Market Morning Briefing: Pound Seems To Be Holding Above 1.36
STOCKS
Dow trades higher after the FOMC and looks bullish for the near term. A rise above 35000 is needed to prevent further fall towards 33000. Dax is also bullish and needs to sustain above 15500 to move up further. Nikkei looks bearish while below 30000. Shanghai has risen well from support and looks bullish. Nifty and Sensex can see a steady rise in the near term.
Dow (34258.32, +338.48, +1%) has risen back above 34000 and while it holds strong, we may expect a rise back towards 34500-34750. However, in the medium term it needs to rise above 35000 and sustain higher to prevent any vulnerability to fall back towards 33000.
DAX (15506.74, +158.21, +1.03%) has risen well too but needs to rise and sustain above 15500 to indicate bullishness towards 15700/800 in the medium term.
Nikkei (29639.40, -200.31, -0.67%) continues to fall over the last few sessions and the view is bearish while below 30000 to see a dip towards 29250-29000 followed by a rise towards 30500-3700 eventually in the longer run. Japan markets are closed today.
Shanghai (3648.57, +20.08, +0.55%) rose sharply from support near 3560 and while that holds, view is bullish on the shanghai.
COMMODITIES
Commodities have risen well. Crude prices have risen and are heading towards resistances. Brent needs to hold below 77-78 while WTI can test 73-74 before coming off from there. Any break above the mentioned resistances can take them higher towards 80 and 75 respectively which are crucial in the medium term. Gold has dipped and needs to sustain above 1740 to move up again soon. Else a fall to 1725/00 cannot be negated in the longer run. Silver can fall towards 22-21.50 but before that it can attempt to rise towards 23.50. Copper tested 4 and has bounced back well from there. It can now rise back towards 4.30/40.
Brent (76.44) has risen well breaking above 75 and could now head towards interim resistance at 77-78 above which there is crucial resistance at 80. The broad 77-80 zone is likely to be tested before a sharp fall towards 70 is seen in the medium term.
WTI (72.41) has risen well as expected and could test 73-74 in the near term.
Gold (1763.90) has fallen as expected from resistance zone of 1780/90 and while that holds, a dip to 1740 cannot be negated. We would have to watch price action near 1740 to see if the price bounces from there or falls further down in the medium term. While correlation with Euro remains strong, a possible bounce in Euro from 1.1665 can help Gold bounce back too.
Silver (22.55) has risen a bit and has scope to rise towards 23.50 before falling off from there. Any break below 22 if seen in the near term would prove contrary to our view and lead to a sharp fall towards 22-21.50. .
FOREX
FED announced that it would start tapering by end of this year and stop purchases by mid-2022. It also signaled 3-rate hikes in 2023. Dollar Index rose sharply but needs to sustain above 93.40 to trade higher else a decline towards 93 is possible soon. Euro has broken below 1.17 and may test 1.1665 support which needs to hold to prevent further dip to 1.16. Aussie and Pound have bounce well from immediate supports. USDCNY is holding below resistance zone of 6.47/48. USDINR can test 74 on the upside but has 50% chance that it would come off from there back to 73.80/60. Watch price action near 74.00
Dollar Index (93.44) rose sharply to 93.4150 yesterday as FED announced starting of tapering by end of this year and signaled 3-rate hikes in 2023. Although the index has come off a bit it needs to break below 93.40 and sustain lower to avoid any further rise towards 93.60-93.80 in the near term. Watch price action near 93.40.
Euro (1.1697) fell to test 1.1684 yesterday before rising slightly from there. Note support near 1.1665 which needs to hold in order to keep some room on the upside intact. Else a fall towards 1.16 cannot be neagted.
EURJPY (128.50) has bounced well from support near 128 and while it holds, there is scope for a rise to 129 in the near term.
Dollar-Yen (109.88) rose sharply along with the rise in Dollar Index. But note that the pair still trades within 109-110.40 range which could hold for some more time.
Aussie (0.7226) has paused its fall near 0.7220-0.7200 and a bounce looks possible from current levels towards 0.7250-0.73 eventually.
