The dollar index (DXY00) on Thursday fell from a 7-week high and finished down -0.18%. The dollar gave up early gains and turned lower today on weaker-than-expected US economic news that is dovish for Fed policy. Weekly jobless claims rose more than expected, Apr capital goods new orders nondefense ex-aircraft and parts unexpectedly declined, Q1 GDP was revised lower, and the Apr core PCE price index, the Fed’s preferred inflation gauge, rose as expected. Also, Apr new home sales fell more than expected. The dollar added to its losses after the S&P 500 rallied to a new record high after Axios reported that the US and Iran had reached a tentative peace deal, pending President Trump’s approval.
The dollar initially moved higher on Thursday after US forces shot down four Iranian drones fired at a commercial ship and hit a launch site near the Strait of Hormuz, which boosted safe-haven demand for the dollar. Also, hawkish comments from Fed Governor Lisa Cook, Minneapolis Fed President Neel Kashkari, and St. Louis Fed President Alberto Musalem boosted the dollar when they expressed concern about persistently high inflation.
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US weekly initial unemployment claims rose by +5,000 to 215,000, showing a weaker labor market than expectations of 211,000.
US Apr personal spending rose +0.5% m/m, right on expectations. Apr personal income was unchanged m/m, weaker than expectations of +0.4% m/m.
The US Apr core PCE price index, the Fed’s preferred inflation gauge, rose +3.3% y/y, right on expectations and the strongest pace of increase in 2.5 years.
US Apr capital goods new orders nondefense ex-aircraft and parts unexpectedly fell -1.1% m/m versus expectations of a +0.4% m/m increase and the biggest decline in a year.
US Q1 GDP was revised downward to 1.6% (q/q annualized), weaker than expectations of no change at 2.0%. Q1 personal consumption was revised lower to 1.4% form the previously reported 1.6%, and the Q1 core PCE price index was revised upward to a 3-year high of 4.4% from the previously reported 4.3%.
US Apr new home sales fell -6.2% m/m to 622,000, weaker than expectations of 660,000.
St. Louis Fed President Alberto Musalem said inflation is meaningfully above target, expectations are rising, and the Fed should respond to higher real rates by hiking policy rates.
Fed Governor Lisa Cook said inflation is headed in the wrong direction and she would be prepared to raise interest rates if that persists.
Minneapolis Fed President Neel Kashkari said US consumer prices are still “much too high” and that bringing down inflation remains his top priority.
Swaps markets are discounting the odds at 0% for a 25 bp rate cut at the next FOMC meeting on June 16-17.
EUR/USD (^EURUSD) on Thursday rose by +0.19%. The euro erased early losses on Thursday and moved higher after the dollar retreated on weaker-than-expected US economic news. The euro also found support after the Eurozone’s May economic sentiment indicator rose more than expected. Also, hawkish comments from ECB Chief Economist Philip Lane lifted the euro when he said the “second round” of the energy shock on the Eurozone will be present for a while.
The Eurozone May economic sentiment indicator rose +0.3 to 93.5, stronger than expectations of no change at 93.0.
ECB Chief Economist Philip Lane said the impact of the Iran war will take longer to show in the labor market, and the “second round” of the energy shock on the Eurozone will persist for a while.
Swaps are discounting an 89% chance of a +25 bp rate hike by the ECB at the next policy meeting on June 11.
USD/JPY (^USDJPY) on Thursday fell by -0.16%. The yen rebounded from a 4-week low against the dollar on Thursday and moved higher after the dollar retreated on weaker-than-expected US economic news. The yen also garnered support on Thursday from lower T-note yields. In addition, the closer the yen falls to 160 per dollar, the greater the likelihood that Japanese authorities will intervene in forex markets to prop up the yen, as they have done several times recently when the yen fell below that level. The yen initially moved lower on Thursday after crude oil prices jumped, which is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy.
The markets are discounting a +77% chance of a 25 bp BOJ rate hike at the next policy meeting on June 16.
June COMEX gold (GCM26) on Thursday closed up +50.90 (+1.14%), and July COMEX silver (SIN26) closed up +1.017 (+1.36%).
Gold and silver prices recovered from early losses on Thursday and settled sharply higher after the dollar fell on an Axios report that said the US and Iran have reached a deal to extend a truce and work toward an agreement to end the war. The decline in global bond yields on Thursday was also bullish for precious metals. In addition, weaker-than-expected US economic news on Q2 GDP, April new home sales, and April capital goods new orders nondefense were dovish for Fed policy and supportive for precious metals.
Precious metals initially retreated on Thursday, with gold dropping to a 2-month low and silver posting a 4-week low. Precious metals fell as renewed clashes between the US and Iran boosted crude oil prices and raised inflation expectations, potentially prompting the Fed to raise interest rates. Also, hawkish Fed comments weighed on precious metals after Fed Governor Lisa Cook, St. Louis Fed President Alberto Musalem, and Minneapolis Fed President Neel Kashkari warned that inflation is much too high.
Recent fund liquidation of precious metals is bearish for prices, as long holdings in gold ETFs fell to a 5.25-month low on March 31 after climbing to a 3.5-year high on February 27. Also, long holdings in silver ETFs fell to a 9.25-month low on May 5 after rising to a 3.5-year high on December 23.
Strong central bank demand for gold is supportive of gold prices, following news that bullion held in China’s PBOC reserves rose by +260,000 ounces to 74.64 million troy ounces in April, the largest monthly increase in a year and the eighteenth consecutive month the PBOC has boosted its gold reserves.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
