Daily Market Outlook, May 1, 2024

Munnelly’s Macro Minute…

“Market MAYDAY, Will Powell Come To The Rescue?”

Asian markets are trending downward this morning, a reaction to the previous day's downturn in both European and US markets. These shifts appear to be driven by a larger-than-anticipated increase in a key indicator of US labor costs during Q1, fueling concerns that today's US monetary policy update may adopt a more hawkish stance. In the UK, the Nationwide index for April revealed a second consecutive monthly decline.

Today's US monetary policy update by the Federal Reserve occurs amidst significantly altered circumstances compared to its last update in March. Even then, market expectations regarding the extent of anticipated interest rate decreases in 2024 had been substantially reduced compared to the beginning of the year. However, Fed Chair Powell previously hinted at potential interest rate cuts in June. Given subsequent surprises in inflation and certain activity measures, such a scenario now appears less likely. Market probabilities for a June cut are now below 10%, with the first anticipated move not fully priced in until December.In light of these developments, Powell is expected to adopt a more hawkish tone today. The pivotal question is the degree of this shift. While he can rightly argue that Fed policymakers had cautioned about the volatile nature of the path towards lower inflation, consistently upbeat inflation data may be harder to dismiss as mere anomalies.This particular meeting does not include new forecasts from Fed policymakers, meaning no fresh interest rate projections. At the previous update, Fed policymakers discussed the possibility of three cuts this year, which now seems less probable. Powell is unlikely to offer an alternative forecast at this stage, instead emphasizing the need for caution in cutting rates until more supportive data, particularly regarding inflation, emerges. While his message may lack specificity on the interest rate trajectory for the remainder of the year, it is likely to signal a higher bar for rate cuts.One reassuring aspect is Powell's probable avoidance of suggesting an upward shift in interest rates. Given the market's existing expectation of a cautious Fed, today's update may not contain overly alarming elements. However, it is also unlikely to provide strong market support.

Prior to the Fed update, the forecast for the ISM manufacturing survey in April suggests it will surpass the 50 expansion threshold for the second consecutive month. This would signify a crucial indication of a rebound in activity within a previously sluggish segment of the economy. In the UK, the April manufacturing PMI, expected to remain unchanged in its second reading, is another significant metric to watch.

Overnight Newswire Updates of Note

Fed Set To Signal It Has Stomach To Keep Rates High For Longer
Senate Passes Russian Uranium Import Ban, Sends Bill To Biden
Israel Set To Send Delegation For Last-Chance Cease-Fire Talks
RBNZ Warns Risk Of Sticky Inflation Keeping Global Rates High
NZ Q1 Jobless Rate Hits Three-Year High As Interest Rates Bite
Extreme Bond Market Shorts Gamble On Hawkish Powell Pivot
Bitcoin See Worst Month Since FTX Crash, ETF Demand Cools
Oil Extends Fall On Mideast Cease-Fire Prospects, US Inflation
Traders See Biggest Fed-Day Move In S&P Since 2023, Citi Say
Amazon Reports Strong Cloud Unit Sales On Rising AI Demand
AMD Gives Tepid Forecast In Weak Demand For Gaming Chips
Tesla Axes Most Of Supercharger Team In Blow To Other Autos

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0600-10 (1BLN), 1.0650 (1.2BLN), 1.0680-85 (1.2BLN)
1.0700-05 (1.2BLN), 1.07450-60 (1.2BLN), 1.0795-1.0805 (1.5BLN)
GBP/USD: 1.2335 (552M), 1.2350 (816M), 1.2425 (301M)
AUD/USD: 0.6400-15 (723M). 0.6445-50 (480M), 0.6495-0.6500 (1.2BLN)
0.6530-35 (400M), 0.6545-50 (1BLN)
NZD/USD: 0.5845-55 (1.1BLN), 0.5940-50 (2.9BLN)
USD/CAD: 1.3800 (326M), 0.3825 (279M)
USD/JPY: 155.75 (941M), 156.50 (250M), 156.75 (401M), 158.00 (250M)
FX options are set for increased volatility in the EUR/USD pair due to the upcoming Fed policy decision. The overnight FX option expiry now takes into account the potential impact of the Fed's statement and press conference, which could result in increased volatility. The implied volatility for EUR/USD has surged from 8.0 on Tuesday to 12.0 on Wednesday, indicating heightened risk. Implied volatility is a measure of the expected fluctuation in the exchange rate and is used to determine the premium for options. The premium/break-even for a straddle is now at 53 USD pips in either direction, compared to 35 USD pips previously. Other expiry dates are also influenced by the Fed, NFP event risk, and a stronger USD. The benchmark 1-month expiry has rebounded from Monday's 6.1 to 5.9 on Tuesday. Overall, FX options are supported by a stronger USD and the potential volatility from the Fed and NFP events.

CFTC Data As Of 26/04/24

Japanese yen net short position is -179,919 contracts
Euro net short position is -9,989 contracts
Swiss Franc posts net short position of -42,562 contracts
British Pound net short position is -26,233 contracts
Bitcoin net position is 0 contracts
Equity fund managers cut S&P 500 CME net long position by 16,969 contracts to 833,074
Equity fund speculators trim S&P 500 CME net short position by 9,927 contracts to 183,864
Gold NC Net Positions: $201.9K vs previous $202.4K