks in Brazil and Mexico front-running the Fed, although AMLO confused everyone by announcing the rate hike before it happened. At least in those two countries the short-term return has a sane relationship with inflation. You can’t say that about the US or the West generally. And weirdly—very weirdly—the yield diff might even be starting to become a factor in Japan. After a hint of inflation in Tokyo, the 10-year JGB yield was up almost to 0.24% from near zero where it has languished for months under the policy of yield curve control. This is more a “hmm moment” than an “aha! moment” but worth noting. The dollar/yen is at the highest since December 2015 and that can’t last. As noted before, old-timers are accustomed to drawing imaginary lines in the sand. At a guess. 125 is a number the MoF and BoJ will not like. It’s almost impossible to convert some observations into trading ideas, but note that next week is month-end and quarter-end, and both can have an effect on position changes by the Big Traders that convert to crowd-following. We continue to see the market coming to accept the Fed is serious about taking ed funds to 2.25-2.50%, with the whole curve higher in lockstep. We can expect more rhetoric pushing sentiment that way. It’s hard to imagine this environment failing to be strongly dollar-supportive, especially with decent US hard data and Europe getting disappointing markers. Why the euro is not weaker is a mystery and a rather frightening one. But stay the course.  Russian Finance: Bloomberg reports the MOEX index fell 3.7% after climbing 4.4% yesterday, led by Gazprom. It’s pointless to watch equities in Russia when a big category of traders (foreigners) cannot sell and when short-selling is banned. Still, Gazprom fell on the news that Germany will seek to cut it out of its supply chain altogether by 2024, so some news is getting through to Russia. Ordinary Russians must be getting some hint when McDonalds and other Western names are closing down. Nobody thinks sanctions and the ruble/MOEX are going to change a single thing in Putin’s conduct, but let’s keep watching. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!  

AUD/USD The Australian dollar remains well supported, with strong gains against Japanese yen, underpinning the AUDUSD pair. Aussie advanced around 5% vs the US dollar and 10% vs yen in past almost two weeks, as Japanese currency remains under pressure on dovish BoJ and soaring prices of commodities and energy, as the country heavily depends on imports. The daily chart shows that  AUDUSD price action is slowly running out of steam, on approach to key resistance at 0.7555 (28 Oct 2021 high) as the bodies of daily candles are getting smaller, while shadows are longer on both sides. Although the bullish momentum continues to strengthen, overbought stochastic adds to signals stall. Correction is likely to be shallow, as weekly studies are in full bullish configuration and the pair is on track for the second strong weekly gains and close above weekly cloud top that generates bullish signal. Good supports lay at 0.7441/17 (Mar 7 spike high / broken Fibo 76.4% of 0.7555/0.6967) with extension towards rising 10DMA (0.7385) not ruled out and expected to offer better levels to re-enter bullish market. Break of 0.7555 pivot would expose net key barrier at 0.7634 (Fibo 38.2% of 1.1079/0.5514, 2011/2020 downtrend). Res: 0.7536; 0.7555; 0.7600; 0.7634. Sup: 0.7477; 0.7441; 0.7417; 0.7385. Interested in AUD/USD technicals? Check out the key levels

USD/CAD traded lower yesterday, breaking below the key support barrier of 1.2560, initially marked by the low of January 26th, and tested again several times this week. This, combined with the fact that the rate is trading below the lower end of the sideways range that contained most of the price action from January 26th until March 17th, paints a negative short-term picture. We believe that, despite a subsequent bounce, the dip below 1.2560 may have opened the way towards the 1.2453 zone, which is marked as a support by the lows of January 13th, 19th, and 20th. If that key zone fails to provide support this time, then we may experience extensions towards the 1.2387 barrier, marked by the low of November 10th, the break of which could allow a test at the 1.2327 level, defined by the low of October 29th. Shifting attention to our short-term oscillators, we see that the RSI, although it rebounded from slightly below 30, it turned slightly down again, while the MACD, already negative, had also turned south and just crossed below its trigger line. Both indicators detect downside speed and support the case for further declines in this exchange rate. We will abandon the bearish case only if we see the rate returning back within the aforementioned range, in other words, breaking above the 1.2665 barrier. This may encourage some more advances within that range, initially towards the 1.2695 level, marked by the inside swing low of March 11th, the break of which could extend the advance towards the 1.2737 level, marked by the low of March 14th. Another break, above 1.2737, could aim for the 1.2785 zone, which acted as the upper end of the aforementioned range.  

