Forex Fundamental News Facts for 10th May, 2024

Forex Fundamental News Facts for 10th May, 2024

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[Quick Facts]
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1. Initial jobless claims hit a record high since August last year.
2. Israel strikes eastern Rafah as cease-fire talks end with no deal.
3. Fed’s Daly says more time needed for restrictive rates to bring inflation down.
4. The BOE says rate cuts may exceed expectations, without a pre-set path.
5. The Bank of Japan says early rate hikes are possible.
6. Bank of England Closing In On Rate Cuts.
7. Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact.
8. China’s Push for Greener Aluminium Hit by Erratic Rains, Power Cuts.

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[News Details]
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Jobless Claims Reach New Heights:

The number of initial jobless claims in the U.S. has risen by 22,000 to 231,000, surpassing the anticipated 212,000. This is the highest it’s been since the previous August. The figures align with the recent slow cooling of the labor market. Despite a slowdown in hiring, the labor market has generally outperformed expectations over the past year, providing an economic boost. Federal Reserve officials continue to monitor labor demand and wage growth, discussing when to begin reducing interest rates.

The latest data from the US Department of Labor indicates a notable uptick in initial jobless claims, reaching 231,000 for the week ending May 4, which surpassed both the anticipated figure of 215,000 and the prior week’s 209,000. This represents the highest level recorded since the previous August and marks the most significant increase since the year’s commencement. The average over the past four weeks also rose to 215,000 from 210,250.

Despite a strong market demand that has generally discouraged layoffs, there’s an observable deceleration in hiring, as evidenced by the most recent employment reports. A contributing factor to the surge in jobless claims could be seasonal variations, particularly with New York City public school employees filing for benefits during school breaks. With the spring break scheduled from April 22 to 30, such seasonal effects are expected to inflate claim numbers temporarily.

Investors and professionals should note that while this spike in jobless claims suggests a softening labor market, it may not signify a long-term trend and could potentially recede in the forthcoming periods.

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Suspension of Indirect Talks between I*rael & Hamas:

Indirect discussions between Israel and Hamas in Cairo have been halted due to ongoing Israeli ground assaults on Rafah. Israel has expressed its concerns to mediators about the hostage release deal proposed by Hamas and will proceed with its military operations in Rafah as planned. Representatives from Hamas, Israel, Qatar, and the U.S. departed Egypt after Gaza ceasefire discussions reached a deadlock.

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Fed’s Daly on Inflation:

Mary Daly, President of the San Francisco Fed, stated that while interest rates are currently slowing the economy, more time may be needed to bring inflation back to target. There is still significant uncertainty about the future of inflation and how to address it.

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BOE’s Rate Decision:

The Bank of England (BOE) voted 7-2 to maintain interest rates at 5.25%. Deputy Governor Ramsden and Monetary Policy Committee member Dhingra voted for a rate cut. The market had anticipated an 8-1 vote, causing a brief drop in the GBPUSD by over 35 points following the announcement. The BOE will closely monitor upcoming data releases to assess whether inflation continues to decline.

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BOJ’s Rate Hike Possibility:

A summary of the Bank of Japan’s (BOJ) April policy meeting revealed that members are closely observing the impact of a weaker yen on inflation and believe that interest rates may be raised earlier. Some members believe that the pace of rate hikes is likely to be faster than expected amid growing prospects for inflation to remain at or even exceed the BOJ’s 2% target level. This underscores BOJ Governor Kazuo Ueda’s recent remarks hinting at the possibility of multiple rate hikes in the future and increases the likelihood that short-term borrowing costs will rise in the coming months.

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Bank of England Closing In On Rate Cuts:

The Bank of England (BoE) has kept its policy rate at 5.25%, but its outlook suggests that rate reductions may be on the horizon. The BoE indicated that the current restrictive monetary policy is impacting real economy activity, leading to a slackening labor market and reducing inflationary pressures. These observations are reflected in the BoE’s updated economic projections.

The inflation forecast of 1.9% in two years indicates that the BoE is nearing a point of easing, while the forecast of 1.6% in three years suggests that the BoE might decrease interest rates faster than markets currently anticipate. A rate cut in June would likely necessitate consistently positive price and wage data, and for three more BoE policymakers to change their vote from “hold” to “cut” within one meeting. While these outcomes are possible, they may not be likely.

