Daily Market Outlook, May 11, 2022

Overnight Headlines

  • China Inflation Exceeds Forecasts As Lockdowns Roil Supplies
  • Australia Consumer Sentiment Dives As Rates, Inflation Rise
  • BNZ: Risk Of New Zealand Recession `Rising By The Day'
  • NZ Government Brings Forward Full Border Opening To End Of July
  • Fed’s Bostic: The US GDP Will Increase By 2.6% This Year
  • Fed's Mester: Will Need "Compelling" Drop Of Inflation To Slow Rate Hikes
  • Fed's Waller: Inflation Is Too High, Job Market Out Of Whack
  • US House Passes $40B Ukraine Aid Package; Sends It To Senate
  • ECB’s Villeroy: Governments Must Tackle Debt As Rates Rise
  • ECB's De Guindos: ECB To Normalize Sooner Rather Than Later
  • EU's Sefcovic: Renegotiation Of N.I Protocol Is Not An Option
  • UK To Enter Recession This Year, Think-Tank NIESR Forecasts
  • Goldman Says Yen Shows Significant Value As A Recession Hedge
  • Dollar Down But Near Two-Decade High Ahead Of US CPI
  • Oil Turns Higher On Looming EU Ban On Russian Oil
  • EU Considers Looser Green Standards While Replacing RU Oil
  • UAE, Saudi Energy Ministers Hit Back At ‘NOPEC’ Bill
  • Asian Shares Inch Up From Near Two-Year Lows Ahead Of US CPI
  • Occidental Posts Record Profit, Free Cash Flow As Oil Soars

The Day Ahead

  • Asian equity market performance is mixed this morning. Several markets are up sharply with China leading the way, possibly reflecting news that Covid cases are slowing. However, other markets seem to be waiting on US CPI data. Chinese CPI inflation rose by more than expected in April, possibly due to the impact of the latest lockdown. Natural gas prices have fluctuated sharply this week reflecting supply uncertainties. The lower house of the US Congress passed a $40bn Ukraine bill and the Senate will vote on it next week.
  • Ongoing concerns about the need for further interest rate hikes to combat rising inflation mean today’s US CPI report for April will be seen as the key release of the week. Expect it to show a fall in the annual rate of headline inflation to 8.2% form 8.5% in March and the core rate (excluding food and energy) to 6.1% from 6.5%. That would be the first deceleration in headline CPI inflation since last August. Barring further energy price shocks, which remains an upside risk, March may mark the peak US inflation rate for this year. However, even if a turning point has been reached, there is substantial uncertainty how quickly it will fall in the coming months particularly as there are signs that inflationary pressures are broadening out.
  • The Fed will probably be expecting today’s deceleration in inflation but nevertheless it will be interesting to hear the reaction of policymakers. Only one Fed policymaker is scheduled to speak today but others may also comment. We expect the news to be welcomed but that there will be no hint that the Fed is through with raising interest rates. Several ECB officials are also set to speak, and their comments will be watched for signs whether a July interest rate rise is on the cards.
  • UK GDP data for March will be released early tomorrow. GDP started the year on a strong footing with a monthly rise of 0.8% reflecting a post-Omicron rebound, but that is likely to be the high point. Growth slowed in February to 0.1% despite the boost to activity from the further relaxation of Omicron restrictions for consumer-facing sectors. We expect a similar rise of 0.1% in March, with a slowdown in services output offset by rebounds in industrial production and construction output. Look for the first estimate of Q1 GDP to have risen by 1.0%q/q, but uncertainties abound for the rest of the year, not least the impact of a big fall in households’ real incomes on consumer spending.

FX Options Expiring 10am New York Cut

  • EUR/USD: 1.0500 (342M)
  • USD/JPY: 129.98-00 (500M)
  • USD/CAD: 1.2765-70 (1.38BLN), 1.2790 (1.12BLN)

Technical & Trade Views

EURUSD Bias: Bearish below 1.0950 Bullish above

  • EUR/USD playing a waiting game ahead of key data
  • Steady trade within an early 1.0525-1.0549 range with a bull bias
  • Inflation data due from the U.S. at 1230GMT: expected to ease in April
  • Reuters poll: core y/y 6.0% vs 6.5% and headline 8.1% vs 8.5%
  • Dollar and yields likely to back off on a softer CPI return
  • Base effects expected to bring down annual inflation readings
  • A large M&A deal on the radar: could impact USD/SEK
  • Technically, sideways bias with breakout points at 1.0488 and 1.0642
  • Talk of offers ahead of 1.0600 and small stops below 1.0470, Apr 28

GBPUSD Bias: Bearish below 1.30 Bullish above.

  • GBP/USD holds above 1.23 ahead of U.S. inflation data
  • Cable has traded a 35 pip range thus far Wednesday; 1.2309-1.2344
  • That range is within Tuesday's parameters (1.2292-1.2375), and Monday's too
  • 1.2262-1.2405 was Monday's range (1.2262 = lowest level since June 2020)
  • U.S. April CPI data due at 1230 GMT; core f/c +6% YY, headline f/c +8.1% YY
  • 50 bps Fed hikes expected in June and July
  • UK to enter recession this year, think-tank NIESR forecasts

USDJPY Bias: Bullish above 125 Bearish below

  • USD/JPY, JPY crosses tread water ahead of US CPI
  • USD/JPY, JPY crosses do little in Asia ahead of key US CPI data
  • USD/JPY 130.24-47 EBS, flows few and participation low
  • Japanese importer/spec bids from @130.00, exporter/spec offers 130.50+
  • Option expiries today - 129.80-130.00 total $774 mln, 131.00 $310 mln
  • Inside day for US yields too, Treasury 10s 2.977%-2.997%, now @2.987%
  • Risk mood better, Nikkei +0.3% @26,249, E-Minis +0.4% @4011
  • EUR/JPY 137.23-40 EBS, GBP/JPY 160.32-88, AUD/JPY 90.29-76
  • Japan foreign reserves fall back in April to $1.322 tln

AUDUSD Bias: Bullish above .7300 Bearish below

  • Moves higher as mood in Asia improves ahead of US CPI
  • AUD/USD opened -0.16% at 0.6940 after key commodities continued to ease
  • The mood in Asia was buoyant as Asian equity markets moved higher
  • AUD/USD traded up to 0.6961 and is around 0.6955 into the afternoon
  • Sellers are tipped ahead of 0.7000 with resistance at the 10-day MA at 0.7060
  • Bids are tipped ahead of 0.6900 with support at yesterday's 0.6911 low
  • US CPI later today will be a key event for direction of yields and USD