Weekly Market Outlook – Investors are considering the possibility of a final Fed rate increase during the summer, and the resurgence of the dollar adds further significance to the upcoming round of US employment data on Friday. The focus will also be on the debt ceiling negotiations, which are crucial in preventing a US government shutdown. Meanwhile, in Europe, the euro’s future will be influenced by a set of inflation figures.
Highlights of last week’s activities:
- In the first half of the week, there was little progress in the debt-ceiling talks, causing concern in the equity markets.
- The S&P 500 reached a 6-day low on Thursday but found support around 4100, as reports indicated that a deal to raise the debt ceiling was imminent before the weekend.
- On Friday, Wall Street experienced significant gains as optimism about raising the debt ceiling was restored.
- Stronger US economic data led to an increased likelihood of a 25-basis points June Federal Reserve interest rate hike, with revised GDP and inflation data for Q1, along with positive developments in initial and continuous jobless claims.
- Jamie Dimon, the CEO of JPMorgan, cautioned that we should prepare for higher interest rates.
- Nvidia’s shares soared by almost 25% on Thursday following an impressive forecast, boosting the Nasdaq to a 13-month high.
- The news of China banning Micron Technology, a US chip maker, from important infrastructure projects due to national security concerns negatively impacted market sentiment in the sector.
- Revised upward US GDP for Q1 resulted in increased expectations of a 25 basis points Federal Reserve interest rate hike in June, rising to over 50%, compared to 17.2% the previous week.
- Business sentiment in Germany continued to decline as the Ifo business climate index broke a 6-month upward trend, aligning with the lower ZEW economic sentiment indicator.
- The Reserve Bank of New Zealand (RBNZ) implemented a dovish 25 basis points interest rate hike, raising it to 5.5%, and hinted that it might be the final hike in the current cycle due to reduced demand and less concern about inflation resulting from the government’s budget.
- The New Zealand dollar (NZD) was the weakest among major foreign exchange currencies, while the US dollar (USD) demonstrated strength.
- Robust UK inflation data increases the pressure on the Bank of England (BOE) to implement at least one or two more interest rate hikes in the current cycle.
- Deflationary pressures continue to be observed across Asia, exemplified by South Korean producer prices, which fell by 1.7% year-on-year and -0.1% month-on-month. South Korea is an economy heavily reliant on exports.
- WTI crude oil experienced its most significant decline in three weeks on Thursday after Russia downplayed the likelihood of further OPEC+ oil supply cuts, causing the price to drop from $74.
What to watch on the Economic Calendar this week:
We may have a quiet start to the week due to public holidays in the UK and US, causing key trading hubs to be closed on Monday. However, low-liquidity sessions can be both quiet and volatile if unexpected events occur. Moving into a low-liquidity market requires less effort, which can result in uncomfortable levels of volatility if an unexpected catalyst emerges. On Friday, the debt ceiling is expected to be raised, leading to a strong rally in risk assets such as the Nasdaq and S&P 500 before the long weekend.
Additionally, there will be final PMI data for Asia, Europe, and the US, as well as key inflation data for Australia, which will assist in their upcoming rate decision in June. Traders are increasingly betting on a 25bp Fed hike, so employment data, including JOLTS job openings, Challenger layoffs, and the ADP employment report, will be closely watched leading up to Friday’s NFP.
Follow the Forex Economic Calendar to stay up to date on upcoming forex events, announcements, and data releases.
