Fundamental News Facts for 16th April, 2024

Fundamental News Facts for 16th April, 2024

[Quick Facts]
1. Israeli official says Hamas rejects its prisoner-hostage swap deal.
2. U.S. workers seeking record wages to consider new jobs.
3. Strong U.S. retail sales further weaken expectations for rate cuts.
4. Israeli military pledges response to Iran attack amid calls for restraint.
5. U.S. homebuilder confidence holds steady in April.
6. Fed’s Williams expects rate cuts to begin this year.
7. [Fed] Recent Sticky Inflation Doesn’t Mean Inflation Progress Stalls
8. China Loosens Grip On Yuan By Weakening Fix Amid Dollar Strength
9. Japan’s Tepid Warning on Yen Fuels Renewed Weakness Ahead Of IMF
10. Could Have Been Worse : Geopolitical situation roundup

Hamas Declines Israel’s Prisoner-Hostage Exchange Proposal
An Israeli official reported on April 16 that Hamas has turned down the most recent proposal for a prisoner-hostage exchange. Hamas insisted on the liberation of Palestinian security detainees in exchange for Israeli civilian hostages in the deal’s initial phase. The second phase involved a lasting ceasefire, a total withdrawal of Israeli forces from Gaza, and an unrestricted repatriation of displaced Palestinians to northern Gaza. The Israeli official stated that the last three conditions would not be accepted by Israel. Hamas agreed to free about 20 Israeli hostages over 50 years old, demanding a six-week ceasefire before their release. The mediators, Qatar, Egypt, and the United States, suggested freeing 40 Israeli hostages.

American Workers Demand Record Wages for New Jobs
According to data from the New York Federal Reserve, the minimum wage (reservation wage) Americans are willing to accept for a new job hit a record high in March. The average reservation wage was $81,822 in March, a significant increase from the $73,391 reported in November 2023. The New York Fed attributed the increase to men, respondents over 45, and those without college degrees. The report also found a decrease in satisfaction with wage and non-wage compensation in March, while satisfaction with promotion opportunities remained stable.

Strong U.S. Retail Sales Lower Rate Cut Expectations
U.S. retail sales increased by 0.7% in March from the previous month, significantly surpassing market predictions of 0.3%. Core retail sales also rose by 1.1% from the previous month, far exceeding market expectations of 0.4%. The numbers for the previous month were also revised upwards. Eight of the 13 industries experienced growth, with e-commerce leading the way. Gas station sales increased by 2.1% due to higher gasoline prices, while auto sales declined. The retail sales report indicated that the worsening inflation situation has not impacted consumer demand. Consumer spending is expected to remain strong in the second quarter. As long as a robust labor market supports household demand, inflation is likely to become entrenched and further delay the Federal Reserve’s decision to cut interest rates.
Israeli Military Promises Response to Iran Attack Amid Calls for Restraint
Following the weekend attack, Prime Minister Benjamin Netanyahu convened his war cabinet for the second time in less than 24 hours to discuss how to respond to Iran’s first direct attack on Israel. Herzi Halevi, the IDF Chief of General Staff, stated that the launch of numerous missiles, cruise missiles, and drones into Israeli territory would be met with a response. French President Emmanuel Macron, German Chancellor Olaf Scholz, and British Foreign Secretary David Cameron urged Israel to exercise restraint to prevent an escalation of the Middle East conflict. John Kirby, White House National Security Communications Advisor, declined to comment on whether Biden advised Netanyahu to exercise restraint in responding to the attack during their Saturday night talks. Russia, an ally of Iran, has not publicly criticized the attacks, but expressed concern about the risk of escalation and called for restraint on Monday.

U.S. Homebuilder Confidence Remains Steady in April
U.S. homebuilder confidence remained steady this month after a recent surge as prospective home buyers look for signs of falling borrowing costs. Data showed the NAHB housing market index at 51 in April, the highest level since July of the previous year but ending four months of gains. NAHB Chief Economist Robert Dietz said, “April’s flat reading suggests the potential for demand growth is there, but buyers are hesitating until they can better gauge where interest rates are headed.” Market popularity remains below the highs reached in the late 2020s when borrowing costs were less than half of what they are now. Builders have been hesitant to reduce prices as mortgage rates have stabilized below the 8% level they reached last fall. Only 22% of builders reduced prices in April, lower than the 24% in March and 36% in December.

Fed’s Williams Anticipates Rate Cuts to Start This Year
New York Fed President John Williams stated on Monday that the Fed could begin to lower interest rates this year if inflation continues to gradually decline. He said, “As monetary policy is in good shape and consumers and the overall economy continues to be strong, we need to cut interest rates at some point this year.”

