Markets Week Ahead: S&P 500, Gold, US Dollar, Oil, BOE, US CPI, China Inflation
The US dollar experienced a decrease over the course of the previous week due to indications from the US Federal Reserve that a halt in the significant rate hiking campaign may be imminent. The global equity markets remained relatively stable, while US markets displayed volatility, influenced by a combination of positive earnings reports, regional banking difficulties, concerns surrounding the debt ceiling, and the belief that the Fed is approaching the end of its tightening cycle.
The DXY index, which measures the value of the US dollar against a basket of major currencies, experienced a 0.4% decrease at the end of the week. In contrast, the MSCI All Country World Index remained relatively stable. Among equities, the S&P 500 saw a decrease of 0.8%, while the Nasdaq 100 index experienced a modest increase of 0.1%. The German DAX 40 showed growth with a 0.2% increase, while the UK FTSE 100 experienced a decline of 1.2%. In Asia, the Hang Seng index rose by 0.8%, while Japan’s markets were closed due to the Golden Week holiday.
During the latter part of the Q1-2023 earnings season, S&P 500 enterprises are achieving their highest performance in comparison to analyst forecasts since Q4-2021. Out of the enterprises comprising 85% of the S&P 500 that have released their reports up to this point, 79% have announced actual EPS results that surpass estimates. FactSet has observed that both the quantity and degree of positive EPS surprises reported by these companies exceed their respective 10-year averages.
Recent data releases reveal that China experienced a contraction in manufacturing activity last month, which underscores the uneven nature of the post-Covid recovery. Although the United States’ manufacturing activity (ISM) improved slightly last month, it still remains in contraction territory. The Reserve Bank of Australia surprisingly raised interest rates by 25 basis points during their Tuesday meeting and expressed a willingness to tighten further to control inflation. Meanwhile, the US Federal Reserve increased its benchmark rate by 25 bps as expected and signaled a pause in its tightening cycle. Finally, the European Central Bank also raised its rates by 25 bps and maintained its hawkish message.
During the upcoming week, there are several important releases of economic data. On Monday, the minutes of the most recent meeting of the Bank of Japan will be made available. Tuesday will see the release of Australia’s Westpac consumer confidence data. Wednesday will bring both the US CPI and Germany’s inflation data for April. Thursday is set to be a busy day, with the Bank of England rate decision, US producer price index for April, and China’s April inflation numbers all being released. Finally, on Friday we can expect to see UK Q1 GDP figures and China’s new yuan loans data.
The upcoming release of US inflation data is anticipated to provide insight into the extent of the abatement of price pressures. It is projected that core CPI will have decelerated from 5.6% in March to 5.5% on-year in April. The publication of a robust jobs report on Friday resulted in a reduction of Fed rate cut expectations for July, with the percentage dropping from 60% to 36%. In the event that price pressures do not diminish as predicted, it may prompt a reevaluation of the 75 bps worth of rate cuts anticipated to occur by year-end.
It is widely anticipated that the Bank of England will increase interest rates by 25 basis points during its upcoming meeting on Thursday, following the release of recent data on wages and inflation. Due to the fact that inflation still stands at a rate of 10.1%, it is probable that the central bank of the United Kingdom will maintain a hawkish stance. Considering that the US central bank has hinted at a pause, there remains potential for continued appreciation of GBP given the divergent monetary outlooks between these two nations.
Forecasts:
The US Dollar experienced a slight decrease in value last week, following the Federal Reserve’s decision to increase interest rates. Despite Chair Jerome Powell’s efforts to discourage predictions of a summer rate cut, such speculations persisted. The focus now shifts towards the upcoming Consumer Price Index report and any statements from the Federal Reserve officials. The question remains whether these developments will lead to a decline in market expectations for a rate cut.
It appears that the EUR/USD currency pair is potentially preparing for a significant technical breakout as a result of forthcoming inflation data from both the United States and Germany. This could be indicative of a state of weariness towards the Euro.
In the upcoming week, the British Pound is expected to experience some setbacks against the US Dollar, while the currency pair EUR/GBP will be testing its support level. Additionally, the Bank of England’s latest monetary policy decision will be announced on Thursday, with a 25 basis point Bank rate hike already expected and accounted for. It is crucial to pay attention to Governor Bailey’s statements following this decision.
Last week, the Australian Dollar experienced a boost in value primarily due to the weakening of the US Dollar. Despite positive domestic data, concerns regarding the future of the US economy resulted in limited attention being paid to this data. The Australian Dollar’s outlook is influenced by potential rate hikes by both the Reserve Bank of Australia and the Federal Reserve, but market sentiment remains a crucial factor.
The weekly forecast for gold indicates significant volatility in the XAU/USD market, which has been subject to major shifts in risk aversion. However, despite surrendering some gains due to positive US jobs data, gold retains its appeal as a safe-haven asset.
The US equities market, represented by the S&P 500 and Nasdaq, has encountered difficulties in surpassing its recent highs despite indications from the US Federal Reserve of a potential pause in its hiking cycle. As the earnings season nears its end, concerns regarding the banking sector have emerged as a prominent issue and could potentially jeopardize the multi-week uptrend. Nevertheless, technical charts do not currently indicate any signs of a reversal of the bullish structure.
The weekly forecast for crude oil suggests that the commodity is anticipating a continued recovery, despite persisting concerns regarding recession and demand. A significant rise in prices has been observed, with WTI reaching above $70 per barrel at the end of the week. Technical indicators indicate the potential for further recovery, although market sentiment remains vulnerable to disruption.