RBA rate meeting – 05/04 – The RBA has been uncharacteristically dovish in recent months despite rising evidence that inflation is running well ahead of expectations. Governor Philip Lowe has gone to great lengths to play down the prospect of a rate rise this year, although at the last meeting he was careful not to rule it out. Unemployment has been falling while wages, as well as inflation pressures, have been increasing. As a major commodity exporter, the rise in wheat, oil and metals prices is likely to exert significant upward pressure on inflation in the coming months, which is a significant shift from the start of this year, when the RBA was insisting that a rate rise this year was unlikely. Events have moved on since then and the RBNZ has already started raising rates, leaving the RBA in its wake. This suggests the RBA could be closer to moving rates off their current 0.1% than at any time in the last six months. Expectations are still for a possible hike in June, however this still seems some way off and given the fluidity of the current situation it wouldn’t be impossible for the RBA to move at their April meeting, if only to anchor inflation expectations. Global Services PMIs (Mar) – 05/04 – The recent flash PMIs from Germany and France showed that despite rising prices services activity has remained resilient. This has come about as a result of the easing of covid restrictions more than any immunity from rising costs, which have shown little signs of slowing down. The rise in costs has also been exacerbated by the war in Ukraine, which is manifesting itself in rapid increases in the costs of doing business. Because of this companies will be faced with the prospect of passing these costs on, and while for the moment they seem able to do so that is likely to change as we move into Q2. Business and consumer confidence is already on the decline, and is likely to deteriorate further. As such this week’s services PMI reading could well be the last hurrah for the rebound in economic activity we’ve seen since the start of the year. France services PMI is expected to rise to 57.4 from 55.5, while Germany services is expected to come in at 55. In the UK services activity is expected to remain steady at 61, however in a worrying sign for the sector for Q2 inflation pressures in the sector are at a record high, and look set to rise further. Business optimism on the other hand saw a sharp drop in the recent flash PMI numbers suggesting that there is rising concern about the growth outlook over the rest of the year. A lot of the recent improvement in the last two months has been as a result of inventory rebuilding as businesses get ahead of rising prices by restocking while prices are lower. Fed minutes – 06/04 – As expected the Federal Reserve raised rates at its March meeting, by 25bps, although the decision wasn’t unanimous in that St. Louis Fed President James Bullard argued for a 50bps rate rise. His argument was that the Fed funds rate needed to be at 3% by year end due to core PCE being over 4% higher than the Feds target rate of 2%. While he is probably in a minority on this point at the moment, the Fed has indicated it wants to see another 6 rate rises this year, and that at minimum one of these is likely to be a 50bps move, probably in May. This week’s minutes should give us an indication as to how much events in Ukraine tempered the Fed’s response in terms of the increase in rates and whether there was a temptation to go harder than 25bps. The FOMC also upgraded their inflation forecast for 2022 to 4.3% from 2.6%, and in 2023 to 2.7% from 2.3%, while downgrading GDP to 2.8% in 2022 and 2.3% in 2023. The upward adjustment to the inflation forecast while significant is still well below the current level of 6.1%. Various Fed policymakers have indicated that a 50bps move is likely to be on the table in future meetings, and when you have the likes of a dove like Neel Kashkari of the Minneapolis Fed arguing the Fed would probably need to be more aggressive, then the calculus could well shift rapidly in the coming months if inflation proves to be much more persistent. US bond markets have already shifted sharply in pricing future rate hike expectations; however, they appear to be pricing the prospect that the Fed could well overtighten in its desire to rein in inflation risk. The nature of this week’s minutes could well reinforce that fear. ECB minutes – 07/04 – At the most...

