This is Mr. Chandler's weekend missive posted as one of his Week Ahead dispatches.
His weekday (May 18) post is after the jump.
From Marc to Market:
The US economy appears to be re-accelerating here in Q2 after nearly grinding to a halt in Q1 (0.5% annualized pace). April US CPI and PPI were more elevated than expected. The anticipated average effective Fed funds rate in December rose more than 15 bp in the past week and is up slightly more than 75 bp since the war on Iran began. The Dollar Index rose almost 1.4% last week, its best week since the first week of March.
In addition to the swinging pendulum of market expectations for the Federal Reserve, which has a new chair (and will likely usher in a new era for the central bank), UK political drama that appears likely to bring down Prime Minister Starmer, added to the pressure on sterling and UK stocks and bonds. The market has taken the yen to its lowest level since the end of April's apparent intervention. It will begin the week ahead testing the resolve of Japanese officials. Lastly, Trump-Xi meeting was heralded as a success by both sides. Despite Beijing promises to buy more beans, beef, planes, and energy) from the US, Washington is a dilemma. If it proceeds with the $14 bln arms package to Taiwan, it will risk the wrath of Beijing, but it is shelved, the administration's domestic critics will cry "appeasement".
US
Drivers: There are two main drivers of the Dollar Index now: Changes in US rates and risk-environment. The rolling 60-day correlation of changes in the Dollar Index and two-year yields is near a six-month high a little over 0.50. The correlation with changes in the 10-year yield is slightly higher. Changes in the two and 10-year yields are around 0.90 correlated over the past 60 days, which is the most in three years. Changes in the Dollar Index and the VIX are correlated over the past 60 days by the most since June 2024 (~0.4)9. The Dollar Index is inversely correlated with the S&P 500 itself, and the inversion over the past 60 sessions is the most since January 2023 (~-0.57).
Data: After the recent jobs and inflation data, this week's high-frequency reports are of a secondary importance. Economists pour over the March TIC report and the minutes from the recent FOMC meeting, but the impact on the capital markets may be minimal. May survey data (including the preliminary PMI, the Philadelphia Fed's monthly survey) may pose headline risk. The Atlanta Fed's GDPNow sees the economy tracking 3.7% growth here in Q2 after Q1's 2.0% annual pace.
Prices: With last week's advance, the Dollar Index has recouped a little more than half of what is lost in the pullback from the year's high set on March 31 (~100.65). The next retracement target is in the 99.50 area, which is also the top of an old gap (from the lower opening on April 8). The momentum indicators are constructive, and the five-day moving average crossed back above the 20-day moving average. A move toward 100.00 looks reasonable....
....MUCH MORE
From Marc Chandler at Bannockburn Global Forex, May 18:
Takaichi Endorses Supplemental Budget, Trump Escalates Rhetoric toward Iran, and Markets Spooked