For now, we continue to anticipate the Bank of England initiating a 25 bps rate cut to 5.00% at its August meeting, an outcome that is fully priced by market participants. We also predict 25 bps rate cuts in November and December, for a total of 75 bps of easing this year, more than the 60 bps currently reflected in market pricing.

Key Elements of the Bank of England’s Announcement The restrictive stance of monetary policy is impacting activity in the real economy, leading to a looser labor market, and reducing inflationary pressures. Key indicators of inflation persistence are moderating broadly as expected, although they remain elevated. Importantly, the BoE reiterated that “monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target sustainably in the medium term” and that it “will keep under review for how long Bank Rate should be maintained at its current level.”

Policymakers voted 7-2 to hold rates steady compared to the 8-1 vote split at the previous meeting. A second policymaker joining the rate cut camp represents a dovish development.

The Bank of England’s updated economic projections are also informative. Based on market-implied interest rates, the BoE sees inflation slowing close to 2% in Q2-2024 before rebounding close to around 2.5% later this year. The BoE forecasts inflation at 1.9% in two years’ time, and 1.6% in three years. The forecast of inflation close to target in two years suggests to us that the BoE is very close to beginning its rate cut cycle, while the forecast of below-target inflation in three years suggests the BoE may lower interest rates more quickly than markets currently anticipate.

The overall dovish message was reinforced by BoE Governor Bailey who said he was optimistic things are moving in the right direction, that more evidence was needed regarding inflation staying low before a rate cut, and that he expected inflation to fall close to target in the next two months. Bailey said that a June rate cut is not ruled out or a done deal, and more broadly that interest rates may fall more sharply than markets expect.

The Bank of England (BOE) has maintained the interest rate at 5.25%, as decided by a majority vote, with a slight shift in the committee’s stance as two members voted for a reduction. The forecast suggests a potential decrease in the rate to 3.75% by the end of the projection period, which is a 0.50% increase from the previous forecast.

Economic growth projections are modest, with an anticipated 0.4% growth in Q1 and 0.2% in Q2. Despite a pickup in demand, it’s expected to lag behind the potential supply, hinting at some economic softness ahead due to the current tight monetary policy.

Inflation within the service sector is on a downward trend but still elevated. The Consumer Price Index (CPI) inflation is likely to align with the 2% target shortly, with a slight increase to 2.5% later this year. Projections for 2026 and 2027 suggest a CPI of 1.9% and 1.6%, respectively. The ongoing conflict in the Middle East presents a risk of increasing short-term inflation, although its impact on oil prices has been minimal.

The labor market is showing signs of relaxation but remains tight, with indications of slowing wage growth. The headline CPI inflation is declining, partly due to lower commodity prices, and the stringent monetary policy continues to suppress the broader economy, contributing to the easing of the labor market and controlling inflation. Although persistent inflation indicators have softened, they are still considerable.

The BOE emphasizes the need for a prolonged restrictive monetary policy to ensure a steady decline in inflation to the 2% target. The Committee plans to keep a close watch on inflationary pressures and the economy’s resilience, including labor market conditions, wage dynamics, and service sector inflation, to determine the duration for which the current interest rates should be sustained.

In terms of reviewing how long the policy rate should stay at its current level, the Bank of England said it will continue to monitor closely indications of persistent inflationary pressures and resilience in the economy as a whole, including a range of measures of the underlying tightness of labor market conditions, wage growth and services price inflation. In that context, we expect the key upcoming U.K. data releases ahead of the Bank of England’s next monetary policy announcement on 20 June will be March wage data (14 May), April CPI (22 May), April wage data (11 June) and the May CPI (19 June).

Should those wage and price data prove to be consistently favorable, which is clearly a distinct possibility, we expect the Bank of England would be comfortable beginning a rate cut cycle in June. That said, U.K. price and wage data have had some tendency to disappoint during the current disinflation process. Moreover, a June rate cut would require three policymakers to switch their vote from “hold” to “cut” within one meeting, a not insignificant shift.

For now, therefore, we remain comfortable with our current outlook which sees the Bank of England delivering an initial 25 bps rate cut to 5.00% at its August meeting, an outcome that is fully priced by market participants. We also forecast 25 bps rate cuts in November and December, for a cumulative 75 bps of easing this year, more than the 60 bps currently reflected in market pricing. That outlook is also consistent with the Bank of England’s signal that rates might be lowered more quickly than markets expect.

