Daily Market Outlook, May 6, 2022

Overnight Headlines

Most Asian equity markets are down sharply overnight. That follows a big fall in US equities yesterday, reversing the previous day’s rally. Markets appear to be reassessing their initial positive response to Wednesday’s Fed monetary policy update reflecting concerns that US interest rates have significantly further to rise. Former Fed Vice-Chair Clarida warned that interest rates will need to rise to at least 3.5% to tame inflation. Meanwhile, European Central Bank policymaker Holzmann said that they would discuss hiking rates at the June meeting and are likely to decide on one.

Today’s US monthly labour market report will, as usual, be seen as a key bellwether of economic conditions. The April update obviously comes too late to have an impact on this week’s decision to raise rates, but both it and succeeding reports are likely to be important factors in determining the extent to which the Fed continues to hike rates.

In his press conference following Wednesday’s US monetary policy update, Fed Chair Powell noted concerns about inflationary pressures not only from international conditions but also from a ‘red hot’ labour market that risks pushing up wage growth. Last week’s Q1 Employment Cost Index showed labour costs growing at their fastest pace for more than 25 years. Today’s report is unlikely to reveal any signs of labour market pressures easing. Look for another solid monthly rise in employment of 450k and a further fall in the unemployment rate to 3.5%, taking it back to its pre-pandemic low. Most noteworthy may be earnings growth which should hold close to the recent high of 5.6%y/y.

The UK April PMI construction index will provide timely information from an important cyclical sector. The March reading for overall activity was unchanged from February, holding at its highest level since last June. However, business optimism fell to its lowest since October 2020 reflecting concerns about inflationary pressures and the potential economic impact of the Ukrainian crisis.

A number of Bank of England and US Fed policymakers are scheduled to speak today, and attention will be on what they have to say about this week’s monetary policy announcements. In the case of the Fed, possibly of most interest will be whether policymakers have anything more to say regarding whether a 75 basis point rate hike at an upcoming meeting is a likely option after Fed Chair Powell seemed to talk down its probability.

EUR/USD: 1.0425 (491M), 1.0530-35 (370M) 1.0550 (263M), 1.0570-75 (550M), 1.0600 (581M) 1.0650 (782M), 1.0700 (569M), 1.0800 (1.2BLN)
USD/JPY: 128.50 (1.345BLN), 130.00 (410M), 131.00 (465M)
GBP/USD: 1.2400 (441M), 1.2450 (592M), 1.2500 (415M)
EUR/GBP: 0.8450 (581M), 0.8500-10 (600M), 0.8550 (731M) 0.8575-85 (933M)
USD/CHF 0.9570 (300M). EUR/CHF: 1.0450 (417M), 1.0675 (710M)
AUD/USD: 0.7000 (524M), 0.7100 (908M), 0.7200 (972M) 0.7300 (2.27BLN)
USD/CAD: 1.2700 (988M), 1.2725 (382M), 1.2745-55 (764M) 1.2760-70 (710M), 1.2800 (912M), 1.2835-40 (1.29BLN