Pound (1.3625) seems to be holding above 1.36 and while that holds, a bounce back to 1.3650-1.37 cannot be negated in the near term. Only a break below 1.36 if seen will force to look for lower levels.
INTEREST RATES
The US Federal Reserve left the rates unchanged at 0%-0.25%. It had said that the stimulus taper will begin soon. The PCE and Core PCE inflation projections have been revised higher to 4.2% and 3.7% respectively from its earlier projection of 3.4% and 3% respectively. The US Treasury yields have risen at the near-end (2Yr and 5Yr) while the far-end (10Yr and 30Yr) yields have seen a dip. A break below the immediate supports can drag the far-end yields further lower from here. The German yields remain stable and are likely see a fresh fall from here and resume the broader downtrend. The 5Yr and 10Yr GoI have risen-back yesterday. However, they have key resistances ahead that can cap the upside and keep it pressured for a further fall going forward.
The US 2Yr (0.24%) and 5Yr (0.85%) Treasury yieldshave risen while the 10Yr (1.30%) and the 30Yr (1.81%) have dipped after the Fed meeting outcome. A fall below 1.28% on the 10Yr and 1.8% on the 30Yr can drag the yields to 1.2%-1.18% (10Yr) and 1.7% (30Yr) in the coming days. It will also negate the chances of seeing 1.4%-1.45% (10Yr) and 2% (30Yr) on the upside. We will have to wait and watch the follow-up movement in the coming sessions.
The German 2Yr (-0.72), 5Yr (-0.64%), 10Yr (-0.33%) and 30Yr (0.16%)yields continue to remain stable below their key resistances. Our view remains the same. We expect the yields to resume the broader downtrend and see a fresh fall from here. The 10Yr can fall to -0.5% while below -0.25% and the 30Yr can test 0% while it sustains below 0.2%.
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Should the support level of $1.17 is broken downside, the price may likely test the support level of $1.16 which may extend to $1.15 level. Inability to break down the support level at $1.17 may result to a bullish movement towards $1.18, $1.19 and $1.20 levels.
EUR/USD Market
Key Levels:
Resistance levels: $1.18, $1.19, $1.20
Support levels: $1.17, $1.16, $1.15
EURUSD Long-term Trend: Bearish
EURUSD is bearish on the long-term outlook. The currency pair retains its movement under the control of the bears. The bears are busy increasing their momentum, pushing the pair to the low of $1.17 support level last week. The just mentioned level holds and a bullish candle is forming, which indicate that bulls are preparing to dominate the EURUSD market.
EURUSD has penetrated the fast moving average (9) and slow moving average (21 EMA) downside preparing to cross the support of $1.17 downside, which is an evidence of an increase in the bearish momentum. Should the support level of $1.17 is broken downside, the price may likely test the support level of $1.16 which may extend to $1.15 level. Inability to break down the support level at $1.17 may result to a bullish movement towards $1.18, $1.19 and $1.20 levels.
EURUSD medium-term Trend: Ranging
EURUSD is ranging in the medium-term outlook. The strength of EUR currency is weak and could not increase above the resistance level of $1.18. The bears’ pressure is lower compare with the strength of the support level at $1.17. The price action on the 4 hour chart is decreasing towards the support level of $1.17. Breaking down the mentioned level may decrease price to $1.15.
The price is trading below the 9 periods EMA and 21 periods EMA, the two EMA are slightly separated from each other as an indication of medium momentum market. The relative strength index period 14 is at 30 levels with the signal line displaying a bearish direction.
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United States: Supply Chain Woes Tug at Growth and Send Prices Higher
This week’s light calendar of economic reports showed supply chain disruptions tugging a little at economic growth. New home sales are being held back by record low inventories, as higher construction costs are slowing starts. While a slightly larger drop in consumer confidence and advance durable goods orders garnered headlines, hiring continues to ramp up and business fixed investment advanced solidly, reflecting the urgency of the supply side to catch up with demand.
Next week: ISM Manufacturing (Tuesday), ISM Services (Thursday), Employment (Friday)
International: Less Positive on the U.S. Dollar Outlook
It was an especially light week on the international economic data front. On Tuesday, however, we released our monthly International Economic Outlook for May. Perhaps the biggest change in our forecast was a somewhat less positive view on the U.S. dollar going forward.
