Take five: will it pass or will it last?

A Wall Street sign in front of the New York Stock Exchange in New York, New York, United States, October 2, 2020. REUTERS / Carlo Allegri

1 / TRANSITIONAL OR NOT

The dollar is on the ropes, having erased its 2020 gains against a basket of currencies. The reversal stems from the Federal Reserve’s apparent willingness to continue printing money at the current rate despite signs of a rebound in the economy and inflation.

Fed officials generally view the higher prices as transient and the result of base effects. This view will be tested on May 28 by the last reading of the Personal Consumption Expenditure Index (PCE).

The core PCE, excluding food and energy, is the Fed’s preferred inflation measure for its flexible average target of 2%. It rose 1.8% in the 12 months ending in March. Find out more.

If the Fed sticks to its guns even in the face of a glowing PCE print, the dollar could fall further. This should fuel the rally in commodities and strengthen equity sentiment. But watch the crypto market – a repeat of this week’s swings could bring back the safe haven supply.

-What signs of US inflation would cause the Fed to change course? Read more

2 / RESET

The yield on the 10-year German Bund is rapidly approaching 0%. A big deal? – Yes and no.

Germany would in fact be the last sovereign in the eurozone to see negative 10-year borrowing costs turn positive. This is proof that entrenched pessimism about the region’s economy is finally fading.

This, along with rising inflation expectations, explains why the ECB does not seem overly concerned about the moves. And with the stimulus measures still in place, the possibilities for a further rise in borrowing costs should be limited.

Nonetheless, watch the ECB’s speech in the days to come. A sharper and more prolonged move that would take Bund yields above 0% could end any discussion of slowing emergency bond purchases in the near future.

– ANALYSIS – Bond yields up, ECB calm – this time it’s different read more

3 / USE THE SUPER CYCLE?

The commodity and energy markets have been supercharged this year, recording synchronized price gains not seen in more than a decade.

Oil is around $ 70 a barrel, the highest in more than two years, and the reopening of economies has taken industrial metals to record levels. Growing demand has been met by supply bottlenecks and shipping delays.

China, which has driven global metals markets for more than a decade, is now committed to curbing unreasonable price increases for consumers. This could relieve commodity importers facing inflationary pressures. It remains to be seen whether this move also dampens recovery prospects for commodity-dependent developing countries.

EXPLANATOR-What is happening with the prices of industrial raw materials in China? Read more

4 / FLY KIWI?

New Zealand’s virus elimination strategy has resulted in an economic recovery well above expectations, which means it may soon join Norway and Canada to start planning rate hikes.

At the Reserve Bank of New Zealand’s February meeting, rate hikes weren’t on the radar but the May 26 meeting follows a stimulating budget, roaring business and inflation indicators and a government directive to take into account the political real estate market.

The swap markets are pricing rate hikes from 2022. The bank might not go so far as to talk about it, but what is possible is a typing speech or a timeline that puts the RBNZ ahead of the most of its peers from developed countries.

-New Zealand central bank to hike rates from August next year, says ANZ Bank

5 / SELL IN MAY

The markets saw it coming – they hit record highs long before the first quarter earnings season saw companies make one of the biggest profit jumps on record. The windfall earnings streams were therefore greeted in the markets with a yawn.

Is the trade “sell in May”? With a few days to go to the end of the month, the S&P 500 is in the red after three months of gains and the European STOXX 600 (.STOXX) is barely afloat.

But the second quarter offers cause for joy, with S&P 500 earnings growth of nearly 62% and European earnings growth expected of around 93%.

-The European record for the Q1 season: “Travel and arrival”

-Sell the news?

Our Standards: Thomson Reuters Trust Principles.


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