Pound Sterling to "Take a Turn for the Worse" says HSBC

Sentiment is not bad for a week which confirmed that the Federal Reserve (Fed) won't cut the interest rates anytime soon. Stocks rebounded and yields fell yesterday, the S&P500 kept floor above the 5000 psychological mark, Nasdaq 100 jumped 1.30% as the US 2-yer yield slipped below 4.90% despite data showing a bigger than expected jump in unit labour costs combined to a larger fall in productivity over the same month. Factory orders fell in April – which could've been good news for the Fed doves, but no – input prices rose at the highest speed since the 2022 peak in inflation. So my conclusion was that: investors just want the stocks to rally even in May, and defy the popular saying ‘sell in May and go away'.

Good news: Apple did just fine after the announcement of its most feared quarterly results yesterday, after the bell. The 10% drop in iPhone shipments to China has been keeping investors up at night regarding the Q1 results. The sales dropped 4% – very very slightly less than expected by analysts, but a 14% jump driven by App Store sales, higher-than-expected earnings, a higher dividend and a $110bn stock buyback sent the stock price 6% in the afterhours trading. The company didn't say anything new regarding its AI efforts though, we will have to wait the June 10th to more details about AI. Pricewise, the post-earnings rally could help Apple break above its ytd descending channel top and pave the way for more gains – on hope to hear something worthy on the AI front in the next few weeks.

US futures are up in the wake of better-than-expected Apple results, and ahead of today's much-important US jobs data. The jobs data will be more important this time than in the past due to increased uncertainty regarding the future of the Fed policy. The US economy is expected to have added around 240K new nonfarm jobs in April, the average pay is expected to have grown slightly slower on a yearly basis, and the unemployment is seen steady at 3.8%. A hotter-than-expected data, especially on the wages front – should easily fuel the hawkish Fed expectations and weigh on equity and bond prices before the closing bell. A softer-than-expected set of data, on the other hand, should give some relief to the Fed doves before the week comes to an end.

We can't predict where the market will be headed after the data, but based on the cost of ATM puts and calls expiring today, Citigroup predicts that the S&P500 could move 1.2% up or down as a reaction to the data.

Elsewhere, the British FTSE 100 continues to perform well. The almost 2% jump in Shell following over $1bn profit beat yesterday certainly helped keeping mood in the British blue-chip index intact. They also announced a $3.5bn stock buyback. Zooming out, the FTSE 100 is up by 10% since the January dip. The UK economy doesn't make anyone dream, and indeed the OECD cut its outlook for the UK economy and expects it to grow by a meagre 0.4% this year – just better than Germany that sits at the bottom of the range with a morose 0.2% growth. But who cares, Britain's biggest companies bring the majority of their revenues from abroad, so all the British blue-chips need is a strong world economy. And the OECD predicts that the world economy will grow more than 3% this year – 0.2 percentage points better than their February forecast. Also, note that the reflation trade – that comes along with the expectation of looser monetary policies across the globe and that benefits to cyclical names like energy, mining companies and financials – continue to play in favour of the index. So if all goes according to plan, the FTSE 100 should do just fine in the coming months. What could go wrong? Well, inflation – inflation could go wrong and delay the reflation gains.

The US dollar is under selling pressure this morning, the EURUSD is drilling above a minor Fibonacci retracement with risk of seeing gains reversed after today's US jobs report. The USDJPY continues to retreat thanks to intervention – and the speculation regarding intervention – from the Bank of Japan (BoJ) this week, while Cable tests the 200-DMA to the upside. The common denominator for what's next is the US jobs report. A strong report could easily reverse gains in major peers, fuel the hawkish Fed expectations and back a dollar appreciation before the weekly closing bell.

The RBA is on hold until inflation falls further. A scenario necessitating a rate hike is not impossible, but it is unlikely, and it would only take shape later in the year.

With the inflation surprise in the March quarter and some further upside possible in the June quarter, the outlook for rate cuts in Australia has been pushed out. The timing of expected rate cuts in the United States has also been pushed out.

One body of opinion goes further, though, holding that rate hikes are necessary and likely in Australia. The reasoning seems to be that, because the RBA raised rates less than the Federal Reserve, it has (by definition) not done enough and will therefore end up having to do more. The unstated presumption behind this reasoning is that both countries face the same shock and the same context, and therefore the appropriate stance of policy is the same (and produced by the same level of the policy rate). Another unstated assumption in this line of argument is that the feasible rate of unemployment is well described by past averages or minimums, and therefore current rates are too low.

