Friday, April 12, 2019

Higher inflation expectations boost Treasury yields and the Dollar but will this last?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks
  • Oil

MORNING BRIEFING

Stronger US figures bolster the Dollar pushing the Yen and Gold lower. Treasury yields hit the 2.5% mark again as investors are hoping for more evidence of domestic market strength. Meanwhile, the European majors continue to tread water within the same range while equities ended the day mixed. UBER filed for what is expected to be this year's biggest IPO and Oil is retreating but the uptrend still remains in place.

The Dollar gained yesterday on the back of a surprisingly stronger US PPI report that pushed Treasury yields higher and in turn benefited the greenback. The Producer Price Index figures for March came in at 0.6% compared to the expected 0.3% advance and the surprising strength in the inflation-related metric bolstered the US currency. The PPI is considered as a leading inflationary indicator - compared to the lagging Consumer Price Index data - and the strong reading more than offsets the miss in the CPI report earlier in the month.

This in turn stoked Dollar bulls' hopes for a steady interest rate policy from the Fed in the face of positive inflation figures, coming in contrast to the recent debate over rate cuts later this year or in 2020. The question of course becomes whether this reading significantly changes our central scenario for a weaker Dollar ahead; the answer is no, we will need a lot more evidence of domestic strength in order to reassess our bearish view over the Dollar and the string of negative figures coming from the US economy forces us to remain cautious.

The next week is almost barren of any important US reports, barring the US Retail Sales data; this will be closely monitored after the abysmal reading last month. Analysts are expecting a healthy rebound but if the report misses again, the Dollar's short-term price action will be nothing other than downwards. In the interim though, Dollar/Yen is trading around 111.80 testing its recent highs and it will take its cue from equities' performance and the release of the University of Michigan Confidence report. Given that stock futures are pointing higher we may see an attempt to break higher towards the 112.20 yearly high, but more gains would require a fresh catalyst.

Meanwhile, the Euro continues to oscillate between 1.1240 and 1.1285 for yet another day looking for direction. In our opinion, the case for the shared currency is a war of attrition where the weak US data prompts prices higher and the fragile Eurozone performance and ECB's dovish views keep them capped below 1.13. On balance though, the US economy looks stronger at this stage and based on growth and yield differentials we remain focused on the downside as the way forward for the Euro, with the 1.12 the key level to break first.

Gold sold off aggressively over the past 24 hours dropping $20 on the back of Dollar's rally. The yellow metal has printed a lower high at $1,310 and this casts some doubts over its medium-term outlook but we believe that the weaker US data will be hard to disregard and it will act as the key catalyst here. At the same time, we need to keep an eye on equities' performance as we enter the US earnings' season where potentially disappointing figures may prompt a stock selloff that could push Gold higher in the medium term. Oil is retreating in line with our expectations for a correction at some point. We have identified the $63 level as the short-term support and depending on how prices react after reaching it, we may see a deeper move towards $61.50 or another leg towards $65.

Finally, equities ended the day in a mixed manner with the EuroStoxx advancing 0.31% while most US markets were under water. This morning, equity futures are pointing towards a marginally positive opening bell and investors' focus will squarely be on the US earnings' season. JP Morgan and Wells Fargo will kick off the season for banks and market participants will focus on customers' savings and loan trends as indicators for the overall performance of the economy. On a side note, UBER has now filed for its IPO and, after rival LYFT listed very recently, investors will look towards the giant company as a potential allocation option.

MARKET EVENTS TO WATCH

  • U. of Mich. Sentiment - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research