Fed Expectations All Over the Place Amid Strong Data, Bank Stress, Debt Ceiling Impasse

The US dollar remains under a decent selling pressure. The debt ceiling and the ongoing stress in US regional banks help keep the Fed doves in charge of the market despite economic data calling for a tight hand from the Fed.

JPY Bearish Positioning is Getting Overstretched

Since 3 April 2023, the weekly reported net open positions on the JPY futures market have indicated a steady increase of net shorts positions on JPY from -109,302 contracts to -145,845 as of 1 May 2023 which suggests that traders’ sentiment on the JPY is getting bearish on an incremental basis.

Technical Picture for Dollar Remains Fragile

The technical picture for the dollar remains fragile with the DXY 100.8 support and EUR/USD 1.1095 resistance still within reach.

Sunset Market Commentary

The Japanese yen underperforms but since both the USD and euro trade fairly week too, the damage in the likes of USD/JPY (flirting with 135) is contained. EUR/JPY ekes out a small gain to 149. EUR/USD edges north to trade in the 1.104 area.

Tightening of US Bank Credit Conditions Seems Smaller Than Feared

Credit conditions in the US. The Federal Reserve Senior Loan Officer Opinion Survey (SLOOS) released yesterday showed that banks reported tighter credit standards and weaker demand for commercial loans. The share of US banks that are tightening the terms on loans for medium and large businesses rose to 46.0% in Q1, up from 44.8% in Q4 2022.

Markets Keep Close Eye at Meeting of Biden with Congressional Leaders on Debt Ceiling

Markets will also keep a close eye at a meeting of US president Biden with Congressional leaders on debt ceiling. At least for now, there are no clear signs of a break-through. Later this evening the US Treasury will sell $40 bln of 3-y notes. After yesterday’s rebound in yields, we expect markets to take a wait-and-see approach ahead of tomorrow’s US CPI data.

Market Mood Mixed Ahead of US CPI

It is worth keeping in mind that even though the Fed signaled a pause in further rate increases, it also left the door open to further tightening if incoming data warrants. Traders are currently pricing in a 49% probability of a 25-basis point cut at the September Fed meeting, according to Fed funds futures. CPI year-on-year is expected to rise 5.0% which would be the slowest pace in almost 2 years while core CPI is forecast to cool to 5.5% from the 5.6% in the prior month.

Nikkei 225: Bulls Showing Signs of Resilience

The Japanese stock market has continued to show resilience despite the current heightened risk of global stagflation and rising geopolitical tensions. The benchmark Nikkei 225 and MSCI Japan have recorded a month-to-date return of +1.30% and +0.95% for May respectively at this time of the writing outperformed the US S&P 500 (-0.75%), MSCI Asia Ex Japan (+0.57%), MSCI Emerging Markets (+0.72%) and STOXX Europe 600 (+0.06%).

FTSE 100 Drops 108 Points in 5 Days Despite Strong Pound

If ever there was glaring evidence that the stock of large cap companies which are listed on the London Stock Exchange are completely uninfluenced by the highly liquid currency markets, this week’s FTSE 100 performance is it.

Will Bank of England Once Again Fail to Address the Inflation Problem?

Events elsewhere have been stealing the headlines lately, but this week’s focus will almost entirely be on the UK as the BoE is holding its rate setting meeting on Thursday. Will the BoE decision provide another boost to the pound against the euro?