In our view, these presumptions are unjustified. As we have noted in the past, the United States is something of an outlier among peer economies. Domestic demand growth is outstripping that in peer economies; headline inflation is stabilising not still falling; and consumption per capita consistently rising. Both countries have tight labour markets, but our assessment is that next year will see labour market slack emerge in Australia.

More broadly, the two countries are facing very different fiscal contexts, which helps explain why domestic demand growth remains strong in the United States and weak in Australia.

This different fiscal context is in part shaped by the actual and perceived interest-sensitivity of the Australian household sector. Nowhere else in the advanced world is the discourse so aghast at the idea that fiscal policy might add to demand, thereby slowing the hoped-for disinflation and delay (or even reverse) the hoped-for rate cuts. Likewise, nowhere else in the world is the fiscal policymaker so incentivised to avoid a further rate hike.

Recall that while tax cuts are coming, these mostly give back recent bracket creep and are necessary to achieve even the small improvement in growth we expect over the second half of this year. They are also already in everyone's forecasts. So they cannot be used as a reason to hike rates unless and until evidence emerges that the consumption (and so inflation) response to the tax cuts is larger than anticipated. That evidence, if it were to emerge, will not do so until late this year or early next year. In the here and now, retail spending and consumption more broadly are weak, and consumer sentiment remains extremely subdued.

A reasonable counter to this view is that the state governments are adding to demand. There are also longer-term issues around the structural budget balance. That is a separate issue from macroeconomic management over the cycle, though. State governments are in any case showing themselves to be sensitive to the need to be seen not to add to measured inflation. This week's announcement by the Queensland government of an increase to electricity rebates is a case in point. Actual electricity bills will be lower, and so measured CPI inflation will be slightly lower, in the second half of the year as a result of that announcement.

Another line of argument for a rate hike hangs off the surprise in the March quarter inflation and labour force data. And maybe that argument is compelling to some of the decision-makers in Chifley Square. The nagging doubt around that course of action is that this was what happened last November, only to see a significant downside surprise in the December quarter inflation and real-side data. The result was that the RBA's February 2024 forecast for trimmed mean inflation over 2025 reversed the upward revision in the November 2023 forecast round. Past surprises are most relevant for what they say about the future. There is no point warning that the disinflation journey could be bumpy if you then treat every bump as a change in trend.

There is a state of the world in which the RBA would need to raise rates. Consider a scenario where services inflation fails to decline further, the federal Budget later this month is more expansionary than expected, and the Fair Work Commission hands down a decision for an increase in the minimum wage not much below last year's outsized result, even though inflation is much lower one year on. None of these outcomes seem likely given the atmospherics, but it is understandable that policymakers might want to see the actual results, and a bit more progress on inflation, before even thinking about cutting rates.

Could they hike? Not yet, and probably not given the current run of data. The language following next week's meeting could be more hawkish. In the end, though, the Board will and should remain forward looking. We continue to expect the next move to be a cut, down the track.

Global wheat prices earlier this week retreated from multi-month highs as Russia's parched crop was finally due for some rain, but those rains were somewhat dismal and the forecast is dry again, threatening to curb the top exporter's harvest.

Average-to-cool temperatures are expected for southern Russia in the first half of May following record April warmth, and the cooldown could be key in avoiding significant crop losses amid an unusually dry spring.

Southern Russia, which grows more than 30% of the country's annual wheat crop, experienced its driest April in a decade as precipitation amounted to just a quarter of the month's normal. Temperatures were likely record for April, nearly 10 degrees Fahrenheit (5.4 degrees Celsius) above average.

Such a dry and warm April combination has not been observed in southern Russia in at least three decades. The closest instance was 2012, when Russia's all-wheat yield notched its worst relative performance of the post-Soviet era.

Dryness may continue for southern Russia as weather models on Thursday pegged May rainfall at about two-thirds of normal by mid-month, but average or below-average temperatures should prevail. Russia's best overall wheat yields generally occur amid cooler Mays in the south, sometimes offsetting moisture deficits.

Another potential saving grace for southern Russian crops is well above-average soil moisture so far this year. Soil moisture is also solid in regions that grow spring wheat, which makes up about 27% of Russia's total wheat harvest. July is the critical period for that crop to maximize yield.

Russian agricultural consultancy Sovecon two weeks ago estimated the 2024 wheat crop at 93 million metric tons, close to last year's levels, and other analysts hold a similar view. The U.S. Department of Agriculture will provide its first official forecast next Friday.

Crop losses in Russia could be a boon for other global wheat suppliers, though alarms are not yet sounding as Russia has recently been exporting record volumes. Russia has doubled its wheat crop over the last 20 years and is now responsible for a fifth or more of all wheat exports.

