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With another  day free of  North American macro-economic releases, financial markets  instead honed their focus on the release of the minutes from the last FOMC meeting, trying to glean any hints  of how  the future course of monetary policy might look  in the United States.   The release of  the minutes  failed to bring with it any surprises  as to the discussions  that took place during the two-day meeting, with the members leaving their medium-term economic outlook unchanged, continuing to attribute the weakness in Q1 growth to the weather and other transitory factors.   A number of participants  were of the  opinion that the unemployment rate  understated the slack in the labour market and that the slowdown in the housing market could prove to be persistent; however, this was not materially different that what we’ve heard from Fed speakers since the meeting occurred.   In addition, there was a special joint meeting that was held between the FOMC and the Board of Governors to discuss an exit strategy for their unconventional monetary policy, although it was stressed this was for prudent planning purposes and was not an indication normalization was imminent.   In this regard, the Committee is still in favour of continuing to test policy tools that would be involved with an exit strategy, but no new policy decisions were made.   That being said, in subsequent meetings we  may see  further clarification around an exit strategy, as  a number of participants favoured providing more information around the length of time the reinvestment of  Treasuries and MBS will last.

Although the FOMC minutes  didn’t offer much in the way of surprises on the policy front,  they also didn’t deter  equities from the rally staged earlier  in the day, clearing the way for the S&P to recoup all of  Tuesday’s  losses  and finish the day  higher by 0.81%.   Cheering along the rally in equities,  the VIX  cratered to a 9-month low below the 12% level,  as near-term protection was unwound and investors got even more complacent.   The  USD strength that was exhibited  earlier in the session was faded  after the minutes were released, though the DXY  ended the session unchanged and  USDJPY managed to skip back above its 200-day moving average.   The Loonie traded with a heavy tone as a result of GBP and USD strength early in North American trade, but with the economic event risks of retail sales today  and CPI  on Friday, position squaring and corporate selling interest drove  USDCAD back to unchanged just above the 1.0900  handle.

It is interesting to see the VIX move to lows not seen since mid-2013, especially considering the wall of worry from a geopolitical standpoint that markets continue to discount.   Overnight pro-Russian separatists attacked a military check-point in Ukraine that left 11 dead and more than twice that wounded, while the martial law that was imposed in Thailand just two short days ago has now turned into a military coup (something the army promised would not happen) with the army detaining opposition leaders and taking control of the administration.   The Thai Baht has weakened this morning after the news of the coup, but still remains below the lows that were seen in January when emerging markets saw a large exodus of investment capital.

The overnight Asian session saw equities exhibit mixed performance, with the Nikkei playing catch-up to the gains seen on Wall Street and posting an increase of 2.11%.   The strong performance from the Nikkei helped USDJPY continue its recovery, with the pair cautiously edging back into the mid-101s.   Chinese equities didn’t fare as well as their Japanese counterparts, with the Shanghai Comp declining by 0.18% despite the HSBC Flash Manufacturing PMI coming in at a five-month high of 49.7 for May, exceeding estimates of a 48.3 print.   The report showed that there are some tentative signs of stabilization in the region with new orders back in expansionary territory, and output prices increased for the first time in six months, which corroborates the narrative of a soft landing for China, and one which result in a stabilization at a slower pace of growth than we’ve seen in the past.

Over in Europe, the flash PMI readings for the Eurozone were reported this morning, with the composite reading of activity in the manufacturing and service sectors coming in bang-on expectations at 53.9.   This was a result of a slightly weaker than expected survey from the manufacturing sector, while service activity picked up the slack and came in more optimistic than forecast.   The report did also highlight the  divergence between purchasing manager activity in Germany and France, with the latter  seeing manufacturing and services sink  back below the 50 boom/bust level, while  activity in  Germany remained resilient and continues to  keep the ship that is the Eurozone afloat.   While these readings will have little influence on European Central Bank  policymakers at the next  meeting in June, it does raise concern as to how reliant the rest of the zone is on the continued strength of the German economy.   As such, EURUSD  has unveiled a slight offer-tone to  early morning trade, with  the pair  easing  into the low 1.36s.

North American equity futures are pivoting right around the  UNCH figure as markets prepare for the opening bell, with investors little phased by the political developments overseas and  instead focusing on the mediocre global  PMI readings.   The  commodity complex has been given a boost this morning, with  metals such as gold, silver, and  copper all putting in strong gains before the North American open.   WTI  is a little weaker so far, but finding support just below the $104/barrel level.   The Loonie has come under a bit of pressure as well, struggling after  headline retail sales fell by 0.1% in March  on expectations we would see a 0.3% increase.   After stripping out the more volatile  auto sales measure,  core retail sales increased by 0.1%, but this was still weaker than the 0.4% gain that had been forecast by analysts.   Besides the notable weakness in autos, sales at clothing  stores fell by 1.4% in March, marking the third time in four months the sector has seen a fall in  sales.   USDCAD saw a slight kick up after the release, but again has seen fairly strong resistance  before reaching the mid-1.09 mark.

After the release of retail sales,  the excitement for Loonie traders will continue, as the change in  consumer prices over the month of April is set to  drop first thing  tomorrow.   With the Bank of Canada putting  so much emphasis  on the constructive development of CPI, the release of  tomorrow’s  number will earn a greater prominence in shaping traders expectations of when the first rate hike can be  expected from the BoC.   As of right now it is expected the BoC will be behind the  BoE and Fed in terms of raising rates, however  the progression in terms of  export growth the  level of consumer prices will continue to influence and  shape those expectations.    Tomorrow’s  CPI numbers are expected to see the core reading tick up to 1.4% on a y/o/y basis, a slightly faster pace than the 1.3% registered  in March,  and a  rate of change the basket has  had a challenge  surpassing since mid-2012.   The weaker than expected retail sales print from earlier this morning  increases the  chance of a  downside surprise with  CPI in April, as  mediocre consumer demand combined with  intense competition  in the retail space could keep a lid on prices.

Further reading:

EUR/USD May 22 – Little Movement As Euro Manufacturing PMIs Slip

Higher rates are in order