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Weekly Market Outlook: All eyes on PMIs, inflation and Powell’s Testimony

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Weekly Market Outlook — The world’s central banks are increasing their efforts to counter soaring inflation amid recession fears. There will be an eye on June’s flash PMI readings to see if tighter monetary policy is stifling economic growth. Meanwhile, inflation figures in Canada and Britain may place even more pressure on policymakers. Fed Chair Jerome Powell, who testifies before lawmakers this week after raising rates by the most in 28 years, may steal the limelight once more.

USD — Powell’s testimony will guide the dollar

The US calendar will be closely watched this week with existing home sales, manufacturing and services PMIs, and new home sales releases as investors seek an early warning on possible recession risks, the flash estimates of PMIs will be particularly crucial over the coming months. 

Weekly Market Outlook

While the Fed raised interest rates by 75 basis points, there is increased anxiety about a hard landing in the world’s largest economy. A close eye will be paid to Chair Powell’s comments on the Semi-Annual Monetary Policy Report, as he does not rule out another 75-bp rise. 

It is likely that the dollar rally will catch more fire if Powell reinforces his hawkish stance on bringing inflation down.

Euro — June PMIs could worsen currency’s woes

Even as Eurozone bond yields reached multi-year highs, a hawkish European Central Bank has been unable to help the Euro. There is still a bias in favor of the USD due to an even more hawkish Federal Reserve. However, that’s not the only reason why the Euro is weak. The risk of an economic downturn seems greater in Europe, where energy prices have risen more pronouncedly than in America due to the continent’s greater dependence on Russian oil. 

Growth in the Eurozone has been relatively steady so far, but the situation is worsening rapidly due to the turmoil in Ukraine. It is expected that Thursday’s flash PMI reports will show a further moderation in business activity in June, with energy prices remaining high and loose monetary conditions ending. 

Moreover, markets have already priced in much of the pessimism by now, so the Euro might not suffer significant losses unless the PMIs are significantly lower than forecasts. Friday’s Ifo index of business confidence in Germany is also a highlight of Eurozone data.

GBP — UK data spark recession fears

The United Kingdom is experiencing even more significant economic pain as a result of the Ukraine conflict and supply chain problems. A number of crises are engulfing the country right now, including inflation, supply and labour shortages, and tensions between London and Brussels over Northern Ireland. 

Considering the current economic climate, it’s no wonder businesses are feeling down and PMIs due Thursday will reflect this. But before that, everyone’s attention will be focused on Tuesday’s consumer price index. 

Weekly Market Outlook,CPI,inflation Market Analysis
Consumer Price Index (CPI)

Among major economies, the UK’s headline inflation rate jumped to 9.0% y/y in April and is projected to rise to 9.1% in May.

For the fifth consecutive meeting in June, the BoE raised interest rates by 25 basis points. It is possible that the BoE won’t have any option but to switch to a more aggressive tightening if CPI rises rapidly. 

Indicators already indicate that UK GDP is headed for contraction in the second quarter. Consumer spending in May will be gauged by retail sales figures out on Friday. Considering stagflation risks, hot inflation numbers are unlikely to support the sterling much, but better-than-expected retail sales data could ease concerns about a downward trend in growth.

CAD — CPI could boost hawkish BoC bets

Retail sales and inflation will be the focus of traders in Canada as well. Canada’s economy is booming and may even be stronger than America’s. However, that hasn’t stopped the Canadian dollar from slipping against its US counterpart.

Earlier this month, Bank of Canada Governor Tiff Macklem hinted that the central bank might be willing to increase rates 75 basis points at a time. In light of what the Fed did recently, the BoC has an increased chance of doing the same at its next meeting. 

It’s likely that Tuesday’s retail sales report and Wednesday’s CPI readings will support the need for more rate hikes, while slightly disappointing numbers won’t keep policymakers from stepping on the brakes.

AUD — Focus on Monetary Policy minutes

The Australian dollar is also considered to be risk-driven. Despite higher commodity prices, concerns about a slowdown in China and elsewhere have partially offset this benefit. Despite this, AUD’s year-to-date losses are significantly lower than those of most of its competitors. 

The minutes of the last RBA policy meeting will be published on Tuesday. A further hawkish shift could give the AUD a modest boost, though Thursday’s flash PMIs could present some downside risks. 

The policy decision of the People’s Bank of China on Monday will also be watched closely by Aussie traders. Some speculate that the prime rate will be cut for the second time in a row.


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