After the first day of the week saw the DJIA up over 200 points and the S&P 500 index more than 20 points higher, the second day brought more of the same with the S&P back above 2700 for the first time since March 22nd and the VIX index of volatility of equity market volatility down at 15. The USD index against a basket of major currencies initially sold off from 89.00 to a low of 88.80 during the European morning but by mid-afternoon it had rallied up to 89.20 before finally ending unchanged on the day. Overnight in Asia, both stock index futures and the USD are very marginally higher.
The main trigger for the rally in the USD (apart from data disappointments in the UK and Eurozone) was a comment from US Treasury Secretary Mnuchin, who told CNBC that Trump's tweet on Monday about unfair FX competition was not a signal for a weaker dollar but a "warning shot" to Russia and China not to devalue their currency in the future. "They've used a lot of their reserves to actually support the currency. The President wants to make sure they don't change their plans, and he's watching it." On a separate issue, Mnuchin said rising economic growth will help pay for a temporary shortfall in tax receipts. "We're now at a point where we're comfortably within our 3 percent or higher sustained economic growth… The difference between 2.2 and 3 percent will pay for the tax cuts." He went on to claim that, “We're seeing very strong economic growth," he said. "We literally have met with hundreds of executives, small companies, big companies, and thousands of workers. We're beginning to see the impact of the tax cuts, specifically people investing large amounts of money back into the United States."
In incoming economic news, US industrial production rose a better than expected 0.5% m/m in March which took the y/y rate up to 4.3%; the fastest pace of growth since February 2012. Behind the headlines, however, there was a huge 3.1% m/m jump in energy output – entirely due to the pattern of weather in February and March – and manufacturing production rose a much more subdued 0.1% m/m. With capacity utilization rising three-tenths to 78.0% and housing starts very slightly stronger than expected, the Atlanta Fed nudged its Q1 GDP forecast back up to 2.0%. As well as three Fed speakers, the highlight of the day on Wednesday will be the Federal Reserve’s Beige Book on current economic conditions. The USD index opens in Europe this morning at 89.10.
After a quiet start to the week on Monday, EUR/USD began a rally which took it up more than half a cent to 1.2390; just above last Wednesday’s high and the best level in 2½ weeks. During the European morning on Tuesday, the euro extended its gains to 1.2410; the first time it had been on a 1.24 ‘big figure’ since March 28th. It subsequently gave back more than three-quarters of a cent to a low of USD1.2340 before rallying back to 1.2375 which is where it opens this morning after another very quiet session in Asia.
In economic news, the ZEW Indicator of Economic Sentiment for Germany once again fell sharply, dropping by 13.3 points compared to March and a huge 26.0 points when compared to February. The April indicator stands at minus 8.2 points, falling far below the long-term average of 23.5 points. The assessment of the current economic situation in Germany decreased by 2.8 points, with the corresponding indicator currently standing at 87.9 points. Commenting on their survey, the ZEW said, “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.” The financial market experts’ expectations regarding economic development in the Eurozone also decreased considerably, with the indicator falling by 11.5 points to a current reading of just 1.9 points. The indicator for the current economic situation in the Eurozone improved slightly in April by 1.5 points to 57.7.
According to the latest Reuters poll, Eurozone economic growth, already moderating in part from a stronger currency, will take a further hit from the ongoing trade dispute between the United States and China. While the consensus for growth in the latest poll of over 100 economists taken April 6-16 was little changed from a poll last month, the dispersion has increased and the range of forecasts shows lower highs and lower lows for growth in the region compared with last month. Full-year GDP growth is expected to average 2.3 percent this year and 2.0 percent next whilst inflation is predicted to average 1.5 percent this year, 1.6 percent next and 1.7 percent in 2020. The EUR opens in London this morning at USD1.2335 with GBP/EUR in the mid-1.15’s.