Next week: India Q1 GDP (Monday), Canada Q1 GDP (Tuesday), May Eurozone CPI (Tuesday)
Interest Rate Watch: Eye-Popping Inflation Not Widespread, but Driving Inflation Expectations Up
Alternative measures of inflation suggest that the April’s leap in inflation is not as widespread as traditional “core” measures indicate. That may boost the Fed’s confidence that the recent strength in inflation is driven by the unique circumstances of restarting activity after a pandemic. However, the hard-to-miss price hikes are lifting inflation expectations, which could lead to inflation becoming more entrenched.
Topic of the Week: The Party’s Just Getting Started for Services
Over the past year, we have watched as piled-up excess savings have left consumers flush with cash, and finally, we are on the verge of what we have all been waiting for: the services spending boom. Still 4.7% below its February 2020 level, real services spending fell back during the pandemic, but we expect more than four and a half years of typical spending to occur in the next three quarters.
U.S. ReviewSupply Is Racing to Catch Up with Demand
While first quarter real GDP growth was unrevised at 6.4%, revisions to the underlying components show a widening gap between the resurgence in the demand for goods and services and the supply. Consumer spending rose at an even faster 11.3% annual rate during the first quarter, with the revision showing stronger purchases of big-ticket items such as cars, light trucks and household appliances. Business fixed investment and residential investment were also revised modestly higher, while there was a larger draw down in inventories than first reported and exports were revised lower.
The strength in demand is pulling prices higher. The GDP Price Index rose at a 4.3% pace during the first quarter, and, after excluding food and energy items, core prices rose at a 3.4% annual rate. Both are 0.2 percentage points higher than initially reported. The stronger inflation readings confirm what we have been seeing in much of the survey data, including the NFIB, ISM and Philadelphia Fed surveys, as well as the recent CPI and PPI data. The acceleration in inflation is extending into the current quarter. This morning’s personal income and consumption data showed overall prices rising 0.6% in April and rising 0.7% after excluding food and energy prices. The PCE deflator has risen 3.6% over the past year and core PCE deflator is up 3.1%; both were slightly higher than expected.
Personal income plummeted 13.1% in April, following a 20.9% surge the prior month, which was driven by the distribution of COVID relief checks. Personal income less transfer payments rose a solid 1% in April, and wages and salaries rose a solid 1%, matching the prior month’s gain. The 0.6% rise in inflation overwhelmed the 0.5% rise in nominal personal consumption, resulting in a 0.1% drop in real outlays. All the drop was in goods outlays and part of the decline is likely tied to supply shortages of cars and light trucks, appliances and other goods. We expect spending to rebound from April’s slight drop over the balance of the quarter, when employment and wages and salaries are expected to rise solidly. The saving rate fell back to 14.9% in April, after surging to 27.7% in March. Prior to the pandemic, the saving rate was 8.3%.
Consumer confidence came in slightly below expectations in April, with the overall index falling 0.3 points to 117.2. The prior month’s data was also revised 4.2 points lower, which made April’s drop appear even larger. The underlying data were mixed. Consumers’ assessment of current economic conditions jumped to 144.3, which is its highest reading since March 2020. Consumers’ expectations for future economic conditions declined 8.8 points to 99.1. The widening gap between consumers’ view on current economic conditions and future conditions is notable, because it is typically associated with the latter stages of the business cycle. The slide in expectations might reflect concerns about rising prices and possible tax increases. It also could simply be noise or some combination of the three.
Purchasing plans also fell sharply in May, with the share of consumers planning to purchase a home over the next six months falling 2.8 percentage points to 4.3%, which is its lowest level since February 2013. The share planning to purchase automobiles fell 2.0 points to 9.1%, while the share planning to purchase major appliances plummeted 9.4 points to 41.9, hitting its lowest level in a decade. Purchasing plans are volatile on a monthly basis. The most recent declines coincide with widespread shortages of homes, motor vehicles and appliances and sharply rising prices. Again, this may simply be noise, or it may be a warning that the stimulus-driven surge in spending and home buying has gotten too far ahead of supply, triggering a spike in prices.
