Week to May 7th

Resolution of Fed policy only reverses trends for a few hours

MY CALL THIS WEEK : BUY GBPAUD

LAST WEEK

The long-awaited 50bp rate hike occurred as expected on Wednesday, and a comment by Chair Powell that the Fed were not considering a 75bp bhike in June (despite Fed Bulllard's hawkish comments) caused a spike with SPX up 3.4% and NDX up 4.7% in the remaining 90 minutes of the session . This move was fully retraced in the US Thursday morning session, as were gains made.

In another volatile week, the RBA made a hawkish hike, the BoE made a dovish hike, and the Fed were somewhere in-between. The latter made all the headlines and led to the strongest session since 2020. This was all given back just as quickly on Thursday and Friday and the SPX closed the week pretty much where it opened, creating doji patterns on the weekly chart and daily chart. This signals indecision, which is apt as there no consensus on what the Fed will do next. Despite Chair Powell saying the Fed were not “actively considering” 75bps hikes, the markets are assigning a 83% chance of a 75bps hike in June. They clearly believe the Fed has lost the battle with inflation and will have to play catch up. This view can be seen in the continued collapse in long bonds, with TLT down over –5% on the week, and USD making a new 2022 high on Friday.

Last week’s action was a challenge to trade and there were rumours of a fund blowing up during Thursday’s crash. It certainly tested our bullish view, but Friday’s close was off the lows and the weekly doji could lead to a reversal. Bulls now want to see the Fed take a “whatever it takes” stance on inflation in the hope they can ease off later so the terminal rate comes in less than expected. Again, we note that 10Y yields and DXY both have weekly and monthly exhaustion signals, but since these are long-term, the short-term charts could still overshoot.  


WEEKLY PRICE MOVEMENT

The biggest index mover was DAX for the third week, down 3%. The top forex mover was GBPAUD down 2.05%. Bitcoin and Ethereum continued to slide, and once again, some FANGs underperformed. Yet again AAPL was relatively unscathed.

Last week's GBPAUD short was the worst trade I could possibly have done, losing 2.05%, which means I am ahead 6.75% this year, with 9/16 (56%) wins. This week I am doing a reversal trade and buying GBPAUD again.

Note we use Google Finance data for daily movements, listing UUP as a proxy for DXY. All references to ‘the dollar’ are based on DXY. The equity and index prices are now based on the cash close each day.

NEXT WEEK

There is only one important release next week which is US inflation (CPI) on Wednesday. As we have stated before, the unemployment part of the Fed dual mandate is satisfied, so the primary indicator of the rate hike path in now inflation, given that the Ukraine effect has receded. In addition to the US, there are inflation reports from Germany and China on the same day. The week is also heavy with CB speakers, with three Fed speakers on Tuesday. Earnings next week is mainly China tech companies.


CALENDAR  (all times are GMT, volatile items in bold)

Monday May 9
02:00 China Imports/Exports/TB
13:00 BoE Saunders speech

Tuesday May 10
09:00 Germany ZEW Surveys
11:40 Fed Williams speech
17:00 Fed Waller speech
17:20 ECB De Guindos speech
19:00 Fed Mester speech

Wednesday May 11
01:30 China CPI (e1.9% p1.5%)
06:00 ECB Elderson speech
06:00 Germany CPI (e7.8% p7.8%)
08:00 ECB President Lagarde speech
09:30 DE10Y Bond Auction
12:20 ECB Schnabel speech
12:30 US CPI (Core e6.0% p6.5%)

Thursday May 12
06:00 UK Q1 GDP (QoQ e1.0% p1.3%)
12:30 US Jobless Claims
12:30 US PPI
15:35 BoC Gravelle speech

Friday May 13
02:00 RBA Bullock speech
07:00 ECB De Guindos speech
14:00 Michigan CSI (e63.6 p65.2)
16:00 ECB Schnabel speech