Monday, May 29:
- CHF: Bank Holiday
- GBP: Bank Holiday
- EUR: French Bank Holiday
- EUR: German Bank Holiday
- USD: Bank Holiday
Tuesday, May 30:
- JPY: Unemployment Rate
- AUD: Building Approvals
- CHF: GDP
- EUR: Spanish Flash CPI
- USD: Home Price Index (HPI)
- USD: CB Consumer Confidence
Wednesday, May 31:
- JPY: Prelim Industrial Production
- JPY: Retail Sales
- NZD: ANZ Business Confidence
- AUD: CPI
- AUD: Private Sector Credit
- CNY: Manufacturing PMI
- JPY: Consumer Confidence
- JPY: Housing Starts
- EUR: Prelim CPIs
- EUR: ECB Financial Stability Review
- CAD: GDP
- USD: JOLTS Job Openings
Thursday, June 1:
- JPY: Final Manufacturing PMI
- AUD: Retail Sales
- GBP: Nationwide HPI
- CHF: Trade Balance
- EUR: Final Manufacturing PMI
- CHF: Manufacturing PMI
- GBP: Final Manufacturing PMI
- EUR: Core CPI Flash Estimate
- USD: ADP Non-Farm Employment Change
- USD: Unemployment Claims
- CAD: Manufacturing PMI
- USD: ISM Manufacturing PMI
- USD: Crude Oil Inventories
Friday, June 2:
- NZD: Overseas Trade Index
- JPY: Monetary Base
- USD: Non-Farm Employment Change
- USD: Unemployment Rate
United States / USD: The dollar looks to the NFP for more momentum
The US dollar had a great month, outperforming other currencies due to interest rate differentials and safe-haven flows. Positive business surveys highlighted the strength of the American economy, prompting investors to revise their expectations of the Federal Reserve‘s rate trajectory. Market expectations now show a 40% probability of a rate hike in June, rising to 85% at the July meeting.
Concerns about a recession have diminished, leading to the removal of rate cut expectations later in the year. However, there is a division among Fed officials regarding further tightening, with some advocating for rate increases, others preferring to pause, and the majority undecided until more economic data is available.
All eyes are on the upcoming employment report, scheduled for Friday. Forecasts suggest moderate job growth of 180k in May, with a slight increase in the unemployment rate to 3.5% and a projected acceleration in wage growth. Economists have consistently underestimated the strength of the labor market, as nonfarm payrolls have exceeded expectations in 12 out of the last 13 months.
Recent business surveys from S&P Global indicate robust employment growth and rising salary pressures, which could lead to a surprising employment report. A strong report may solidify expectations for one final rate increase this summer or prompt investors to adjust their rate-cut bets, further strengthening the US dollar. Additionally, a selloff in stocks that drives safe-haven demand can also boost the US dollar.
Interestingly, a potential catalyst for such a stock market event could be a debt ceiling deal. Once a compromise is reached, the Treasury will need to raise cash levels by increasing borrowing, resulting in a significant issuance of bonds that can impact liquidity. In terms of upcoming data releases, the JOLTS job survey is expected on Wednesday, followed by the ADP report and the ISM manufacturing index on Thursday. It’s worth noting that several markets in the US and Europe will be closed on Monday for a bank holiday.
Eurozone / Euro: Euro falls ahead of inflation figures
Euro is experiencing downward pressure in recent weeks. This can be attributed partly to the strengthening of the US dollar, as the euro and the dollar tend to move in opposite directions. However, economic weakness is also emerging.
Specifically, the manufacturing sector’s slowdown has become more severe, causing Germany, which is known as a manufacturing powerhouse in the region, to enter a technical recession. This poses a significant challenge for the European Central Bank (ECB) because while economic growth appears to be slowing down, inflationary pressures remain high. As a result, policymakers are in a difficult situation.
Market expectations still anticipate the ECB to raise interest rates by another 60 basis points in the upcoming months. Therefore, the focus will be on incoming data, starting with Germany’s inflation and unemployment figures for May, which will be released on Wednesday. On Thursday, investors will also receive the same data for the entire Eurozone, along with the latest ECB meeting minutes.
Forecasts indicate a decrease in inflation, a notion supported by business surveys showing that average prices of goods and services rose at the slowest pace in two years in May. If inflation cools down significantly, there is a possibility that some expectations for ECB rate hikes may be revised, leading to further challenges for the euro/dollar exchange rate.
United Kingdom / GBP: A quiet week ahead
The week commences with a public holiday, and the momentum doesn’t significantly improve thereafter. Bank of England policymakers have been highly active in recent weeks, but it appears that most of them intend to have a relatively low-profile week, which might be beneficial.
