By Stuart Talman, XE currency strategist
The market has been struggling to find direction over the past few trading days, mixed US corporate earnings and mixed macroeconomic data causing a push-pull effect for US equities and other risk assets.
As we were publishing yesterday’s morning update, US equities were staging an impressive rally from early session losses (S&P 500 down ~1.70% at lows), shrugging off Microsoft’s dour outlook to end Wednesday’s session flat.
Heading into the New York afternoon, Thursday’s session is doing the opposite.
US stocks opened higher, largely due to Tesla’s 4Q earnings beat, exceeding both top and bottom line estimates. There were however concerns – profit margins are being squeezed sales growth is slowing.
The Nasdaq was up close to 2% shortly after the open, now up three-quarters of a percent as we release this morning’s update.
Many risk assets, including the New Zealand dollar are trading within close proximity of recent highs, but are looking a tad weary at these levels, unwilling to push up through key upside resistance.
For the Kiwi, that zone is located between 0.6500/30.
Seven month highs were marked a 0.6530 last week....this week the NZDUSD has ranged between 0.6440 and 0.6525, again failing to maintain a foothold above 0.65 through Thursday, retreating from north of 0.6510 to 0.6560.
Although, it could well be a case of recharging the batteries ahead of another leg higher given the upside bias remains intact.
Next week should prove pivotal, providing the impetus for US stocks, the Kiwi and Aussie dollars and other risk assets to either push higher or end January’s surge. An interest rate decision from the Fed (+25bps widely expected) and US jobs numbers are the two headline events. The ECB and BoE also meet – both expected to raise by 50bps.
Financial conditions have been easing.
The Bloomberg Financial conditions index which tracks the overall level of financial stress in the US money, bond and equity markets is now back to similar levels seen last January. Back then, the Fed funds rate was near zero, the S&P500 had just logged its all-time record high.
Whilst inflation has been moderating, it remains at elevated levels.
Investor optimism, as measured by the Bloomberg Financial Conditions Index, does not sit well with the Fed. We therefore may see Jay Powell and his colleagues once again try to pushback, negatively affecting sentiment to drive US stocks lower.
In these extraordinary times, the Fed put has pivoted to a Fed call.
Bringing our attention back to the current week, Thursday’s US data dump has delivered positive numbers for the US economy. The headline data point – 4Q US GDP came in stronger than expected (2.9% vs 2.6%), whilst signalling that inflation pressures continue to ease.
Durable good also exceeding expectations and US jobless claims at their lowest since April raises hopes the Fed can thread the needle, delivering a soft landing for the US economy.
The data flow out of the US continues to be mixed. Forward looking indicators are flashing recession signals.
Earlier in the week, the Conference Board’s Leading Economic Index (leading indicator intended to forecast future economic activity) fell for the 10th month in a row. Such a streak of consecutive monthly declines has led to seven of the last eight recessions....the only outlier being the pandemic induced recession. No indicator could have predicted that one.
The yield curve is at historically inverted level. The 3month-10year yield curve inversion has one of the best track records of predicting a US recession – a 100% success rate over the past decade of calling a recession.
Offsetting these warning signs – the jobs market. Still tight, still robust.
At some point this will change....recent highly publicised tech lay-offs suggesting it already has.
The unemployment rate will tick higher, consumer spending will plummet, the recession will occur.
The question is – will it be a recession of material consequence?
The answer likely to be received in 2H 2023 or early next year.
To the day ahead, the Fed’s preferred inflation gauge, Personal Consumption Expenditure (PCE) is the day’s major data point. Core PCE peaked at 5.2% in September. A fall from 4.7% to 4.4% is expected for the December reading.
The Fed has a preference for PCE data, considering it a broader and more robust measure of inflation (relative to CPI). PCE updates weightings more frequently, includes urban and rural prices and covers items bought on behalf of consumers as well as goods and services consumers buy directly.
You know the drill by now – a softer than expected PCE result, US stocks, NZD, AUD and other risk sensitive assets push higher. A stronger PCE fuels concerns that inflation is sticky, the Fed must keep the foot on the pedal, risk assets retreat.
Barring a PCE shock expectations are for the Kiwi to end the week within close proximity of 65 US cents.
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Stuart Talman is Director of Sales at XE. You can contact him here.
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