The robust run of US macro data in 2024 has been telling markets that we are going to need to wait for rate cuts, and now Jerome Powell has essentially reinforced the point. Speaking this week, the Fed Chairman has delivered the message that the wait is taking longer than expected to see progress on inflation back towards the two percent target. Whilst this wasn’t exactly groundbreaking news we received, US treasury yields ticked higher on Powell’s remarks on the reality that the wait will continue to see interest rate relief.
The USD continues its run of good form as the star performer in the currency market, with the greenback racking up some further gains against its counterparts. The Dollar Index (DXY) maintains a hold above the 106 level on expectations that the current yield advantage the Dollar holds over many other major currencies looks set to be extended. Upside bias remains on the USD until such time as US macro data starts to cool off and investors see a rate cut in sight. But for the time being, courtesy of US economic indicators holding up much better than expected, other currencies remain at the mercy of the USD.
Including the Japanese yen, which keeps sinking further and further into uncomfortable territory as far as Japanese officials are concerned. With the threat of intervention in the air, there remains a figurative standoff between traders and Japanese authorities, with the question being how low will the yen be allowed to go before we see intervention to defend the yen against the barrage of rising US bond yields.
Gold has been ‘steadying the ship’ in the last few sessions with the precious metal in consolidation mode below the $2400 level. There remains solid buying flows for gold from a safe haven perspective, however the move higher in the USD and treasury yields has at least moderately put the brakes on the precious metal. The strong USD has made gold more expensive to buy (for non US investors), but there appears to be enough underlying demand to keep the gold price propped up despite the headwinds created by the greenback trading at these levels.
Oil momentum slowed marginally with no major new developments between Iran and Israel. Energy markets were also hindered by the Chinese economic data figures this week which were sluggish at best. Chinese GDP produced a beat to the upside (5.3% versus 4.8% expected), though Industrial Production and Retail Sales figures both missed the mark, raising questions over demand appetite moving ahead in coming months.
Looking ahead, we have more Federal Reserve members due to deliver remarks, and investors will be waiting to see if other members echo the sentiments of the Fed Chairman when it comes to the timeline for interest rate cuts and the path of inflation. Meanwhile, US Q1 earnings season continues, with the focus being on the earnings outlook for the rest of the year against the potential backdrop of interest rates staying higher for longer.