Home prices have clearly jumped. The median price of a new home surged 11.4% on a non-seasonally adjusted basis in April and is up 20% over the past year. Part of this past month’s surge in prices reflects an 8.2% decline in new home sales in the South—the largest and most affordable region for new home sales—and a 7.9% rise in home sales in the West, which is the second-largest region for new home sales and the least affordable region. Prices are also being driven higher by rising construction costs, reflecting soaring lumber prices, higher labor costs and higher lot costs. While supply shortages are clearly playing a role in driving prices higher, demand is also doing its part. Builders report buyers are largely shrugging off higher prices, and report brisk demand for new homes. Builders are increasingly limiting sales in new communities. Prices for existing homes have also spiked, with the S&P CoreLogic Case-Shiller National Home Price Index jumping 1.5% in March and climbing at a 17.2% annual rate during Q1.
The best cure for high prices is high prices. Higher selling prices should bring out more sellers and prompt builders to build more homes. Further back in the supply chain, higher lumber prices are spurring production at sawmills around the country. Prices have eased slightly in recent days. The major motor vehicle manufacturers are also investing in new equipment to deal with supply bottlenecks and there have been a flurry of announcements from firms planning to increase production of microchips. The increased emphasis on boosting production capacity and bringing supply and demand back into balance was evident in the advanced durable goods report, which showed overall orders falling 1.3% in April. The drop was the first drop in 11 months and was largely due to a drop in orders for aircraft and motor vehicles, while orders for nondefense durable goods, or core capital goods, rose a solid 2.3%. Whether this will be enough to avoid a larger flareup in inflation that lingers for a while remains to be seen. (Return to Summary)
U.S. Outlook
ISM Manufacturing Index • Tuesday
After notching a high not seen since the 1980s, the ISM manufacturing index slipped four points, or the most since lockdown measures last March, in April. We expect the index gave up a bit more ground in May and slid to 60.4, which is still a reading that signals broad and strong expansion in the sector.
The main takeaway from the ISM in recent months is that the economy could be running even hotter if it were not for a variety of constraints on supply. We expect this remained a theme in May. But we still expect demand remained robust and orders continued to roll in last month based on new orders holding up across a number of regional Fed PMI surveys.
Supply issues likely continued to constrain production and lead to higher order backlogs. We will be paying close attention to the prices paid component in next week’s release, which has surged in recent months as low supply is met with solid demand. Higher input prices paid by manufacturers could further stoke concerns that inflationary pressure may be here for longer than implied by the transitory pop associated with the reopening. Source: Institute for Supply Management, Federal Reserve System and Wells Fargo Securities
ISM Services Index • Thursday
Supply shortages are not limited to the manufacturing sector. The services side of the economy is facing its fair share of problems, as service providers also struggle to get their hands on the materials and help they need. Supply issues, rather than a lack of demand, is what we expect is responsible for slower servic
e sector activity this month, and we forecast the ISM services index eased modestly to 62.0 in May from 62.7 previously.
We believe the reopening of the economy amid increased vaccinations and households’ desire to again participate in many previously constrained services is about to unleash a rapid recovery in the service sector (See Topic of the Week for more detail). As such, demand factors that drive service sector activity are only starting to heat up. Strong demand matched with scarce supply is stoking inflation, exhibited by the recent jump in the prices paid component.
If the ISM comes in weaker than expected, scarce supply is limiting the rebound. A better print, however, would suggest the service sector is restarting despite these headwinds and perhaps signal services are in such high demand that consumers will happily accept the higher price tag.
Employment • Friday
Fully reopening the economy after a pandemic is not a seamless process and this was on full display in the April jobs report. Strong demand for labor as firms reopen and restaff collided with a number of constraints on the supply of workers. Still, the April payroll figure was in stark contrast with other data on the labor market. PMI indices on employment, consumers’ views of the job market and declining jobless claims all suggest the economy should be adding jobs at a robust pace.
While we don’t suspect all the labor supply issues worked themselves out in May, we believe the jobs’ recovery got back on track. We forecast employers added 800K jobs during the month and the unemployment rate ticked down to 5.9%. We will also be paying extra close attention to any revisions to prior month’s data in next week’s release.
