EC Looking Forward: May Monthly

Despite a split in the Scottish National Party, it appears that a majority of Scots now want independence. If that is the result of the election, then a clash with Prime Minister Johnson is inevitable. Wales is a traditional stronghold for Labour, and polls suggest it may hold on to 29 of the 60 seats. However, the polls have not included 16 and 17-year olds who will be allowed to vote for the first time.  

Japan has lagged Europe in rolling out the vaccine and four prefectures are formally in states of emergency, including Tokyo and Osaka. This will likely dampen the recovery from what is expected to have been a nearly 4% annualized contraction in Q1. Prime Minister Suga has seen his support erode, and ideas of an early election have been dashed.

Suga insists on pressing ahead with the Olympics, which is also terribly unpopular. There will be a leadership contest in the Liberal Democratic Party in September ahead of the general election that must be held by late October. A supplemental budget may be delivered ahead of the election.

China's economy expanded at a modest rate of 0.6% in Q1, which was less than half of what economists had anticipated. The early indications for April suggest the momentum has not picked up at the start of Q2. Officials have moved to discourage banks from expanding lending, except to small businesses. It is difficult to tell whether Beijing's anti-monopoly stance is truly about the concentration of market power or a crackdown on the private sector.

While China's voracious appetite for industrial metals may have been tempered, it apparently has stepped up its buying of soy, wheat, and corn. China's buying amid tight supplies and challenging weather conditions in some key growing areas in the US and Brazil have seen prices rise to the highest levels in eight years. 

Emerging market currencies mostly gained against the dollar in April. Eastern and Central European currencies as a whole did best. The Turkish lira was an exception. Its small decline brought the year-to-date loss to around 10.3, after around a 20% drop last year. Rising grain prices did the Argentine peso few favors. With its nearly 1.7% decline in April, it was the weakest among the emerging markets. It is off 10% so far this year.

The public health tragedy that continues to unfold in India, sapped the rupees strengthen, and darkened the economic outlook. It recovered in the last week of April as international assistance was offered. The 1.3% losses in April followed a nearly flat performance in Q1 when it was the best performing emerging market currency.  

The Bannockburn World Currency Index, a GDP-weighted basket of the top 12 economies (with the eurozone counting as one) rose by a little more than 1.1% in April, the first monthly gain of the year and nearly offsetting the March decline in full. This reflected the US dollar's heavier tone after broadly trading higher in Q1 following its slide accelerated in the last two months of 2020.

The Indian rupee was the only currency in our index to have fallen against the dollar. The Brazilian real's nearly 3.5% gain was the best performer. The larger than expected 75 bps rate hike in mid-March (lifting the Selic rate to 2.75%) and progress on the budget helped the real pare the 7.7% decline in Q1. With inflation pushing above 6%, the central bank is expected to lift the Selic rate another 75 bps when it meets on May 5.  

US Dollar

The dollar trended lower in April. The Dollar Index rose in nine sessions of the 22 sessions in the month. The retreat was likely corrective after rallying in Q1. Yields softened, too. About 18 hours after the Federal Reserve Chair said that it was too early to "talk about talking about tapering" the $120 billion of bonds it is buying a month, the US reported that in nominal terms, the economy expanded by 10.5% in Q1.

The economy is surging and nonfarm payrolls likely rose by around a million in April after an almost 920 thousand increase in March. Efforts to legislate the Biden Administration's Job and Family initiatives with their accompanying progressive tax increases will likely take several months.

In the Senate, conservative Democrats may prove to be more effective than Republicans in moderating the proposed expenditures and revenues. After the April slide, the technical indicators warn that the greenback is oversold. The strength of the bounce may be shaped by the trajectory of US yields.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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