The US equity markets rallied yesterday after taking over a positive session from the Europeans. However, the US retail sales data didn’t necessarily hint at slowing spending, and Jerome Powell didn’t say things that investors would normally like to hear.
Resilient spending is no good news for the Fed’s inflation battle
US retail sales grew more than 8% on yearly basis in April, more than around 7.30% printed a month earlier, meaning that Americans continue spending despite tighter economic conditions.
Unfortunately, the resilience of spending means that the Federal Reserve’s (Fed) actions don’t result in desired cooling effect on inflation.
Inflation mostly comes from the supply side, especially from the soaring energy and food prices as a result of pandemic-hit supply chains and the war in Ukraine. Whereas, the monetary tools are intended to control the demand side - and bring inflation by cooling down demand. If demand doesn’t ease fast enough, the Fed must tighten faster.
So, it’s no surprise Jerome Powell said that the Fed is resolved to curb inflation even if it means pushing the rates into restrictive territory. If that ‘involves moving past broadly understood levels of neutral we won’t hesitate to do that’, he said.
Powell’s words didn’t hit the investor appetite immediately. Nasdaq rallied more than 2.50% yesterday, as the S&P500 rebounded 2%. But mixed activity in US futures hint that appetite may not remain as strong in the coming sessions.
In the FX
The US dollar eased from two-decade highs. Prospects of higher US rates, and the positive divergence between the Fed and other central banks should prevent the dollar from falling significantly, as other central banks are also tightening their purse strings, but they sound timider when it comes to the timing and the intended sizes of the eventual moves.
The EUR/USD rebounded past the 1.05 level yesterday on the back of a broad-based softening in the US dollar. But the US 10-Year yield remains steady around the 3% mark, and poised to move higher, parallel to the expectations of solid rate hikes in the US in the coming months.
Eurozone’s final inflation data is due today, and should confirm a rise to 7.5% in April, an eye-watering number which should keep the European Central Bank (ECB) hawks and the euro bulls alert, and help the single currency consolidate its latest gains against the US dollar.
Gold trades around the $1800 mark. On one hand, the positive pressure on the US yields weighs on appetite for the non-interest-bearing gold. On the other hand, the high volatility and the looming uncertainties support safe-haven inflows toward the safe-haven metal. Yet, the long-term risks remain tilted to the downside. The yellow metal is below its 200-DMA - which now acts as resistance to any positive attempt, and is preparing to test the long-term triangle base - if broken should confirm a further negative outlook.
Crude oil spiked above the $115 per barrel, but bumped into top sellers above this level. Solid support approaching the $120 mark will likely be hard to clear, as the rising energy prices have a curbing effect on demand at the actual levels, and automatically cool down the rally.