Years ago, Russian wheat production had an unpredictable reputation due to volatile yield swings, though results have been steadier and higher in recent years. It has been a while since Russia had a wheat disaster, but the 2021 harvest came in about 10 million tons (12%) below initial expectations on unfavorable weather.

That eased exportable Russian supplies in the 2021-22 season, though other exporters picked up some of that slack, especially as prices surged following the Ukraine invasion. India, an on-and-off exporter, shipped a huge record of 8 million tons that year.

India's wheat stocks are now at a 16-year low, and the country may be forced to import wheat for the first time since 2017. India imported 6 million tons of wheat in 2016-17 and about 1.2 million in 2017-18.

Australia, which exports most of its crop, had a record wheat harvest in 2021-22 and was the No. 2 exporter behind Russia. Australia's wheat output heavily depends on global weather patterns, and the recent El Nino is not ideal.

Australia's recently harvested 2023-24 crop was about a third smaller than in the prior year, and exports are set to fall a similar degree, by more than 11 million tons. Major exporter France is also facing issues with its crop, and the European Union's upcoming wheat harvest could be a four-year low.

The United States, which was last the world's leading wheat exporter in 2016-17, has sold an above-average amount of wheat for export in the 2024-25 season starting June 1. That could help U.S. wheat shipments rebound off a 52-year low in 2023-24.

Bank of Canada (BOC) Governor Tiff Macklem delivered his opening statement before the House of Commons Standing Committee on Finance on May 2, with the key points as follows.

Monetary policy is working. Total consumer price index (CPI) and core inflation have eased further in recent months. We expect inflation to continue to move closer to our 2% target this year. Economic growth appears to be accelerating. We expect GDP growth to remain solid this year at 1.5% and strengthen further in 2025 to 2% as strong population growth is increasing consumer demand and labor supply. Household spending is expected to recover throughout the year, and government spending is also contributing to economic growth.

Price increases are slowing across most major categories in March, but housing cost inflation remains high and is the largest contributor to headline inflation.

The three-month core inflation rate is well below the 12-month core inflation rate, suggesting some downward momentum, and core inflation is expected to continue its gradual slowdown. CPI inflation is likely to remain around 3% in the coming months. Inflation is expected to fall to 2.5% in the second half of this year and reach the 2% target by 2025.

Data since January have reinforced our confidence that inflation will continue to come down even as economic activity strengthens. Our key inflation indicators are moving in the right direction, and recent data suggest that economic growth is picking up.

We are getting closer to a rate cut. We just need to see it for longer to be confident that progress toward price stability will be sustained.

In the coming months, we will be closely watching the evolution of core inflation. We remain focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour as indicators of where inflation is headed.

Asian stocks rallied on Friday after Apple's record $110 billion share buyback plan lifted the tech sector, while the yen put more distance from recent 34-year lows to cap a tumultuous week that saw suspected interventions from Tokyo.

With markets in Japan and mainland China closed on Friday, regional trading activity is likely to be subdued as traders look ahead to the U.S. nonfarm payrolls data later in the day.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 1.5% and was set for a second straight week of gains. Hong Kong's Hang Seng Index spiked 2% higher, on course for a 5% gain for the week.

The yen strengthened 0.55% to 152.80 per dollar in early trading on Friday, having started the week by touching a 34-year low of 160.245 per dollar on Monday.

In between, traders suspect the authorities stepped in on at least two days this week and data from the BOJ suggests Japanese officials may have spent roughly $60 billion to defend the beleaguered yen, leaving trading desks across the globe on high alert foe further moves by Tokyo.

A series of Japanese public holidays as well as Monday's holiday in the UK - the world's biggest FX trading centre - could present a possible window for further intervention by Tokyo. Japanese markets are also closed on Monday.

The yen has weakened for over a decade, largely due to low Japanese interest rates drawing funds out of the country towards higher yielding assets in other large economies including the United States. Despite the sizable bounce in the yen this week, it is still down 8% against the dollar this year.

While there has been two bouts of suspected MOF interventions, another $20 billion of yen buying on Friday would really scare off the yen shorts and get dollar/yen below 150, Chris Weston, head of research at Pepperstone, said in a note.

"Good things come in three’s, and while another bout of intervention seems unlikely, the MOF/BOJ could turn momentum trader and shake things up one last time ahead of nonfarm payrolls."

The dollar index, which measures the U.S. currency against six peers, was last at 105.25. The index is set to clock a 0.7% decline for the week, its worst weekly performance since early March.

The Federal Reserve this week left rates unchanged and signalled that its next policy move will be to lower its rates, though chair Jerome Powell noted that recent strong inflation readings have suggested that the first of these cuts could be a long time in coming.

