The final trading day of April kicked off with a positive mood in Asia after North Korea’s Kim Jong-un made history by crossing into South Korea. The scene of Kim Jong-un shaking hands with Moon Jae-in brought cheer to financial markets as the two leaders vowed to work towards denuclearizing the Korean peninsula, hopefully ending a seven-decade conflict. However, concerns over Iran’s nuclear deal may keep investors in a tricky situation and limit the upside moves.
Will the U.S. dollar sustain its uptrend?
The greenback has managed to gain 2.5% from April’s low against a basket of currencies as 10-year U.S. Treasury yields touched 3% for the first time in four years. Whether the uptrend resumes this week will depend on inflation data, the FOMC meeting, and the employment report.
The core Personal Consumption Expenditure index, the “Fed’s preferred measure of inflation”, is expected to move closer to the Fed’s target of 2% for the first time since 2012 when the numbers get released later today. An upside surprise in this reading is likely to provide a further boost to U.S. interest rates with the potential of U.S. 10-year Treasury yields taking out its 3.04% tested back in January 2014. After breaking up for some time, the correlation between interest rate differentials and currency moves seemed to have returned strongly in April. Thus, another push higher in U.S. yields will likely refuel the bullish positions on the greenback.
Attention will shift later this week to the FOMC statement that is due on Wednesday. Although markets do not expect any changes in policy and the decision will not include a press conference or economic projections update, any signs of steeper inflation expectations should support the outlook for an additional three rate hikes instead of two for 2018. If the Fed is willing to increase rates in June, this should be reflected in a hawkish statement.
The U.S. non-farm payroll report will be the final event for currency traders on Friday. The economy is expected to have added 195,000 jobs in April, which is up from 103,000 in March. Meanwhile, unemployment is forecast to drop to 4.0% from 4.1%.
According to FactSet, 79% of S&P 500 companies reporting actual results have managed to beat earnings expectations so far. It’s undoubtedly one of the best earning seasons ever. However, the reaction I’m seeing in U.S. equities is concerning me. Investors are not rewarding earning beats anymore, making the risk of a steep correction high. This is maybe due to the belief that the economy is due a slowdown, or future earnings growth will be interrupted by higher interest rates.
It will be very interesting to see how Apple performed in Q1. The most valuable company in the world is due to release results on Tuesday. Chipmakers in Asia fueled fears last week that the iPhone X wasn’t the product that would take Apple to the $1 trillion market cap. Although the company might announce special dividends payouts and share buybacks to redistribute its repatriated overseas profits, signs of declines in iPhone sales remain to be the key metric to watch.