The economic data has not met their expectations, resulting in investors reluctantly factoring in the likelihood of four additional interest rate increases throughout the remainder of the year. There are no noteworthy data releases anticipated for the upcoming week, with the final manufacturing Purchasing Managers’ Index (PMI) possibly being the most significant event.
Australia / AUD: Inflation report on focus
The RBA surprised by increasing rates by 25 basis points to 3.85% in a single meeting, citing ‘high inflation’ as the reason. The decision was finely balanced, highlighting the RBA’s reliance on data between meetings. This has brought Wednesday’s inflation report into focus for traders. Although the ABS does not directly provide a read on services inflation, monitoring electricity prices and rents can serve as a shortcut since they are non-tradable items unaffected by international trade and are crucial components of household budgets.
In May, electricity prices rose by 15.7% year-on-year, while rents reached a high of 5.7% year-on-year. The RBA, like us, would prefer to see some softness in these areas to ensure they won’t raise rates again. Considering the RBNZ’s indication of a peak rate of 5.5% and slight weakness in Australia’s recent employment report, the RBA might have room to pause once more.
New Zealand / NZD: Two significant data releases to watch
On Wednesday, the ANZ business confidence for May will be revealed, with a consensus forecast of -42 compared to April’s -43.8. If this prediction holds true, it will mark the 23rd consecutive month of negative readings. Additionally, on Friday, Q1 terms of trade, export prices, and import prices will be disclosed.
Analysts anticipate a quarter-on-quarter contraction of 1.8% following the 1.8% contraction in Q4 2022. Export prices are also projected to decline further, reaching -2.7% quarter-on-quarter from -0.6%, while import prices are expected to decrease at a slower pace of -1.3% month-on-month from -2.1%.
Japan / JPY: Retail sales & Industrial data on the radar
Monday’s unemployment rate for April is expected to improve to 2.7% from March’s 2.8%, while the jobs/applications ratio for April is likely to remain steady at 1.32. This week, attention will be on Wednesday’s release of retail sales and industrial production data for April. Retail sales are expected to dip slightly to 7% year-on-year from March’s 7.2%, while industrial production is expected to increase to 1.5% month-on-month, up from March’s 1.1%.
On Wednesday, consumer confidence for May is forecast to improve to 36 from April’s 35.4. This would mark the fourth consecutive improvement in consumer sentiment. Housing starts for April are also expected to improve to -0.9% year-on-year from March’s -3.2%. Thursday’s release of data for the week ending May 27 will provide insight into foreign stock investment, especially considering the recent 33-year high of the Nikkei 225.
Switzerland / CHF: An exceptionally busy week
The main event to look forward to this week will be the presence of SNB Chair, Thomas Jordan, on Wednesday. Additionally, we can anticipate the release of GDP data on Tuesday, retail sales on Wednesday, and the manufacturing PMI on Thursday.
China / CNY: Key PMI week
NBS manufacturing and non-manufacturing PMIs for May out on Wednesday. Manufacturing expected to contract to 49.4 (slight improvement from 49.2 in April), services to dip to 55 (from 56.4 in April). On Thursday, Caixin manufacturing PMI for May (covering small and medium enterprises) expected to contract to 49.3 (from 49.5 in April). Weak PMIs will indicate the disappearance of China’s growth spurt post-reopening.
Key currency pairs to watch in the week ahead:
- EUR/USD: The euro is expected to remain under pressure in the week ahead, with the ECB’s dovish stance likely to weigh on the currency. A break below the 1.0400 level could open the door to a move towards the 1.0300 level.
- GBP/USD: The pound is also expected to be under pressure in the week ahead, with the UK economy facing headwinds from Brexit and the ongoing cost of living crisis. A break below the 1.2300 level could open the door to a move towards the 1.2200 level.
- USD/JPY: The dollar is expected to remain strong against the yen in the week ahead, with the Bank of Japan’s dovish stance likely to continue to support the greenback. A break above the 130.00 level could open the door to a move towards the 131.00 level.