If employers added significantly fewer jobs than we forecast, it would seem the disconnect between the demand for and supply of labor needs a little more time to work out. A weak report could entrench expectations that tapering doesn’t start until early 2022, despite the recent rise in inflation. Alternatively, big upward revisions to prior data or a solid gain in May employment, particularly if accompanied by a meaningful upward revision to April, may put a brighter spotlight on when the Fed may discuss and ultimately kick off tapering.
International Review
Less Positive on the U.S. Dollar Outlook
It was an especially light week on the international economic data front. On Tuesday, however, we released our monthly International Economic Outlook for May. Below, we review some key takeaways.
As the world slowly emerges from the COVID crisis, the aftershock to the global economy is becoming increasingly evident, as cross currents have become more apparent across geographical regions as well as across time. Overall the global economy remains on a path to recovery, but the performance of individual economies is varied. The variance reflects economies that were initially hit and then began to recover from the COVID crisis at different times, as well as differing policy responses (i.e., public health policy, monetary and fiscal policy) by governments and other institutions. As a result, the pattern of economic recovery has been unusual and unpredictable in early 2021.
The outlook for many European economies has brightened as they begin to emerge from COVID-related restrictions that had restrained growth. United Kingdom activity and survey data have surged in recent months, while a rise in key PMI and KOF confidence surveys in the Eurozone and Switzerland point to a significant upswing in economic momentum for those economies moving forward. As a result, we have revised our 2021 GDP growth forecast for the Eurozone and the United Kingdom perceptibly higher.
In addition to cross currents among the developed economies, there have also been some among the emerging economies. China’s Q1 GDP growth slowed to just 0.6% quarter-over-quarter, and activity data and confidence surveys were up and down during the early part of 2021, while Mexico also eked out a small gain in Q1 GDP. Moreover, with COVID cases still widespread in countries such as India and Brazil, among others, we have revised our outlook for growth among the emerging economies lower in recent months. In the aggregate, our forecast is for global growth of 6.3% for 2021 and 4.1% for 2022 (above chart).
In terms of our currency forecasts, we think this translates into a softer U.S. dollar than we had previously anticipated (above chart). The longer-term fundamentals (global growth catch-up and relative monetary policy trends) remain consistent with a weaker greenback, in our view. However, we had previously anticipated a period of near-term U.S. dollar strength before the greenback softness emerged. In our opinion, recent developments, including relative economic and monetary policy trends, and low FX volatility, make that near-term U.S. currency strength seem less likely. Instead, we now lean toward a brief period of U.S. dollar stability before U.S. dollar softness resumes.
India Q1 GDP • Monday
In the first quarter of calendar year 2021, the Indian economy was continuing to regain its footing. COVID spread was at reasonably low levels, and on a sequential basis, the Indian economy grew 10% to finish 2020. As recently as April 7, the Reserve Bank of India’s monetary policy statement pointed to continued gains in manufacturing and services activity. Around that time, however, COVID cases exploded in the country, taking a significant human and economic toll. As a result, although the Q1 numbers may show a modest rise in real GDP growth in India, this lagging indicator masks the economic problems that began at the end of the first quarter. To that point, we downwardly revised our forecast for Indian GDP growth for the second month in a row.
The Reserve Bank of India (RBI) also meets next week for a monetary policy meeting. In our view, the RBI is likely to continue Operation Twist measures and asset purchases, both forms of monetary policy easing, and the fragile state of India’s economy will force the RBI to keep interest rates on hold both at the upcoming meeting and over time as the recovery progresses.
Canada Q1 GDP • Tuesday
When data for Q1 Canadian GDP growth are reported next Tuesday, we expect the figures to show the Canadian economy grew somewhere in the 6%-7% range on a quarter-over-quarter, annualized basis. If realized, this would put Q1 Canadian economic growth right around the 6.4% reported in the United States in Q1. The Bank of Canada has taken steps to slow its bond purchase program, although this was in part due to an improving economy and in part for market-functioning reasons.
