Following hawkish remarks from the US Federal Reserve and concerns over persistently high inflation, the US dollar saw a significant rebound in the previous week. The DXY index recorded a notable increase of 1.4%. Conversely, within the G10 space, the Euro experienced a decline of 1.5%, while the Swedish Krona and New Zealand’s currency saw losses of 2.1% and 1.6%, respectively, against the US dollar. Such fluctuations have prompted speculation regarding whether or not there will be a pause in policy at the upcoming central bank meeting in June.
The global equity markets experienced a decline due to various factors that indicate weakness in China’s post-Covid recovery, concerns regarding the US debt ceiling, and persistent worries about regional banking issues in the US. The Dow Jones Industrial Average was the main contributor to the mostly lower US markets, losing 1.1%. The MSCI All-Country World Index also dropped by 0.5%. The S&P 500 saw a decrease of 0.3%, while there was a slight increase of 0.6% in the Nasdaq 100 index. Both Germany’s DAX 40 and the UK’s FTSE 100 suffered a decline of 0.3%, while Hong Kong’s Hang Seng index experienced a more significant drop of 2.1%. However, Japan’s Nikkei 225 index saw an increase of 0.8%.
Market performance in the second week of May
Please take note that the Global Bonds proxy being referred to in this study is the Bloomberg Global Aggregate Total Return Index Unhedged USD. The Commodities proxy utilized is the BBG Commodity Total Return while the Hedge Funds proxy used is the HFRX Global Hedge Fund Index.
There are several upcoming speeches by officials of the Federal Reserve, with Fed Chair Jerome Powell set to speak on Friday. The recent speeches from the Fed seem to lean towards a more hawkish stance. Fed Governor Michelle Bowman stated on Friday that if inflation remains high, it is probable that the US central bank will need to increase interest rates.
New York Federal Reserve President John Williams stated on Tuesday that the Federal Reserve may continue to raise interest rates. The latest data on US Consumer Price Index (CPI) and Producer Price Index (PPI) indicates a reduction in inflationary pressures, but not at a significant pace. As a result, investors have adjusted their expectations for potential Fed rate hikes. The CME FedWatch tool shows that the probability of a 25 basis point rate hike at the June meeting has increased from 8% to 15% in the past week.
US core inflation measures
The US Congressional Budget Office has warned of a notable possibility of defaulting on payment obligations within the first two weeks of June if the debt ceiling is not raised. A meeting scheduled between US President Joe Biden and top lawmakers to address the debt limit, originally planned for Friday, has been rescheduled to take place next week.
In April, China experienced a deepening of producer price deflation and a slower increase in consumer prices. This data serves as additional evidence of a patchy post-Covid economic recovery in China, following last week’s report of an unexpected contraction in manufacturing activity. As a result, there are concerns about slowing demand in the second-largest economy, which have had a negative impact on Asia ex-Japan and Emerging Market equities, as well as commodity prices and currencies such as the Australian and New Zealand dollars.
As the first quarter US earnings season nears its end, the favorable market influences are dwindling. FactSet reports that 92% of corporations in the S&P 500 have issued their earnings reports, with 78% surpassing estimated actual EPS. The upcoming week will witness a primary market focus on various data, including China’s industrial output and retail sales, Reserve Bank of Australia meeting minutes, Germany’s ZEW sentiment index, UK job reports, and United States’ industrial output and retail sales data on Tuesday. Additionally, Wednesday will see Japan’s GDP and Euro area inflation, Thursday will have Australia’s job data, and Friday will observe Japan’s inflation.
The GBP has experienced a favorable week in terms of data, although it concluded on a sour note with losses against the USD. The pivotal point for bullish continuation lies at 1.2460, and the upcoming week is expected to bring fresh catalysts with the release of UK Employment data.
The Australian Dollar experienced a decline towards the end of last week due to the increasing popularity of the US Dollar, which is attributed to a greater likelihood of the Fed reducing the target rate in the coming months.
The XAU/USD market maintained stability despite a sudden surge in the value of the US dollar, resulting from an unexpected rise in inflation figures. Gold prices experienced a slight decline leading up to the weekend, but are expected to remain stable due to the continued demand for safe haven assets.
The current state of the crude oil market is bleak due to the debt ceiling crisis and concerns over a potential recession. Market sentiment and risk appetite are being negatively impacted, which is expected to result in continued low crude oil prices in the near future.