[Fed] Recent Sticky Inflation Doesn’t Mean Inflation Progress Stalls
John Williams, the President of the New York Fed, stated in an interview on April 15 that if inflation continues to decrease steadily, the central bank is likely to begin reducing interest rates this year. He believes that the Fed’s current monetary policy is well-positioned, and with the economy and consumer spending remaining strong, there is a need to start reducing interest rates to restore them to a normal level. He anticipates that this process of rate reduction could commence this year. Williams mentioned that recent inflation data have shaped his perspectives and predictions on inflation, but he does not believe this signifies a reversal in inflation progress.
On the same day, San Francisco Fed President Daly expressed that there is no immediate need to reduce interest rates considering the current robust economic growth, strong labor market, and high inflation. Daly stated that before deciding to lower interest rates, there needs to be more assurance that inflation can continue to decrease to 2%. She said, “We’re in a ready position; we can respond as the economy evolves.”
Daly also mentioned that the recent inflation surge is not unexpected. She cautioned against overreacting or underreacting in policy responses. She advised not to interpret recent persistent inflation as indicating a halt in disinflationary progress, and warned against overconfidence that inflation will continue to decrease to the 2% target. She emphasised that the Fed should be considerate about the inflation data.
Both officials share similar views on the current monetary policy, agreeing that it can adapt to economic changes and can be adjusted at any time. They implied that interest rates would be kept high for an extended period. They also agreed that recent persistent inflation does not imply that disinflationary progress has come to a standstill. They did not suppress expectations for rate cuts this time, which appears to be a shift in attitude from the previous month.

China Loosens Grip On Yuan By Weakening Fix Amid Dollar Strength
China has unexpectedly lessened its defense of the yuan as a resurgent dollar and negative sentiment pushed it towards a policy threshold. The People’s Bank of China (PBOC) broke away from its usual stance and set a lower daily reference rate for the managed currency, suggesting some allowance for it to depreciate in line with regional counterparts amid the dollar’s widespread strength. The offshore yuan fell by up to 0.3% to its lowest level since November in response to the so-called fixing.
Observers of China have been scrutinizing the fixing for indications of Beijing’s direction for the currency after it recently weakened to just shy of the edge of its trading range. On Monday, the onshore yuan reached a five-month low following a new batch of heated US inflation data that strengthened the greenback and Treasury yields.
Richard Franulovich, head of foreign-exchange strategy at Westpac Banking Corp, stated, “The PBOC is yielding to reality, with the dollar generally higher and onshore dollar demand increasing. They clearly want to manage and limit the move, so they are guiding the yuan lower in a controlled and steady manner.”
The PBOC set the fixing, around which the currency is allowed to trade within a 2% range, at 7.1028 per dollar. In the onshore market, the yuan remained relatively stable at 7.2378 and was 0.1% from the weak end of its trading band.
Officials have been watchful of yuan pressure, which can overflow to Chinese assets and limit its ability to relax monetary policy, even though the country’s exporters would gain from a weaker currency. On Tuesday morning, state-owned banks actively sold a large amount of dollars to support the yuan in the onshore market, according to anonymous traders.
Any alterations in Beijing’s currency stability strategy may also affect other currencies amid the dollar’s broad strength. After the PBOC lowered the fixing, Asian currencies continued to fall, with the Australian dollar dropping 0.5% and the Korean won plummeting 1%.
Khoon Goh, head of Asia research at ANZ Group Holdings Ltd, said, “The authorities are permitting a bit more yuan weakness.” Given the persistent strength of the dollar with rising US yields, “it is likely that the authorities are now more open to a slight depreciation in the yuan.”

Japan’s Tepid Warning on Yen Fuels Renewed Weakness Ahead Of IMF
Japan’s finance minister has issued a warning that he is prepared to intervene in the foreign exchange market if necessary, but he did not make his most severe threat. These remarks have led to a renewed weakening of the yen after it fell to a new 34-year low overnight.
Finance Minister Shunichi Suzuki stated in Tokyo on Tuesday, before leaving for Washington to attend annual International Monetary Fund events and meetings with finance leaders from the Group of Seven and Group of Twenty nations, “We are keeping a close eye on recent developments. If required, we are ready to take all possible steps to address the situation.”
Suzuki did not mention the possibility of taking “bold” action if necessary, which is the clearest indication of potential intervention in the foreign exchange markets. He used this phrase last month when the currency was nearing the 152 mark against the dollar.
Suzuki’s comments were made after the yen hit a new 34-year low of 154.45, following stronger than anticipated US retail sales figures. As Suzuki did not make his most severe threat, the yen weakened to its lowest point of the day.
As Japanese currency officials head to the US for meetings with their counterparts, they find themselves in a difficult position. International agreements urge countries to let markets set exchange rates, but they also allow for intervention if market movements are excessive. Strong verbal interventions or market actions would draw attention to Japan’s actions.
Suzuki stated that he would avoid commenting on whether market movements have been rapid or excessive. He said, “In terms of movements in the foreign exchange market, my stance remains the same as what I’ve previously stated, and I prefer not to repeat it.”
In 2022, Japan spent over $60 billion to intervene in the currency market to support the yen.
The latest US data contributes to a picture of economic resilience in the US, which once again counters expectations that the Federal Reserve will lower interest rates in the coming months.
The disparity in US and Japanese interest rates and yields is a major factor behind the yen’s weakness, making it more difficult for Japanese officials to argue that the currency is not aligned with economic fundamentals.