However, after a solid start to 2021, renewed COVID-related restrictions will likely cause growth to slow in Q2. Canada lags the United States in its vaccination program, and in April, Canadian employment declined for the first time since January. The Canadian employment data for May are released next Friday and will show what kind of bounce back, if any, has occurred. Longer term, we believe the public health situation will improve, and the broader fundamentals remain supportive of the economy, including sturdy household income trends, elevated savings rates and generally high commodity prices.
Eurozone CPI • Tuesday
Higher expected inflation in the United States has been corroborated recently by higher realized inflation in recent months. In April, the headline CPI in the United States rose 4.2% year-over-year, while core inflation rose 3.0%. The reasons for this are well-known: base effects from the year-ago comparison, significant pent-up demand amid a better public health situation, still flowing fiscal stimulus, etc.
In the Eurozone, realized inflation has not seen quite the same pickup. Headline CPI inflation was 1.6% year-over-year in April, up from 0.9% at the start of the year but still much lower than the comparable U.S. reading. Core inflation was even lower at just 0.7%. We expect prices to accelerate as Europe follows the United States into a full reopening, but we believe price pressures will still be much more muted on a relative basis. We look for Eurozone headline CPI inflation to average 1.6% in 2021 and 1.3% in 2022.
Interest Rate Watch
Eye-Popping Inflation Not Widespread, but Enough to Drive Inflation Expectations Up
April’s jumps in the “core” Consumer Price Index and the “core” PCE deflator, the largest one-month increases since the early 1980s, have brought forward questions as to how much inflation the Fed might be willing to withstand before adjusting policy. Fed officials have been adamant that the current pace of inflation is unlikely to be sustained after the initial burst of activity associated with the economy’s reopening and resulting bottlenecks subside. To that end, April’s leap in prices was largely driven by categories hit particularly hard by the pandemic and recent supply chain issues. While the core CPI rose 0.9% in April, prices for used vehicles, car & truck rentals, hotels, airline tickets and sporting events all rose 8% or more last month.
The degree to which the rapid strengthening in price growth has been driven by extreme jumps in a few categories can be more clearly seen in alternative measures of inflation. The traditional core CPI, which excludes food and energy, is up at a 5.6% annualized pace the past three months. But the Sticky CPI, which focuses on items for which prices change relatively infrequently, and the Median CPI have picked up to a less alarming degree. This marks a turnaround from the past two decades, when alternative measures tended to outpace traditional core inflation, and likely gives the Fed confidence that the current pop in inflation is indeed being driven by some unique factors.
While the more tempered pickup in alternative measures of inflation suggests that prices are not surging in a widespread fashion, there is danger in that the hard-to-miss hikes in some categories raise expectations for future inflation. Higher inflation expectations could become self-fulfilling, as businesses raise prices in anticipation of higher costs and workers push for greater wages to compensate for rising living expenses.
Consumer inflation expectations shot up further in the May Consumer Sentiment Survey. As Fed Governor Lael Brainard said this week, “a very important part of inflation dynamics is longer-term inflation expectations and those have been extremely well-anchored.” Yet as actual inflation rises, those expectations may quickly become unanchored as the May reading hinted.
For now, inflation expectations, while certainly higher than in recent years, remain near levels consistent with the Fed’s 2% PCE goal over time. As demand growth cools and supply constraints ease over the year, price pressures should abate in the areas seeing particularly sharp price hikes, which in turn, should curb the rise in inflation expectations. But how high inflation expectations rise in the meantime is likely to influence where inflation settles down even after the unique factors currently speeding inflation along subside. Along with the breadth of price hikes indicated by alternative measures of inflation, these expectations will bear close watching by Fed officials and watchers alike.
Topic of the Week
The Party’s Just Getting Started for Services
Over the past year, we have watched as piled-up excess savings have left consumers flush with cash, and finally, we are on the verge of what we have all been waiting for: the services spending boom. Real services spending fell sharply over the past year due to the inability to purchase many services, and it remained 4.7% below its February 2020 level as of April. But, changes are on the horizon, as we expect more than four and a half years of typical spending to occur in the next three quarters. This would move the level $700 billion higher than Q1-2020 by year’s end (see chart). It’s not just a rebound; it’s a tsunami of spending.
