So, what do we know?
(A forex, index, and commodity market review)
Last week’s central bank policy meetings all went according to market expectation. The Federal Reserve kept rates on hold as promised in past communications whilst the European Central Bank raised rates again by another 0.25%, taking the Refi rate 4.0% from 3.75%.
Equity markets open the week on a weaker note following Goldman Sachs downgrade of China’s economic prospects.
Weekly change (amount change and percentage change on the week)
FTSE +80 +1.06%
DAX +408 +2.56%
DOW +422 +1.24%
S&P +110 +2.58%
NASDQ +430 +3.24%
NIKKEI +1,440 +4.47%
Hang Seng +650 +3.35%
Despite the increase in rates from the ECB and a more hawkish statement from the Federal Reserve last Wednesday, US equity markets made further advances last week with the widely followed S&P500 up 2.6% on the week which is its biggest weekly gain since the last week in March.
The Federal Reserve’s rate setting committee, the FOMC, announced a pause in rates that had been well telegraphed prior to the meeting and was justified in light of the better-than-expected inflation data released the day before.
A number of the FOMC had talked up further rates hikes coming down the line but supported the pause in rates which was a unanimous vote. Despite the vote, the outcome of the meeting was more hawkish than many commentators were expecting with the dot plot of individual member’s rate expectations showing an average of two further 0.25% hikes this year followed by total cuts of 1% through 2024.
Whilst the hawkish stance could be considered bearish for equities, the impression given by the committee painted a more robust economy through the remained of 2023 which help support equity prices.
What many analysts are questioning is, if the data is forecast to be stronger than previously expected, why pause rates in June. Why not just hike them if that’s the committee’s opinion. Jerome Powell stated that the Federal Reserve is justified in pausing even if it knows it is likely to be raising rates again in July. Its possible that the fall in inflation could accelerate further next month in which case some committee members may argue for a pause but that is likely to only fuel the economy. The Fed, along with all other Central Banks, has a delicate balancing act to perform, but where some of the effects of their actions are not felt for months. So central bankers follow closely all the key indicators that we all report on and look for trends that will confirm changes in the trajectory of the US economy.
The Fed is sounding more hawkish than the market is – time will tell who is more right.
European markets steadied after the much-expected ECB rate hike on Thursday which took the refi rate to the highest level in 22 years. The ECB confirmed that is would continue to raise rates with another rate hike expected in July unless there was a material change in key data. The ECB highlighted the fact that inflation is likely to remain elevated for longer than hoped for, with the bank’s target of 2% likely to take until 2025 before it is hit again.
UK markets were steady ahead of this week’s Bank of England interest rate decision. Following the alarming jump in core inflation in the May release, the bank’s rate setting committee, the MPC, will find out how much inflation sodftened ahead of its decision on Thursday. The stronger than expected UK average earnings will also add to the bank’s deliberations as rates are expected to be raised again to combat the stronger than expected economy and higher core inflation.
EURUSD +1.93 +1.80%
GBPUSD +2.39 +1.90%
USDJPY +2.51 +1.80%
Despite the more hawkish comments from the Fed, the US dollar lost further ground to other majors as the weaker US Dollar trend extends further.
Sterling continues to outperform as traders react to expectations that the Bank of England will raise rates again this week by 0.25%, with some analysts calling for a 0.5% hike. Forward interest rate contracts now imply interest rates will peak at 5.7% which is almost 1% higher than was the case three months ago. The higher the interest rate the better the return investors get for holding sterling – hence sterling’s strength.
Gold -4 -0.20%
UK OIL +1.46 +1.95%
US OIL +1.25 +1.77%
Gold was unusually lacklustre last week despite the weaker US dollar which we would have expected to have resulted in a greater gain for gold.
Oil markets made modest gains last week although bearish news from China offset the better-than-expected US data and the rebound in consumer confidence which was released last Friday.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
UK rate decision - an important week for sterling markets and homeowners who are witnessing a further surge in mortgage rates as markets price in their expectations for higher rates to come this year.
Monday
US Juneteenth federal holiday. Commemoration of the end of slavery. US markets closed in observance.
Tuesday
Australia Release of minutes of last RBA policy meeting. AUD sensitive.
China PBOC – People’s Bank of China. After a surprise cut in its main policy rate last week, the PBOC will announce any further changes to economic policy as the Chinese economy fails to keep up the pace set in Q1.
Wednesday
UK Headline and core CPI inflation data . Expect fall in headli8ne to 8.4% from 8.7%. Core rate is expected to have fallen by 0.1% to 6.7% in May. GBP and UK assets very sensitive to this release.
US Jay Powell, chairman of the Federal Reserve, testifying about the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington. Two days of testimony, with second appearance on Thursday. . USD sensitive.
Thursday
Switzerland Swiss national Bank rate decision. A further increase in rates by 0.25% to 1.75%. CHF and Swiss assets sensitive.
UK MPC interest rate decision. Expect 0.25% hike with outside chance of 0.5% hike in rates depending on how hot the core inflation data is. No press conference or updates to forecasts this meeting. Sterling and UK assets will be very sensitive to this outcome.
Friday
UK Retail sales. A pullback from last moth’s number. GBP sensitive.
UK, EU and US Flash manufacturing and service PMI data. Services coming under a little more pressure but still comfortably above the 50 level whilst all manufacturing readings remain below the 50-level implying this sector is contracting.
What should we be trading?
(Analysis of the popular markets and what we like)
What’s the problem?
(Examining a problem many traders face and what to do about it)
