Weekly Market Outlook – The RBNZ appears poised to increase interest rates for the twelfth time this week. Meanwhile, the inflation data from the UK and the US will play a vital role in shaping expectations for future rate hikes. Given the recent release of disappointing economic data, the market will closely monitor Germany’s Purchasing Managers’ Index (PMI) readings, as they are likely to garner significant attention in S&P Global’s preliminary surveys for May. Considering the prevailing fragile sentiment, the PMI results could establish the overall tone for equity markets. Yet, the real question is whether these PMIs will support the US dollar’s upward momentum, or whether the Fed’s meeting minutes will counteract this trend.
Highlights of last week’s activities:
- President Biden and Republican House Speaker Kevin McCarthy’s comments on the debt ceiling boosted market sentiment on Wednesday. The Nasdaq 100 and S&P 500 rose to 9-month highs, gold fell comfortably below $2,000, and the yen lost its safe-haven appeal.
- Fed members remained hawkish overall, with standout comments including:
- “It is premature to be talking about rate cuts.”
- “We don’t want to quit [hiking rates] too soon.”
- “Smaller, less frequent steps” could avoid financial instability.
- “I don’t think we’re at a hold rate yet.”
- The Bank of England (BOE) governor warned that the cost-of-living crisis could persist, and that tight labor markets are adding to inflationary pressures. The BOE remains committed to its 2% target, which translates to higher rates for longer.
- The Turkish election failed to produce a majority winner, although incumbent President Recep Tayyip Erdogan goes into the runoff with the higher number of votes.
- Germany’s ZEW expectations index fell for a third month.
- China’s Q2 data continued to stumble, with retail sales, industrial production, and fixed asset investment all falling below expectations. Beijing seems happy once again to let the yuan slide to help their economy, sending USD/CNH to a 5-month high and on track for its best week in three months.
- Japan’s GDP was stronger than expected, although weak trade data continues to show that slowing growth is a growing problem. A core measure of Japan’s CPI rose to a 42-year high, although with producer prices plummeting, perhaps the Bank of Japan (BOJ) are correct in thinking inflation will be transitory.
- The Nikkei smashed through 30,000 for the first time in 20 months and to a 32-year high, thanks to the BOJ retaining an ultra-easy stance and an improvement in risk appetite.
- The Reserve Bank of Australia (RBA) minutes revealed that the decision to raise rates by 25 basis points in May was ‘finely balanced.’ Softer Australian employment cooled rate-hike expectations for the RBA in June, even though wages rose slightly higher than markets expected (which still lag inflation by quite some margin).
What to watch on the Economic Calendar this week:
May’s flash PMI is a key economic report for several major economies over the weekend. Its significance is particularly notable for Europe, as the region appears to have lost the earlier year’s momentum. In the United States, the FOMC minutes can provide the market with a clearer understanding of the Federal Reserve’s perspective on the peak. There is a risk that the peak might be higher than what the market assumes, given recent comments.
While the US CPI typically garners more attention than the PCE deflator (which is the Fed’s target), the underlying measures, due to methodological differences, may exhibit more persistence. The UK’s April CPI is expected to decline sharply due to base effects, and Tokyo’s May headline and core CPI may experience a slight slowdown. However, there is still an upside risk for the measure that excludes fresh food and energy.
Monday, May 22:
- GBP: Rightmove HPI m/m
- JPY: Core Machinery Orders m/m
- CAD: Bank Holiday
- EUR: Consumer Confidence
Tuesday, May 23:
- AUD: Flash PMI
- JPY: Flash Manufacturing PMI
- JPY: BOJ Core CPI y/y
- CHF: Trade Balance
- EUR: Flash Manufacturing PMI
- EUR: Flash Services PMI
- GBP: Flash Manufacturing PMI
- GBP: Flash Services PMI
- USD: Flash Manufacturing PMI
- USD: Flash Services PMI
- USD: New Home Sales
- USD: Richmond Manufacturing Index
Wednesday, May 24:
- NZD: Retail Sales q/q
- NZD: RBNZ Monetary Policy Statement
- NZD: RBNZ Rate Statement
- GBP: CPI y/y
- EUR: German ifo Business Climate
- USD: Crude Oil Inventories
- USD: FOMC Meeting Minutes
Thursday, May 25:
- EUR: German Final GDP q/q
- EUR: German GfK Consumer Climate
- USD: Prelim GDP q/q
- USD: Unemployment Claims
- USD: Prelim GDP Price Index q/q
- USD: Pending Home Sales m/m
Friday, May 26:
- JPY: Tokyo Core CPI y/y
- AUD: Retail Sales m/m
- GBP: Retail Sales m/m
- USD: Core PCE Price Index m/m
- USD: Core Durable Goods Orders m/m
- USD: Revised UoM Consumer Sentiment
Stay on top of upcoming forex events, announcements, and data releases by keeping an eye on the Forex Economic Calendar.
United States / USD: Fed’s June decision hangs in the balance
The Federal Reserve is widely expected to hike rates by 50 basis points in June, but speculation is growing that policymakers may pause after that. Attention will be focused on the release of key economic data next week, including PCE inflation, durable goods orders, and new home sales.
The core PCE price index, which is the Fed’s preferred inflation measure, is expected to have decreased by 0.2 percentage points to 4.4% in April. This would indicate progress after being stuck in the 4.6%-4.7% range for the past few months. Additionally, the readings on personal income and spending will be significant, as there is no significant evidence of US consumers becoming more cautious. In fact, it is expected that personal consumption increased by 0.4% month-on-month in April.