While many nondiscretionary categories of spending or “staples,” such as housing & utilities, financial services & insurance and healthcare, are now over or close to their pre-pandemic levels, “discretionary” and “other” services spending remain depressed. These categories are crucial to what we have deemed the “recreation renaissance.” Recreation spending is essential to the robust service rebirth, as real spending in this category is almost $100 billion under its pre-pandemic level. However, food services and transportation services also fall under the discretionary umbrella, and stand to benefit from a resurgence in leisure activity and vacation travel this year. As in-person entertainment again becomes an option, bars & restaurants and hotels are able to lift restrictions and more of the nation starts hitting the road for personal & business travel, each of these categories should see the strong demand they need to take off.
A closer look at the other major category of services spending that is under its Q1-2020 level, other services (-$93B), exposes another clear area for growth. The catch-all category has obvious room for improvement in three main areas: personal care services, education and childcare services. As with leisure & travel, their higher exposure to social distancing requirements meant spending was limited, so shifting to in-person activities should boost consumption.
The services sector resurgence we expect also need not take away from the invaluable support goods spending has provided to consumer spending this past year. In fact, we think the goods spending spree could continue. Real consumer spending levels are only a stone’s throw away from where their pre-pandemic peak thanks to goods spending, which is currently 16% above its February 2020 level. Despite the robust rebound already seen in durable goods spending, spending to date still only accounts for around 40% of growth typically seen over an entire cycle, so there is still room to run. Furthermore, the massive amount of excess savings on household balance sheets afford households the means to continue to spend.
The bottom line is that the confluence of consumers with full wallets and more spending options should lead to robust, double-digit consumer spending growth this year. But, the reopening of the economy has not been without its struggles, as goods and services providers face supply constraints due to input and labor shortages. A translation of these issues into higher consumer prices could mean that confidence and purchasing power could decrease. However, for now, we are optimistic and are anticipating a period of historic growth for consumer spending.
Market Morning Briefing: Aussie Has Risen Slightly Maintaining Above 0.77 For Now
STOCKS
Dow and DAX continue to trade mixed and are stuck around 34000 and 15200 respectively. Dow has to get a strong follow through rise above 34000 to move up. DAX keeps alive the chances of seeing 15500-15700 before reversing lower. Nikkei and Shanghai are closed till Wednesday this week. Sensex and Nifty have bounced sharply yesterday but needs to get a strong follow through rise today to avoid a fall again. The price action today will need a close watch.
Dow (34113.23, +238.38, +0.70%) continues to remain mixed and oscillates around 34000. Our view remains the same. A sustained rise above 34000 is needed to see 35000 on the upside. 33500 is an important support. A break below it and a subsequent fall below 33000 will be bearish to see 32000-31000 on the downside.
DAX (15236.47, +100.56, +0.66%) seems to lack strong follow-through selling below 15200. This keeps alive the chances of seeing 15500-15700 on the upside before the expected reversal to 14500-14000 is seen.
COMMODITIES
Commodities trade higher today. Brent and WTI have risen slightly and could move up to test resistances near 68-70 and 65-67 respectively before falling from there. Gold has risen sharply and needs to break above 1800 to head further towards 1820+ levels. Silver has also risen well and needs to break above 27 and sustain to move higher. Else the range of 27-25 may remain intact. Copper has moved up well and is bullish while above 4.40. A rise to 4.60 is on the cards.
Brent (67.64) has risen and could test 68-70 levels which could limit the immediate upside and produce a short corrective fall towards 64 in the medium term. WTI (64.55) on the other hand, has also risen slightly and could test 65-67 levels before again falling lower. Immediate view is bullish but upside is limited to near term resistances.
Gold (1790.00) has risen again indicating a possible test of 1800. In the medium term, a break above 1800 is needed to take the price higher. Silver (26.93) has also risen well and needs to break above 27 to head higher to 28-29 levels in the near term. Till then the 25-27 range could hold strong.
Copper (4.5090) is bullish while above 4.40 and may rise to test 4.60 on the upside.