"The Federal Reserve has clearly had its confidence shaken by the recent string of disappointing inflation releases," said Susan Hill, senior portfolio manager at Federated Hermes.

While the bar for moving back to a tightening bias is quite high, it seems likely that the current 5.25%-5.50% Fed Funds target range will be unchanged for the next several months, Hill said.

U.S. stocks ended higher on Thursday, with tech heavy Nasdaq advancing 1.5% buoyed by chip stocks.

In after-market hours Apple reported quarterly results and forecast that beat modest expectations and unveiled a record share buyback program, sending its stock up almost 7% in extended trade.

U.S. economic data on Thursday also showed the labour market remains tight, ahead of key government payrolls data due later on Friday. Economists polled by Reuters forecast 243,000 jobs, with estimates ranging from 150,000 to 280,000.

In commodities, U.S. crude rose 0.39% to $79.26 per barrel and Brent was at $83.98, up 0.37% on the day.

Spot gold was last $2,304.16 an ounce and were set for second straight weekly decline.

1. Bond traders bet on the Fed's first rate cut in November.

2. Eurozone saw strong wage growth in Q1.

3. Oil prices are volatile on increased stocks and a potential truce deal.

4. BOC Macklem says the central bank may start cutting rates soon.

5. U.S. initial jobless claims held steady last week.

6. Production cuts may be extended if oil demand fails to pick up.

U.S. short-end Treasuries posted their best two-day gains since January after the Federal Reserve's May interest rate decision. The yield on the 2-year Treasury note, which is the most sensitive to interest rates, has fallen by 17 basis points to 4.87% from Tuesday's yearly high of 5.04%. Fed Chairman Jerome Powell spoke in a less hawkish tone than expected and he signaled that a rate rise was unlikely. A rate cut is expected once economic data provides clear evidence that inflation is falling. Bond traders are betting on the Fed's first rate cut in November.

Agreed pay in the Eurozone may have failed to slow in the first quarter. A report on Thursday shows that pay is expected to have risen by 4.5% year-on-year in the three months to March, which is based on data from most of the EU's largest economies. This is largely attributable to accelerating pay growth in Germany, which rose by 5.6% because the country's public-sector workers received large one-off paychecks.

Oil prices fluctuated in a narrow range. A rise in U.S. crude stockpiles and a possible Middle East cease-fire curbed the rebound following yesterday's sharp drop. WTI crude futures fell below $79, hitting their lowest in more than a month, as Hamas said it was "positively" studying current ceasefire proposals that could ease geopolitical tensions.

U.S. oil stockpiles rose last week by the most since February. Oil prices have fallen by more than 5% this week on signs of easing tensions in the Middle East, including the prospect of a historic deal between Washington and Riyadh. Stock market declines in recent days have also weighed on crude oil as traders shy away from risky assets.

Bank of Canada (BOC) Governor Tiff Macklem said at a meeting of the Treasury Board on Thursday that inflation is showing signs of moving downward again, signaling that the time for a rate cut is near, but the central bank needs to be more confident that the trend can be sustained.

Canada's economic growth has slowed, with an oversupply of commodities, steady wage growth, and a cooling labor market all helping to drive prices down. These key inflation indicators that the central bank is watching are moving in the right direction.

With inflation falling and staying low, the Bank of Canada may soon start cutting rates.

U.S. initial jobless claims stabilized at a low level of 208,000 last week. Initial jobless claims have been hovering between 194,000 and 225,000 so far this year. This shows that the labor market is still fairly tight and may continue to support the economy in the second quarter.

For now, even though labor demand is weakening and job openings fell to a three-year low in March, layoffs remain low as companies are holding on to their employees after they struggle to find workers during and after the pandemic. Continued jobless claims were at 1.774 million last week.

OPEC+ has not yet begun talks on extending its voluntary production cut of 2.2 million barrels per day (bpd) beyond June. Three sources from OPEC+ voluntary cutters said they may extend the cuts if demand fails to pick up. A voluntary 2.2 million bpd production cut by some OPEC+ members is set to expire at the end of June. The Middle East conflict has provided support for oil prices this year, but concerns about economic growth and high interest rates have also weighed on prices.

One source said the cuts could be extended through the end of the year, while another said OPEC+ would need to see an unexpected jump in demand before making any changes. Two other OPEC+ sources said formal talks had yet to take place, with one saying OPEC+ had not yet made any decision on extending the cuts.

UTC+8 20:30 U.S. Non-farm Payrolls (Apr)

UTC+8 22:00 U.S. ISM Non-manufacturing PMI (Apr)