As the conflict in Ukraine remains frozen for now, markets have started shifting their attention also to other topics, especially monetary policy signals. Despite volatile oil prices rising again to USD/bbl 120 after Russia demanded Rouble payments for gas, positive risk sentiment sent yields higher and equities held up. Bund yields rose above 0.5% for the first time since 2018 and 10Y US Treasury yields are now trading around 2.4% after hawkish comments from Fed chair Powell, which seemed to prepare the ground for a more aggressive monetary policy tightening ahead. EU leaders agreed on more joint gas buying going forward, although an embargo on Russian energy imports remains off the table for now amid German opposition. G7 leaders agreed to crack down on Russia’s ability to sell its gold reserves to support its currency and the US announced expanded sanctions against more than 400 Russian individuals and companies. Norges Bank (NB) continued with its gradual policy tightening and hiked rates by another 25bp this week, but we think the NB rate path will prove too aggressive and pencil in fewer hikes and an earlier top in policy rates (read more in Reading the Markets Norway - NB firms tightening signals but maintains 'gradual' pace, 24 March). In contrast, the Fed's new mantra seems to be "get to neutral as fast as possible", and a range of FOMC members this week talked about front-loading rate hikes, with none ruling out a 50bp at this point. With inflation still high and the Fed behind the curve, we see an increasing probability that the Fed will tighten more and faster than we have pencilled in (i.e. risks are skewed towards the Fed hiking by 50bp in both May and June or 75bp in one go). Tighter monetary policy (and financial conditions) and the commodity price shock increase the risk of a global recession 1-2 years down the road, which is also reflected in the ongoing flattening of the US yield curve. In Research Russia - EU embargo on Russian energy could be a game-changer, 23 March, we took a closer look at the economic implications from the war in Ukraine on Russia. The 'Fortress Russia' policies have already significantly weighed on households' living standards and the war ensures that weakness will persist for years to come. On a positive note, PMI figures for March suggested that the hit to the euro area economy from the Ukraine war might have been less than feared, calming immediate recession fears. That said, growth momentum in both manufacturing and services slowed and future output expectations have become more clouded amid renewed supply disruptions, weakening export orders and sharp rises in input prices. While Ukraine war developments will remain in focus amid signs of a stalling Russian advance, next week central banks will also get more data to assess the state of the labour market and inflation pressures. The US labour market report for March is due on Friday and we look for a decent report with jobs growth around 450k. In the euro area, flash HICP figures for March are released and we expect to see a further rise in headline and core inflation (to 6.5% and 3.0%, respectively) as higher input costs are still working their way up through the pricing chain, keeping pressure high on ECB to normalize policy. We see some downside risks for Chinese PMIs released on Thursday, following recent headwinds from COVID-19 outbreaks, property sector stress and the rise in commodity prices. Download The Full Weekly Focus

The war at Europe’s eastern border weighed heavily on the common currency, hurling EUR/USD back to levels not seen since the 2020 pandemic year. The focus returned to reigning market themes in the meantime. In this respect, the ECB’s hawkish shift protects EUR/USD’s downside. A solution to the geopolitical conflict may be required for the pair to start a sustained comeback. EUR/GBP remains trapped near YTD lows. Sterling/UK money markets do not buy into a cautious BoE normalization narrative. A 2% policy rate by year-end is discounted. As in EUR/USD, EUR/GBP’s downside is better protected though thanks to the ECB. Monetary policy divergence and higher core/US real rates launched USD/JPY to the highest levels since 2016. High commodity/oil prices weigh on the yen as well with Japan being a net energy importer. The currency fall-out of the war in Ukraine was the biggest on nearby countries, including in Central Europe. The Czech National Bank (CNB) intervened in FX markets to stabilize the koruna. The central bank will also raise rates more and keep them restrictive for longer than previously envisaged. Calm meanwhile returned, allowing the koruna to appreciate close to pre-war levels as the underlying fundamentals remain solid. The forint hit a record low of EUR/HUF 400. The central bank re-introduced the use of the weekly deposit rate to stem the currency’s decline. Along with improved sentiment, the forint pared losses to a still-weak EUR/HUF 370. The Hungarian central bank already announced a longer and more aggressive tightening cycle as inflation is expected to rise to even higher levels. The zloty was caught in the risk-off slipstream with a subsequent recovery as the dust settled somewhat. The NBP also intervened in the currency market. It hiked by a more than expected 75 bps in early March with more definitely to come. A significant comeback by the zloty (as well as the forint) is probably difficult as long as the war drags on. Download The Full Monthly Chartbook