Could Have Been Worse : Geopolitical situation roundup
This Monday morning, the appetite for risk is more favorable than it was last Friday when the world was preparing for Iran’s retaliation against Israel. Iran launched over 300 drones and missiles at Israel on Saturday night, but only a few reached their target, minimizing the damage. There were no casualties, and only a military base suffered minor damage.
The positive news is that Tehran declared the operation a success and announced that it would not take any further actions unless Israel retaliates. In response to the weekend’s events, oil prices fell slightly, while gold prices opened higher due to the increased tensions last week. In other news, base metals such as copper, iron, and aluminum saw a surge after the US and the UK decided to impose sanctions on Russian supplies. Spot aluminum prices jumped by more than 5%, while copper futures reached their highest levels since last summer. The dollar index stabilized on Monday after a 2% increase last week.
The US dollar is strengthening due to a significant decrease in expectations for a Federal Reserve (Fed) rate cut following strong employment and inflation data, and the outlook for the dollar remains decidedly bullish.
The US 2-year yield reached 5% after the US CPI data was released, and the likelihood of a Fed rate cut in June dropped to around 22%. Expectations for a rate cut in July are about 50-50, and a rate cut in September is considered about 73% likely.
The narrative surrounding the election suggests that the Fed may choose not to cut rates as the November presidential election approaches, which would postpone the first cut until after the election. Some believe that the Fed’s next move will not be a cut, but a rate hike to curb rising inflation. This is a significant adjustment compared to the expectation of six rate cuts in January.
While US data continues to reinforce the strength of the US economy and the fact that the US does not need to – and should not – cut rates with inflation heating up, expectations for rate cuts elsewhere remain quite solid. Last week’s European Central Bank (ECB) meeting provided another indication that the bank is more likely than not to cut its own rates in June. ECB Chief Christine Lagarde stated that the ECB is dependent on data, not the Fed, and other members noted that it’s time to ‘diverge’ from the Fed, as US consumers are relentless – and the US government is very supportive – with Biden planning to cancel $7.4bn in student debt to appeal to young voters before the election.
As a result, the gap between the Fed and the ECB rate cut expectations has widened to its highest level this year following a dovish ECB stance and another set of strong employment and inflation data in the US. Talk of further depreciation of the euro to parity against the US dollar is resurfacing. At current levels, the RSI indicator is very close to the oversold territory, indicating that the euro was sold too quickly in a short period of time and a correction may be needed. However, most traders will be looking to sell the highs in the EURUSD due to the growing divergence between the dovish ECB and the Fed – which simply cannot justify a rate cut this summer.
The S&P 500 recorded its worst weekly performance since late October 2023. Mixed bank earnings did not help to improve sentiment on Friday. JPM shares fell 6.5% as net interest income fell short of expectations and decreased from the previous quarter as investors sought higher returns. This is a major disappointment for investors who were hoping to hear about potential increases in net interest income from the bank with a delayed rate cut from the Fed. Similarly, non-interest-bearing deposits at Wells Fargo fell 18% in Q1.
This week, the earnings season picks up pace with the rest of the US big banks, Netflix, and TSM set to announce their Q1 results. The expectation is a 3.8% annual growth in S&P500 companies’ earnings per share in Q1, while profits for the Magnificent Seven are expected to have increased by around 38%. Another strong quarter in terms of earnings could slow a potential selloff in the S&P500 – which is seeing increased selling pressure due to rising hawkish voices. However, a weaker-than-expected earnings season will likely trigger profit-taking.
Bitcoin fell over the weekend as rising geopolitical tensions dampened risk appetite. Bitcoin halving is expected to occur in the coming days. A lower supply is fundamentally supportive of an asset’s valuation, but we may not see a clear immediate reaction to Bitcoin halving as most of it is already priced in.

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

Prepared to you by “Akif Matin“

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