US Open Note – Risk appetite improves with FOMC optimism



Dollar hovers as yields stabilize with US GDP figures

Yesterday’s minutes from the Federal Reserve’s May meeting reiterated two 50 basis point raises in June and July but also highlighted the possibility that the Fed may then stall hikes if the effects on the economy of these increases have managed to calm inflationary pressures. The question is will inflation have eased enough by then for the Fed to lower its rate trajectory?

The minutes hinted that if post-hike inflation remains stubborn, then things could become more complicated for the Fed to achieve the 2% inflation target. This is considering they are already trying to avoid harming growth and are tackling lingering risks of stagflation.

While the aim of rising rates is to drain some liquidity and hamper borrowing to stall consumer demand and calm inflation, there is a fine line to avoid pushing the economy into a mild recessionary environment, i.e., growth into negative territory. Supply chain issues and the war in Ukraine are not positively contributing to supply and demand functioning well.

Fed tightening cycles in the past have more often led to recessions. Furthermore, the US economy has in the Q1 already slipped into contractionary territory as the advanced Q1 GDP came in at -1.4%. The Fed’s prayers for Q1 GDP second estimate figures to avoid another negative print seem to have fallen on deaf ears as today’s secondary reading of GDP q/q was revised lower, showing an annualized decline in GDP of 1.5%, accentuating the economic slowdown, which may now intensify worries to a degree about stagflation. Nonetheless, the risk-on tone seems to be holding intact for now.

This throws into question, is a soft landing on ‘bumpy’ roads still considered a soft landing, or is it a hard landing?

The dollar index, which measures the reserve currency against six major peers, has ticked slightly up to the 102.00 mark, returning to Asian session levels. The greenback, the swissie and the yen seem to be holding onto their haven appeal as a store of value. Largely unchanged, USDCHF is just above $0.9600 and USDJPY is a tad north of 127.00 per dollar.

US Treasury yields are mixed with the 10-year yielding 2.75%, while the 5-year and the 2-year both are easing a tad, now at 2.70% and 2.45% respectively. The dollar on a daily perspective is consolidating finding little aid from yields for now.

Growth fears linger

While supply chain disruptions persist as China adheres to a zero-covid policy, investors’ fears around the country’s modest economic slowdown are starting to fire up. Global stock markets are also trying to slowly shrug off additional overcast clouds approaching from the war in Ukraine, which only strengthens market uncertainty around growth.

The euro is holding around its recent rally highs, just above the $1.0700 mark, after European Central Bank chief Christine Lagarde’s comments early in the week highlighted the likelihood that there will be an end to negative interest rates in the eurozone, come the third quarter.

The Bank of England’s Tenreyro reiterated that central banks can’t foresee market jolts, the current case being the surge in energy prices and the consequences that accompany such a setting in markets. More so, real incomes of workers are being squeezed and people are struggling under the current economic conditions. The pound is holding resiliently at $1.2565.

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