Stocks drop, USD pops after Powell Walks Back Recession Talk

The US Dollar is surging back up towards yearly highs today as the greenback continues to build strength. Yesterday, Fed chairman Powell appeared to walk-back last week’s comments regarding recession risks in the US. Powell said while there are risks, the Fed believes that the US economy is strong enough to avoid recession. Instead, Powell focused on the need for the Fed to battle inflation, keeping expectations geared towards more aggressive hiking towards year-end, where the rates market is now pricing in a peak in Fed tightening. Attention now shifts to today’s May core PCE data. 

Key Factors for Today

• USD continues higher as Powell plays down recession fears, focuses on need for tightening

• Lagarde & Bailey warn they’re ready to do more if needed

• Equities plunge on central bank tightening signals 

• JPY leads FX on safe-haven flows

• GBP stronger on hawkish Bailey comments

• Metals mutes, oil lower on stronger USD – OPEC talks continue today

Coming Up 

• CAD Canadian GDP m/m

•  USD US Core PCE May

• USD Unemployment claims 

Equities Signal on Hawkish Central Bank Comments

Equities markets are tanking across the board at the European open on Thursday. Comments from central bank speakers yesterday (Powell, Bailey & Lagarde) put the focus firmly on central bank tightening expectations. With the coming months expected to see a wave of fresh central bank tightening, risk sentiment is plunging here with the Nikkei now down around 4% from weekly highs and the Dax threatening to break through June lows. 

JPY & GBP Leading in FX

In FX, JPY has been the strongest performer across the European open on Thursday. The currency is benefiting from strong safe-haven inflow amidst the current downturn in risk assets. GBP has been stronger today also, bolstered by hawkish comments from BOE’s Bailey yesterday who warned that the bank has the option to act more forcefully on inflation if needed. These comments echoed those of Lagarde who also reaffirmed the ECB’s willingness to act faster if necessary to contain inflation, raising hawkish risks for both banks. 

Gold & Silver Still Muted

Metals remain muted today, with gold lower on the day and silver just about in the green. Both metals remain near recent lows, however, dragged down by the stronger US Dollar. Any further USD upside on today’s PCE data will no doubt act as a further headwind for metals in the near term. 

Oil Softens as OPEC Meetings Continue

Oil prices are continuing to pull back from the week’s highs today. Having started the week on a strong footing, the resurgence in USD has weighed heavily on crude futures. The June OPEC meetings continue today though there is little expectation of any material surprise. OPEC is likely to stick to the output increases agreed last month which will likely have limited impact on prices as USD flows remain the key theme for now. Yesterday saw the release of two sets of EIA crude inventories following the delay the prior week. 17th June inventories were see in mild drawdown while last weeks’ came out in a larger drawdown. Again, neither were able to lift oil prices given the current USD backdrop.