Espresso Morning Call: Markets react to a less hawkish Fed

What are we looking at today:

• USD correction sets in: The USD fell sharply on the less hawkish than expected FOMC decision. It is reasonably stable this morning, but a corrective move could begin to develop.
• US yields down sharply post-Fed: In the wake of the FOMC last night, shorter yields especially have fallen. A big “bearish engulfing” candle on the 2-year yield suggests a downside threat now.
• Indices in recovery: Wall Street rebounded strongly in the wake of the Fed and European markets are higher today. This could now be a key swing higher in the near to medium-term outlook. 
• Data trading: The UK Composite PMI (expected to be unrevised) and US Weekly Jobless Claims (forecast to be a shade higher) may not cause too much volatility for markets. However, the Bank of England monetary policy decision has the potential to create a stir. A rate hike is expected, but how big, and how will the MPC vote?

Overview

The FOMC decisions have been a momentous event in the past few meetings. Expectations of increasingly aggressive monetary policy tightening have been stoked in recent weeks. However, despite a +50bps rate hike (which was expected), the Fed has decided to run down the balance sheet at a slightly slower pace than previously expected. Also, it is “not actively considering” 75bps hikes at future meetings. There has been a considerable reaction to US Treasuries, USD, and also US equities. Yields have fallen (especially shorter-dated yields), the USD has corrected back and Wall Street indices rallied.

This morning we are seeing a slight moderation of these moves. After stabilizing overnight, into the European session the USD is regaining lost ground against all major forex. How this move develops through the coming days will be key. The FOMC move should re-set market expectations and profit-taking on the huge USD bull run could continue. For now, this is still the dust settling. There have also been hints of a slip in precious metals and indices too. Reaction to these pullbacks this morning will help to determine whether a sustainable recovery can form again. Buying into weakness is an important feature of rallying markets. Today is a good test of the nascent recovery.

There is the UK focus on the economic calendar today. The UK final Composite PMI is not expected to create too much drama, forecast to be unrevised from the flash reading. However, the Bank of England could cause a stir a little later. The analyst consensus suggests a 25 basis points hike (to 1.00%), with the decision expected to be almost unanimous (at 8-1 in favor of a hike). However, the shadow MPC (a group of highly regarded economists writing for The Times) is aguing 6-3 in favor of a 50bps hike in an attempt to get ahead of the curve on inflation pressures. The shadow MPC tends to be more hawkish than the BoE, but it could suggest that perhaps market participants should be on alert for a potential hawkish surprise today. 

Today's news

Market sentiment has improved post-the Fed: European indices are playing catch up on Wall Street gains overnight. US futures are, however, unwinding some of the gains this morning. It is a similar story to the USD. A fall back on the Fed meeting but has looked to regain lost ground this morning.

Treasury yields fell on the Fed but are ticking higher today: We have seen a “bull steepener” on the yield curve, where shorter-dated yields fell by more than longer-dated yields. This has unwound slightly today, with the 10yr yield slightly higher, but the 2yr yield rebounding more.

The Fed fallout: A +50bps rate hike has brought the Fed Funds range to 0.75%/1.00%. Fed chair Powell also indicated 50bps hikes in the next two meetings, however, appeared to rule out 75bps hikes. This was the key takeaway, with the Fed seen as less hawkish than some had expected.

China Caixin Services PMI falls sharply: China is suffering amidst COVID lockdowns. According to Caixin (unofficial), Services PMI fell to 36.2 from 42.0 last month. This missed the estimate of 40.0. The services PMI has seen the “quickest fall in the service sector output for over 2 years”. The Caixin Composite fell to 37.2 from 43.9. 

Cryptocurrency unwinding some of yesterday’s gains: Coins rallied in the wake of the Fed meeting, but are paring some of those gains this morning. Bitcoin hit $40,000 yesterday but has just eased back slightly this morning.

Economic Data:

• UK final Composite PMI (at 0930BST). The final Services PMI for April is expected to be unrevised at 58.3(down from 62.6 final March). The final Composite PMI is expected to be unrevised at 57.6 (down from 60.9 last month).
• Bank of England monetary policy (at 1200BST). The BoE is expected to hike rates by 25bps to 1.00% (from 0.75%).
• US Weekly Jobless Claims (at 1330BST). Weekly claims are expected to increase slightly to 182,000 (from 180,000 last week). 

Major markets outlook

Broad outlook: Market sentiment has fluctuated since the Fed. A strong improvement last night is just being eased back this morning.

Forex: USD is reclaiming lost ground. The GBP underperformance is notable, coming in front of the Bank of England meeting today.

• EUR/USD rallied through 1.0590 but has seen the rebound falter around the old key low at 1.0635. How the market reacts to this failure will be key. There is near-term breakout support around 1.0560/1.0590 and if this can be used as a basis of support then a rally may be sustainable. The main overhead barrier is 1.0750/1.0800. Support is strengthening at 1.0470/1.0500.
• GBP/USD rebounded following the Fed but has given much of that back this morning on a failure at 1.2638. Reaction to the Bank of England will now be key, with 1.2638 an initial gauge. A breakout opens at 1.2675 initially, but there is little resistance until 1.2970/1.3000. The support at 1.2410 is still not entirely secure.
• AUD/USD has been strongly higher with the AUD a key outperformer in recent days. A break above the resistance band 0.7160/0.7195 now needs to be held as the market pares gains this morning. Resistance at 0.7265 is now a gauge. 

Commodities: Precious metals have rallied well on the Fed, they need to hold this recovery momentum. Oil is looking more positive within the range again.

• Gold has rallied well from a low of $1861 and pulling decisively above $1878/$1890 whilst also breaking a three-week downtrend, adding to the improvement. The key test will be the overhead supply of all the March/April lows around $1910/$1920.
• Silver has improved strongly after it held the key support band of $21.40/$22.00, and with a “bullish engulfing” one-day candlestick, the potential for near-term recovery is improving. Initial resistance at $23.55 comes ahead of the more considerable barrier of overhead supply around $23.80/$24.10. Posting a higher low today would add grounding to the improvement.
• Brent Crude oil has improved in the past 24 hours as a move above the middle of a one-month trading range of c. $99/$116 opens the range resistance once more. For now, we see this as a mild near-term improvement within a consolidation range, but a breakout above $116 would improve the outlook. Momentum suggests that this is still a range play, for now. Initial support is at $108/$109.

Indices: An overnight recovery on indices has just eased slightly this morning. However, the potential for sustainable near to medium-term recovery is growing.

• S&P 500 futures have rallied sharply on the Fed meeting but have just seen this movie paring gains slightly this morning. Incredibly the resistance has been hit at 4303 (to the tick for a third time) in this rebound, suggesting the importance of this is growing. As the market has just slipped back slightly, the appetite to buy weakness will be tested. Above 4303 opens 4355/4385 resistance. Initial support is at 4195.

• DAX has broken above the 14,080/14,190 resistance and is now testing the key barriers overhead. This includes the falling 21 & 55-day moving averages adding to the key four-month downtrend (today at 14,365). A close above the downtrend would open a test of 14,600. Initial support is 14,080/14,190. Under 13,960 would be another bull failure.
• FTSE 100 has moved above 7585 resistance to re-open the key highs again around 7660/7695. There is a mild positive bias to momentum now (with the daily RSI confirming the near-term breakout). This suggests that weakness is a chance to buy. Holding the higher low at 7490 is important to this improvement. 

This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorised to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.