US Open Note – Market sentiment dulls with growth worries

US yields ebb and heavy dollar follows

A risk-off tone has gripped markets as rekindled growth concerns are being highlighted due to China supply constraints from lockdowns, the domino effects from the Russian invasion on Ukraine and pressures on central banks who are expected to do more to bring inflation lower without pushing their economies into recession. The already aggressive Federal Reserve is finding its job to curb inflation more challenging as the degree or constant pace of tightening is important as the United States and global economies are simultaneously tackling unprecedented obstacles.

The reserve currency’s index remains under pressure around the 102.00 barrier after fading from the 105.00 mark. The dollar index has deteriorated by 3.13% over the last eight sessions, and recently sliding US treasury yields are not defending the greenback. The US 10-year is yielding 2.82%, the 5-year 2.83% and the 2-year 2.59%.

Meanwhile, a drop in US yields seems to have assisted gold on its bullish bearing, which is currently at $1,860/oz, but it’s haven appeal remains somewhat dormant in light of fresh rising growth concerns and muted risk appetite in markets. However, the Swiss franc and the yen are sustaining a haven inclination with the franc at 0.9625 and the yen at 127.20 per dollar.

New home sales in April collapsed an astounding 16.6% m/m to a seasonally adjusted annual rate of 591 k in April of 2022, a two-year low level from April 2020, and deteriorating below forecasts of 750 k in the midst of rising construction costs and mortgage costs, which make buying a house less affordable.

The Richmond manufacturing index highlighted the reported decline in business activity in May. The composite manufacturing index snowballed from 14 in April to -9 in May as two of the three components of the index turned negative.

ECB and Bank of England vibes

Is there resilience in the euro and the pound or are the moves in the major pairs driven mainly by the weaker dollar? The euro’s recent gains are holding above $1.0700 on the back of mixed Flash PMIs out of Germany and France, while the pound has surrendered yesterday’s gains after a larger miss in Flash service PMIs due to a surge in input cost inflation in the service economy. UK growth in the private sector slumped and the pound has now stabilized around the $1.2480 price level.

Today European Central Bank’s Christine Lagarde injected some hawkish rhetoric into markets mentioning that she sees the ECB’s deposit rate, which is currently at -0.50%, at zero or ‘slightly above’ by Q3, indicating that we may have two quarter hikes in the pipeline. However, ECB hawks considered this as a sign of weakness as it removed a 50 basis points hike from the ECB’s arsenal. Lagarde tried to upgrade her remarks by stating a cautious pace is likely to be adopted highlighting that record inflation, April’s figures being 7.4%, is being fed by supply side market attributes that trickle back to elevated prices in fuel, exacerbated by the Russian invasion on Ukraine, and pandemic restrictions lingering in China.

Persistent Chinese lockdowns and countries that are limiting exports of soft commodities are beginning to paint a picture where global households will be faced with higher inflation as elevated costs accompany fuel, services, goods and food. Curbing consumers purchasing power could not only slow inflation but hit growth too, as central banks are monitoring both indicators closely.

Heightened food protectionism may snag the cogs of the free functioning market, and this could exacerbate food security risks for those most vulnerable. Down the road, developed countries are not walled off from these risks either.

Lower income households in the UK are struggling to feed themselves and those people who spend a big chunk of their budget on food look to be affected the most. A huge portion of UK citizens have minimized food purchases due to the squeeze on their incomes. The key point is that restaurants and hospitality businesses could take a serious hit if this prolongs, as eating out and travelling represent discretionary spending.

Oil and antipodeans

The risk-off tone has trickled to the antipodeans who have retreated somewhat due to uncertainty surrounding global growth. AUDUSD is around $0.7070 and NZDUSD is at $0.6440. WTI oil futures have pushed to $111.00 per barrel, breaching the Asian session start level, while the loonie has remained unchanged around C$1.2800.

Fed Chair Powell is due to deliver pre-recorded opening remarks at 14:20 GMT at the National Centre for American Indian Enterprise Development Reservation Economic Summit.

UK MPC Member Tenreyro is speaking at 17:15 GMT and following is ECB’s Christine Lagarde, who is to deliver opening remarks at a session of the World Economic Forum in Davos.

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