FOREX
Dollar Index fell yesterday but has managed to bounce back taking Euro to lower levels. EURJPY may trade stable within 131-132 before rising higher in the longer run. Aussie and Pound look stable just now. Lower trade volumes seen in USDJPY and USDCNY as the markets are closed for Golden week and Labor Day respectively till 5th May. USDINR may test 73.80 but a break below this if seen would indicate further bearishness going forward. On the upside we may expect the movement to be restricted to 74.30 and higher at 74.50/60.
NOTE: Despite the lower spot closing of 73.92, the 1month forward premia rose to almost 8.50% after closing at 7.19% (yield wise) rising from 5.36% seen on last Friday. This has been a sharp rise and the premium needs to come off immediately to lower levels again this week. Also the Cash/Spot rose to 5/10p yesterday rising from 3/5p earlier. This also needs to come down to earlier levels.
USDINR (73.92) rose to 74.3250 yesterday exactly in line with expectation but came back sharply to test lower support of 73.90 and closed near the day’s lows. It could possibly indicate that the pair may continue to fall lower in the near term. A break a below 73.80, if seen would indicate further bearishness for the pair in the medium term. Else a bounce back to 74+ levels if seen could take it higher towards 74.30 again.
Dollar Index (91.12) fell yesterday after the lower than expected US ISM index. Additionally holidays in Japan and China led to lower trade volumes for the Dollar which dragged the index lower. The Dollar Index has bounced back a bit from yesterday’s low of 90.87. We do not negate a rise to 92 over the medium term/. View is bullish while above 90.50-91.00.
Euro (1.2043) trades lower and seems to be maintaining below 1.21. A test of 1.20 cannot be negated in the next few sessions and any break below 1.20 could trigger a faster move towards 1.19 on the downside. Watch price action near 1.20 in the near term.
EURJPY (131.54) looks sideways ranged and could trade within 131-132 for sometime before rising higher in the medium to longer term. An eventual rise to 135 is not negated but needs a break above 132 to confirm.
Dollar-Yen (109.24) is seeing a low trade volume as Japan is closed till 5th May for the Golden week but we may expect volatility to increase in the second half of the week. A possible test of 109.75-110 is possible on the upside from where a sharp fall is possible.
Aussie (0.7738) has risen slightly maintaining above 0.77 for now. As mentioned yesterday, there is scope for a fall to 0.7645 before a rise back to 0.78 or higher is seen in the near to medium term.
Pound (1.3879) looks stable and could be ranged within 1.40-1.38 in the near term. Unless a break on either is side is seen, we continue to look for the mentioned range to hold.
USDCNY (6.4730) is closed for labor day till tomorrow 5th May and we may expect a possible upmove in the pair in the second half of the week.
INTEREST RATES
The US Treasury yields seem to be in need of a fresh trigger to move up sharply higher from here. From a bigger picture, while the yields remain above their current supports, the chances of a rise in the coming weeks cannot be ruled out. We will have to wait and watch. The German Yields hover near their crucial resistance. A reversal is possible if they fail to breach their resistances. The 10Yr GoI fell sharply yesterday and keeps our bearish view intact. A further fall is possible in the coming days.
The US 2Yr (0.16%) Treasury yield remains stable while the 5Yr (0.82%), 10Yr (1.60%) and 30Yr (2.28%) have dipped slightly. The yields seem to be in need of a fresh trigger to move up sharply from here. However, while above 1.5% (10Yr) and 2.2% (30Yr) we remain bullish on the yields to see a rise to 1.7%-1.8% (10Yr) and 2.4%-2.5% (30Yr) in the coming weeks. The bullish outlook will get negated only if the yields break below 1.5% (10Yr) and 2.2% (30Yr).
The German 2Yr (-0.69%), 5Yr (-0.59), 10Yr (-0.21%) and the 30Yr (0.35%) yields remain stable near their crucial resistances. -0.20% (10Yr) and 0.35% (30Yr) have to be broken decisively for the yields to move further up from here. A pull-back from here can take the yields lower to -0.45% (10Yr) and 0.20% (30Yr) again. The price action in the coming days will need a close watch.
The 10Yr GoI (6.002%) had declined sharply to test 6% in line with our expectation. Our bearish view remains intact of seeing 5.9% on the downside. A break below 6% can trigger this fall. 6.06% is an intermediate resistance that can cap the upside if the yield bounces from current levels.
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