Durable goods orders are also scheduled to be released on the same day, but before the Friday release, the flash PMIs on Tuesday will draw some attention. Investors will closely examine the subcomponents of the PMI indices to gain an early insight into new orders, employment, and input prices in the first half of May. Other data to be published include new home sales on Tuesday and the second estimate of Q1 GDP on Thursday. The release of this data will provide important clues about the state of the economy and the Fed’s likely path to monetary policy in the months ahead.
The Dollar Index rose for the second week in a row, gaining 0.65%. This follows a 1.5% rally the previous week. The gains were driven by stronger-than-expected data, hawkish Fed comments, and a sharp rise in US rates. The next resistance level is 104.00. On the downside, a break of 102.60 would signal a potential end to the rally.
Eurozone / EURO: Will Eurozone PMIs boost the currency?
The euro and the yen have suffered the most as a result of the dollar’s resurgence, even though there haven’t been any significant changes in the likelihood of interest rate hikes by the European Central Bank. The recent negative economic data from Germany has caused a downward trend in the euro’s value, while the dollar has been strengthening and the euro has had to give up important levels.
The upcoming flash PMIs on Tuesday could have a significant impact on either stabilizing the euro’s decline or exacerbating its losses. The economic forecasts for the Eurozone don’t indicate much change, with the manufacturing sector expected to continue contracting while the services industries support overall growth. A surprising recovery in manufacturing output, particularly in Germany, could alleviate concerns about the weakening economic momentum. In light of this, investors will also closely monitor Germany’s Ifo business climate gauge on Wednesday and the detailed Q2 GDP report on Thursday.
The euro fell below its April low last week, reaching $1.0760. A break below $1.0735 (61.8% retracement) could target $1.0650. However, momentum indicators are stretched and a close above the 5-day moving average ($1.0830) would be a sign of strength.
United Kingdom / GBP: Good news from UK CPI, but not for the pound
The pound has exhibited greater resilience against the dollar’s resurgence compared to other major currencies. Recent statements from the Bank of England, which no longer anticipate a recession, along with double-digit inflation, have led investors to believe that the UK has more potential for interest rate hikes compared to the Federal Reserve‘s expected rate cuts.
However, the prevailing belief that inflation in the UK will persist more than in other countries might lose some influence when the consumer price index for April is released on Wednesday. It is anticipated that the headline rate of CPI will finally dip below 10% last month, decreasing from 10.1% in March to 7.9%. The core figure is also predicted to decline to 5.7%.
The May PMIs, to be observed a day earlier, will provide insights into the performance of economic activity during the additional public holiday in celebration of King Charles’ coronation. On Friday, the focus will shift to the April retail sales statistics. The overall strength of the data could determine whether or not the pound can maintain its relative superiority over the dollar.
Sterling's advance from $1.18 to $1.2680 is over. The five-day moving average fell below the 20-day moving average, and sterling returned to late April levels. Momentum indicators are trending lower. Initial resistance is at $1.2500-25.
New Zealand / NZD: Will this be the last hike by the RBNZ?
The Reserve Bank of New Zealand is expected to raise interest rates by 25 basis points next week. This would be the 12th consecutive increase and would take the cash rate to 5.50%, the highest among advanced nations.
Investors are also expecting a further 25 basis point hike over the summer. This is more hawkish than the RBNZ’s own forecast of where rates will peak, which was projected at 5.50% back in February. The Bank will publish its updated forecasts in the quarterly Monetary Policy Statement on Wednesday.
The latest employment report supports the case for more tightening, as the jobless rate remained low at 3.4% and wage growth accelerated slightly in the first quarter. Retail sales data due the same day as the policy decision could show that consumer spending bounced back in Q1. However, there is also an argument to stop at 5.50%, as inflation expectations for two years ahead fell within the Bank’s 1-3% target band to 2.79%. Hence, there is some downside risk too for the kiwi from the meeting.
Canada / CAD: April wage figures due
April’s CPI data exceeded expectations, impacting market expectations for Bank of Canada policy. While the underlying measures eased to 4.2%, the headline CPI rose by 0.7% and the year-over-year rate increased to 4.4% from 4.3%. This marked the first increase since June of the previous year. Despite the shift in the interest rate and derivative markets towards a rate hike, Bank of Canada Governor Macklem maintained that the downtrend remained intact. Consequently, the swaps market reduced the probability of a hike from 85% to around 60% by the end of the week.
Anticipated year-end rate cuts have been completely unwound as Canada’s two-year yield reached its highest level in two months at 4.15% on May 18, up from 3.60% on May 11. However, soft March retail sales caused the two-year yield to retreat toward 4%. The Bank of Canada is scheduled to meet on June 6, and upcoming high-frequency data points such as Q1 and March GDP on May 31, followed by the May jobs report the next day, will be crucial.
USD/CAD was confined to a narrow range last week. The greenback peaked in March near CAD1.3860 and is expected to trade between CAD1.3580 and CAD1.3545 in May. Momentum indicators are not generating a strong signal, and a break of CAD1.34 is needed to suggest a trend reversal.
Australia / AUD: The Australian economy is facing challenges
The Australian dollar’s decline from around $0.6800 to approximately $0.6600 was further prolonged by the disappointing April employment report. However, there is a prevailing belief in the market that there might be a small interest rate hike to conclude the tightening cycle by the end of the third quarter.
Currently, the cash target rate stands at 3.85%, while futures market projections suggest a 4% rate by September’s end, marking the highest level since mid-March. Interestingly, the market reacted more favorably to the jobs disappointment, causing the rate expectations to increase. This pricing could indicate a potential 15 basis point adjustment or a 60% probability of a quarter-point hike.
Aussie dollar pulled back to $0.6600 after a poor April employment report. Market leans toward a small hike to finish tightening cycle by Q3. The Aussie tested both sides of its trading range over the past two weeks. We are not convinced that the greenback's recovery is over and the market may test $0.6600 again. Break of $0.6565 would confirm a downside breakout.
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