With the Federal Reserve to release their most recent prescription on what they see as the optimal path of monetary policy later today, equity markets traded with a sanguine tone throughout the course of yesterday’s session. The slight misses on Consumer Confidence and the Case Shiller Home Price Index did little to alter the markets’ perception that we would see the Fed drastically change their tone from the previous meeting, with the confidence of continuation from the FOMC pushing the S&P higher by 0.48%, while the VIX traded heavy and slipped into the high 13% area.
The Loonie managed to snap out of its recent trading range, yielding solid bid tones as weakness on its crosses generated the buying interest. USDCAD sunk below the 1.10 handle early in the session, and was unable to find its ground as the pair pivoted in the mid-1.09s as Governor Poloz addressed the House of Commons in Ottawa.
As expected, the Bank of Canada head didn’t waver much from what we’ve heard lately, continuing to reiterate the Central Bank remains neutral on the direction of interest rates, yet took a slightly dovish tone in parlaying that information. Poloz noted that even after the roughly 10% percent depreciation in the Canadian unit, the Loonie still remains high by historical standard, also adding that it shouldn’t stymie overseas capital expenditures by a noticeable amount. Furthermore, Poloz conveyed that rate cuts for the Canadian economy could still be a possibility if exports didn’t pick up and inflation remained below target for a sustained period of time, although he did say that any cut in rates would have to be weighed against the risk of worsening consumer debt levels and household imbalances. The Loonie saw only a muted reaction to Poloz’s comments to the House of Commons, with traders not gleaning anything different in terms of stance towards the future path of monetary policy then what has been telegraphed previously.
The overnight Asian session saw subdued optimism in financial markets, despite a number of macro-economic indicators for Japan that missed expectations to the downside, while the Bank of Japan made no changes to its stance towards monetary policy. Industrial output came in softer than expected with only a 0.3% increase after last month’s 2.3% drop, with manufacturing PMI also disappointing by sliding below the all-important 50 level. The BoJ’s decision to keep monetary policy unaltered was widely expected, as we feel it will be closer to the end of Q2 or early Q3 before some of the rough affects of the sales-tax increase push the BoJ to expand their stimulus campaign. USDJPY was pressured lower after the announcement, yet the pair has been able to claw back some of its earlier losses and now trades in the mid-102s before the North American data releases.
Turning our attention to Europe, the restrained optimism that had the Nikkei finish its session higher by 0.11% has the major bourses in Europe slightly positive ahead of the North American cross. EURUSD has mustered a comeback from yesterday’s fall and has managed to work its way back into the mid-1.38s after the flash CPI data for the zone didn’t come in as soft as traders had expected given the miss in German CPI witnessed yesterday. The flash reading for April in the common-currency bloc edged up to 0.7% from the 0.5% registered in March, and lessens the prospects the European Central Bank will choose to act at their May meeting given that the core reading was in-line with estimates at a print of 1.0%. The increase in forward looking inflation expectations has caused the Euribor curve to steepen, which has traders looking to cover off weaker short positions in the EUR, pushing it higher against the big dollar prior to the ADP Employment Report and the Advanced GDP release.
Heading into the North American open, the economic calendar is chalked full of important releases. The reading on private employment in the US as tracked by payroll company ADP was just released, and is usually a fairly good bellwether on helping market participants gauge how the Non-Farm Payrolls on Friday will shake out. Expectations had been for the private sector to add 210k jobs over the month of April, but the actual print beat forecasts and showed 220k new jobs had been created over the previous month. The good news for the American economy was that goods-producing industries continued to create jobs, with construction and manufacturing accounting for roughly 20k of the new positions as the weather starts to warm up and companies start hiring. Interesting to note is that the ADP number has under-reported the Non-Farm jobs numbers (on the private side) for the last few months, so heading into Friday this could bode well for a strong NFP report.
Also of interest, readings on GDP growth from both North and South of the 49th parallel were also released earlier this morning. The Canadian report showed that GDP growth expanded by 0.2% over the month of February, bang in line with what economists had estimated, but the real surprise was the drastic drop in GDP growth for their neighbours to the South. The Advanced reading on GDP growth for the American economy in Q1 showed only a 0.1%, a sharp drop from the 2.6% registered in Q4, and far below the 1.2% which had been expected. The main contributors to the disappointing reading were a decrease in exports and nonresidential fixed investment, both of which struggled in the first quarter of 2014. The silver-lining of the report was that personal consumption expenditure held up with a 3.0% increase, and absent of the decent consumer demand Q1 GDP would have been a lot worse.
After the dust settled, S&P futures were little changed, mildly negative before the opening bell. Currencies saw a bit a knee-jerk reaction to the US GDP figures, with USDJPY sliding back into the low-102s, EURUSD reigniting into the high-1.38s, and USDCAD falling back into the mid-1.09s after levitating higher on the back of the stronger than expected ADP report.
As we get set for the remainder of the session, the big event risk still on the docket is the FOMC interest rate statement to be released at 14:00 EST, although we expect that compared to recent meetings, this one will likely pass without major implications for market direction. The statement does not carry with it a press conference from Janet Yellen or updated economic projections from the board, so it is likely the most we will see is a slight tweak in language in the statement itself, potentially referencing some softer than expected housing indicators for the first quarter of the year. Outside of the housing market, the US economy has picked up after the relatively slow start to the year, thus balancing any cautious tones from the Fed in its statement later today. That being said, we modestly favour being long-USD heading into the release this afternoon, as the confirmation the economy is developing as expected and the pace of asset purchases will be slowing down by another $10bn/month should help underpin the DXY.
Also to note, while April was choppy for price action in USD equities, the major indices generally underperformed other developed markets, and therefore signals month-end re-balancing from international hedgers could see a slight bid-tone in the USD.
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