Forexlive Americas FX news wrap: PCE inflation comes down and any decline is good

The financial markets were anxious about the US core PCE inflation data. Not only are traders laser focused on inflation but they know the PCE is the "favored" inflation indicator for the Fed.

The core PCE declined from 5.2% to 4.9% in April while the headline came in at 6.3% vs 6.6%. Admittedly, that is still higher than the Fed wants to see, but with the economic news this week for the most part pointing to a slowdown of growth, confidence and even some chinks in employment (see the list of payroll cuts underway at tech giants), the hope is it has a corresponding decline in inflation (and inflation expectations) as well.

Of note today within the economic data today was inventories rose by 2.1%. That is the 3rd straight month with gains of inventories of over 2%. With the economy in the US shifting more toward services and things like vacations, that could be the antidote for supply chain issues of goods. If inventories continue to build, that could lead to a shift lower prices for some goods.

Also today, the Michigan consumer sentiment index came in at 58.4 vs. 59.1 estimate. The sentiment index is the lowest since 2011. The expectation index is also near the low for the year which was the lowest level since 2011 as well. So, although the consumer may be flush from gains and things like housing in stocks, concerns about the levels of the housing market, and lower stock prices are having an impact on the margin. Consumers are not likely to cancel their vacations, or not go to that Elton John or Michael Buble concerts, but they may downshift other spending habits especially if oil prices remain elevated. This weekend, there will be a lot of people out for dinner and to check out a movie as Top Gun is expected to open to large crowds in theaters. Oh....the good ole days.

Having said that, the Fed is still walking a tightrope as they try to bring the economy down softly.

Still to come:

US jobs will be released next Friday. Traders will be hoping for a softer number. The stock market will be hoping for a softer number (we are in an environment where slower economic data is good for stocks at least for now). The expectations are for a gain of 325K which is still rather robust with the current unemployment rate at 3.5%
QT. The Fed has not started its bond selling program. However, the last 3 weeks have seen a decline in the 10 year yield from 3.203% to 2.74% currently. At least if the Fed is selling treasuries bought in 2020 and 2021 when 10 year yields were between 0.6% and 1.8%, they won't be selling them at the high yield from 3 weeks ago at 3.20%, but at a lower 2.7%. Will treasury and mortgage-backed selling push yields back to the upside? PS, at least part of the balance sheet decline will be the maturing of short-term issues which there seems to be a decent amount of demand.
Russia/Ukraine war. Oil prices rising up $150 is not out of the question as oil supplies remain tight and the risk of a more escalation increases especially if it starts to impact things like food that people rely on to live.
China and China Covid policy. The bad news about China Covid policy is that they shut down their economies which has the potential to exasperate supply chain issues, and inflation. The good news is demand for goods seems to be lower. Apple spoke this week about lower iPhone sales. That might be a good thing. If demand was strong, the supply might not been there and could push prices even higher.

These things (and more) will have to be worked out in the markets. However, for this week, the focus was on lower inflation, lower yields, lower stocks and a lower dollar too.

In the forex market today, the NZD was the strongest and the USD was the weakest.

The NZD gain may have been a delayed reaction to 50 basis point hike by the RBNZ on Wednesday. At the meeting: in addition to raising rates by 50 basis points, they also raised expectations for rates going forward. As a reminder,

In September 2022, the RBNZ expects the official cash rate to be 2.68% (previous 1.89%).
By June 2023, the RBNZ expects the official cash rate to be 3.88% (previous 2.84%).
In September 2023, the RBNZ expects the official cash rate to be 3.95% (previous 3.1%).

That 3.95% is expected to be the peak says the RBNZ. The peak was previously seen at 3.35% by the RBNZ.

After initially moving higher on Wednesday, the NZDUSD moved lower but found support buyers against the rising 100 hour MA (see post here). The pattern continued on Thursday. Today however, the NZDUSD moved up 0.91%. It was the biggest mover of the day. US dollar selling also contributed as the string of "lower inflation" type numbers, and a general flight out of the safety of the greenback, pushed the greenback lower.

A look at other markets showed:

Spot gold rose $3.16 or 0.17% at $1853.49
spot silver rose $0.11 or 0.5% at $22.10
WTI crude oil remains elevated at $115.19 up $1.10 or 0.96%
The price bitcoin is trading below the $29,000 level at $28,813.
Natural gas which traded to a high this week of $9.43 in at the highest level since August 2008, backed off into the weekend and is closing at $8.70. That still higher by 6.73% this week, but as I said it could've been worse

In the US stock market, the major indices broke there string of multi-week declines in grand fashion by rising over 6% this week alone. Below are the gains of the major indices for the week:

Dow industrial average rose 6.24%
S&P index rose 6.58%
NASDAQ index rose 6.84%
Russell 2000 rose 6.46%

In the US debt market today, the yields were little changed, but are down sharply from the cycle highs reached in the month of May:

2 year 2.484%, +0.2 basis points. The cycle high yield reached 2.857%. The yield has moved down -37 basis points.
5 year 2.724%, +1.2 basis points. The cycle high yield reached 3.107%. The yield has moved down -38 basis points
10 year 2.743%, -0.8 basis points. The cycle high yield reached 3.203%. The yield has moved down -46 basis points..
30 year 2.972%, -1.2 basis points. The cycle high yield reached 3.309%. The yield has moved down -34 basis points

For the trading week:

2 year fell -10.3 basis points
5 year fell -8.0 basis points
10 year fell -4.2 basis points
30 year fell -2.0 basis points

Overall, if the mood of investors is measured by things like stock markets and interest rates, this week was a good week, a great week. Thank you for you support and your patience with me this week as Adam had to deal with a power outage for 3 consecutive days as result of violent storms last Sunday (he was dealing with all that goes with that).

So happy days were here again after 7/8 weeks of stocks moving lower and yields mostly moving higher.

However, the mood for humanity continues to be somber as result of the continued Russian aggression in Ukraine where old, young, men, and women are dying senselessly, and as a result of the other senseless killing of nineteen 10-year-olds, and their two teachers in Uvalde, Texas (and the death of 14 in Buffalo, New York.

I will never understand the thought process, no matter what was written down on a piece of paper nearly 250 years ago.

I have always said - and believed -that when my time comes, I don't want to remembered by my party affiliation, by the country that I was born, or even by the religion that I practice. I don't affiliate with any particular ideology, I just happened to be born in America and my parents were Catholic so that's how I was raised. I do love my home and country. I love my faith, but I love something grander.

What I would like to be remembered as is a person who appreciated that life is a gift from God (if you have a different God than mine that's okay I don't care). That God gave me this life filled with choices. Those choices - kinda like trades - are either this way - the right way, or that way - the wrong way. The right way, is to love one another. The wrong way, is to not love one another.

None of us are perfect and I am in that bucket. We all have losing trades.

There are times when I judge. There are times when I choose not to love, to hurt someone.

However, if I am truly grateful for this gift called life, I can get back on the trend. I can attack the good trends in life with a focus on love.

I will look to enjoy the weekend, and I wish you all a love and peace filled weekend as well. However, I will also remember and pray for the children, the men and women, young and old that have lost their gift of life early for senseless reasons, and for their families who are left with a void that can only be filled with faith.

Love one another...