US Open Note – Wall Street pushes back, will positive sentiment last?

Dollar soft as markets digest pause in Fed tightening, PCE Price index eyed

The assumption that the US central bank would remain hawkish through 2022 in relation to rate hikes to starve hot inflation has now matured into a more vigilant approach, with the Federal reserve still keeping tabs on recession risks and stagflation fears.

The decline in US Treasury yields recently and the cautious rhetoric from the Fed that they may tone down their aggressive hiking pace, plus this week’s misses in economic data like the US PMI, new home sales which were horrible, the new orders for manufacturers and the secondary reading in US GDP, all imply that the greenback may struggle to regain its recently lost strength. The US 10-year is yielding 2.74%, the 5-year 2.71% and the 2-year 2.48%, failing to soften the blow to the reserve currency.

The dollar index, which measures the greenback against a basket of six other major currencies, is exhibiting a two-week bearish vibe from 20-year high levels, signalling a 3.20% drop. Meanwhile, traders have also lowered Fed rate hike expectations after comments of reducing or even pausing their tightening cycle moving to year end, should inflationary pressures start to calm.

Personal income in the United States rose less than forecasted, up by 0.4% in April 2022 versus predictions of a 0.5% gain, while personal spending overshot projections of 0.7%, coming in at 0.9% m/m, suggesting consumption was strong despite elevated prices, possibly in light of stronger wage gains.

The Core PCE prices that exclude food and energy, increased by 0.3% m/m in April of 2022, matching the previous month and in line with market estimates. Furthermore, the annual rate, the central banks preferred gauge of inflation, eased to a 4-month low of 4.9%, off a 5.2% number in the prior month, equalling expectations, and hinting that inflation appeared to have peaked, which may potentially help to upgrade economic growth in the second half of the year.

Next week’s ISM and payroll reports will surely keep investors on their toes.

Economic strains, euro and pound

Meanwhile, lockdowns in the world's second-largest economy, China, are still disrupting factory activity in the country and fuelling supply chain chaos. Economic slowdown concerns have yet to significantly subside. Interestingly though, WTI oil futures correlation to potential slowing demand is recently having a muted effect on the black liquid. WTI oil futures are holding at $113.50 per barrel. New ground, which was secured by Russia, who is still at war with Ukraine, is adding to the uncertainty around an economic downturn as well.

Nonetheless, the euro is keeping a positive tone around $1.0726, capitalising on dollar weakness and rising market expectations that the ECB will soon join other central banks in the tightening cycle.

The pound ticked up to $1.2666 and is attempting to overcome the May 4 high of $1.2637. A large government spending package to support households may knock two birds with one stone, underpinning the UK economy in the short term too.

The government announced a 25% windfall tax on oil and gas producers' profits to help fund a 15 billion pound support package for households struggling to meet elevated energy bills. It may soften the hit to real incomes from an expected energy bill rise in October.

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