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Gold, Silver and Copper Eyeing Upside, US Inflation Report Key to US Dollar Impact:

It’s hard to ignore the current sensitivity of commodities to fluctuations in the US dollar. This was evident on Thursday when a significant rise in US unemployment claims triggered substantial gains across commodities, pushing gold, silver, and copper towards their year-to-date highs.

The stronger dollar has been a limiting factor for commodity prices this year, preventing what could have been an impressive recovery. It raises the question of what could happen if the strong dollar narrative collapses. If this is not accompanied by heightened global recession fears, commodity prices could skyrocket.

The US dollar is significantly influenced by Federal Reserve rate expectations. One of the key indicators to monitor in this regard is the front-end of the US bond curve. The daily correlation between the US dollar index and US two-year bond yields over the past quarter is 0.89, suggesting that the dollar typically follows movements at the front-end of the US curve. When yields drop, the dollar usually does too, and vice versa.

Currently, the focus is on the movements in US two-year Treasury note futures. This instrument is used as a filter to gauge trade setups in markets directly involving the US dollar or where the dollar can be highly influential. As it tracks a highly liquid market that measures price rather than yields, note futures can combine fundamentals and technicals to get a clear read on directional risks for US rates and foreign exchange.

At present, it’s unclear whether we’re witnessing a turning point for the big dollar, with futures remaining close to key horizontal resistance. This area is crucial for directional risks for the dollar and short-end rates. It managed to resist an attempted break higher last Friday following the release of softer-than-expected payrolls and ISM services PMI data.

The direction in which futures will break from here is uncertain. However, the signal it eventually delivers will be acted upon. If futures break higher, it suggests a softer US dollar and stronger risk appetite, provided it’s not accompanied by recession fears. But if futures reverse course and push back towards the year-to-date lows, that would be problematic for risk appetite and cyclical assets as it would imply a growing risk of no rate cuts from the Fed this year.

Looking at the macro event calendar for next week, the US consumer price inflation report could potentially be the catalyst to generate the signal from this indicator. However, that’s just a speculation – the signal could arrive from no obvious catalyst at all.

While waiting for the signal on rates and dollar, the bias for commodities such as gold, silver, and copper is higher. Gold looks promising on the charts, continuing to consolidate above former record highs within a broader uptrend. Silver appears to be the most bullish market of the base and precious metals covered. Copper is in a pennant formation within a broader uptrend dating back to February.

Should these bullish trade setups play out, the signal from short-end US rates will be used to determine whether to cut, hold or add whenever it is delivered.

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China’s Push for Greener Aluminium Hit by Erratic Rains, Power Cuts:

China Hongqiao Group, among other companies, shifted a significant portion of their aluminum production capacity to Yunnan, attracted by the promise of affordable hydropower and the potential to reduce carbon emissions. However, the expected stable power supply from hydropower has proven unreliable due to insufficient rainfall, which experts link to climate change, leading to only partial fulfillment of the planned capacity transfer.

The industry has faced production cuts and is exploring alternative locations due to the power instability. The situation has not only impeded China’s environmental objectives but also caused fluctuations in global aluminum prices and affected the market for eco-friendly aluminum.

Hongqiao’s relocation involved constructing two large plants near the Vietnam border, but they have faced delays in reaching full capacity due to the hydropower issues. The Yunnan government and relevant Chinese ministries have not commented on these challenges.

Aluminum production is a significant contributor to industrial carbon dioxide emissions, and for China, transitioning to cleaner energy sources for aluminum production is key to achieving its carbon neutrality goals. Companies were initially drawn to Yunnan by the prospect of greener and cheaper power, but the reality has been different, with higher electricity costs and the removal of discounted rates.

The industry’s response includes seeking more reliable power sources, including coal, in other regions of China. Plans are underway to establish a green aluminum base in Inner Mongolia, leveraging wind and solar energy. Meanwhile, those in Yunnan hope for increased rainfall to alleviate the power supply issues.

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🔥News releases on THIS WEEK :

10/05 Fri 9:35am JPY 30-y Bond Auction

10/05 Fri 12:00pm GBP GDP m/m & Goods trade balance

10/05 Fri 6:30pm CAD Employment Change

10/05 Fri 8:00pm USD Prelim UoM Consumer Sentiment

N.B. Time mentioned here is on Gmt +6

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Sources :
– CNBC, Bloomberg, Reuters, Fastbull, Yahoo Finance, CNN, ForexFactory News, Myfxbook News etc

Prepared to you by “Akif Matin“

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