Another important week for global markets with the release of US CPI inflation data ahead of the FOMC interest rate decision. We also have the reaction to the European Parliamentary Elections held on Sunday, where the far right made notably gains.
What happened last week.
(A forex, index, and commodity market review)
Weekly change (amount change and percentage change on the week)
FTSE -90 -1.08%
DAX -47 -0.25%
DOW +26 +0.07%
S&P +51 +0.96%
NASDQ +444 +2.39%
NIKKEI -99 -0.26%
Hang Seng +385 +2.11%
US markets well given mixed messages last week with ISM manufacturing data weakening unexpectedly in May whilst the ISM Services came in much stronger than expected at 53.8 versus consensus of 51.0. US equities responded immediately with both the S&P500 and Nasdaq hitting all time highs despite the potential impact on rate expectations.
US Non-Farm employment change last Friday looked to be much stronger than forecast, with 272K new jobs (versus 182K expected) and a higher average hourly earnings , up 0.4% versus 0.3%.
Equity markets did not react as some might have expected, closing out the day with modest losses whilst consolidating the gains from mid-week. Whilst the headline employment report looked strong there were signs that the data continues to imply cooling in the labour market with a higher than consensus unemployment rate at 4.0% and a slowdown in wage growth in the service sector.
Interest rate expectations drifted lower last week with the probability of a rate cut in September now standing at 47% probability versus 60% a week ago whilst a second rate cut by year-end fell from 54% to 45% probability.
On Sunday, the European Parliamentary Elections took place across the EU with exit polls putting the centre right European People’s Party on course to win 189 seats with the Socialists and Democrats on 135 seats in second place. More damning was the exit poll in France which forecast the RN Party, lead by Marine Le Pen, on 31.5% whilst President Macron’s centrist alliance was forecast to receive just 14.5% of the vote. In a huge surprise to all political parties, including his own, Macron called a snap general election saying ……“For me, who always considers that a united, strong, independent Europe is good for France, this is a situation which I cannot countenance. I have decided to give you back the choice of our parliamentary future with a vote.” There had been rumours for some time that Macron might call an early election, with parliament struggling to function effectively. This is a big gamble for Macron as Marine Le Pen’s RN party has significant momentum and will either halt her progress or result in RN becoming the dominant force which will certainly change the direction of the EU. The election is scheduled for June 30, with a run-off in July 7th .
EURUSD -0.50 -0.46%
GBPUSD -0.25 -0.20%
USDJPY -0.54 - 0.34%
The US Dollar reacted positively to the better-than-expected US Non-Farm employment report. Week-end nerves ahead of the European Parliamentary Elections also resulted in a weak Euro against all majors as traders fretted over the potential impact of a shift in the political landscape in the EU.
The exit polls on Sunday night suggested a surge in support for the far-right parties in both Germany and France and the potential impact on the direction for both the EU and the Eurozone.
The FOMC meeting this week will have an impact on the US Dollar over the next month or so. We expect no change in rates, but the statement is what the markets want to read for clues about shifts in policy between now and the year end.
Gold -38 -1.63%
UK OIL -2.11 -2.59%
US OIL -2.05 -2.66%
Oil reacted negatively to the outcome of the delayed OPEC+ meeting from the previous Sunday. OPEC+ has boxed itself into a corner with demand forecasts implying a mixed picture whilst supply continues to build with non-OPEC oil producers making up for the 2.2 Mln barrel per day reduction by OPEC+ members. OPEC+ agreed to extend their voluntary cuts to Q4 but also agreed to some members increasing production in Q3, unwinding some of the voluntary cuts. The problem for OPEC+ is that it is losing market share whilst supporting prices, not that effectively, to the benefit of Non-OPEC members. And any unwinding of its commitment to restrict supply will undermine prices, the very issue that OPEC + wanted to avoid.
Data and events in the coming week
(What traders need to look out for in the week ahead)
Interest rate decision at the Federal Reserve as the FOMC meet to deliberate interest rate policy. Prior to that we have US CPI inflation data which will surely have an impact on committee members as they decide their next move.
Monday
No key data release / announcements
Tuesday
UK Employment data. Claimant Count and average hourly earnings - expected to show slight increase in claims. GBP sensitive to this release.
Wednesday
China CPI and PPI. China has managed to lift CPI over the past two months as concern about a deflationary spiral subsides. PPI data suggests there is still little price pressure at the factory gate which will not help CPI going forward.
UK GDP. Monthly data. Less dependable as subject to revisions but may help inform where the UK is at. GBP sensitive to any significant swing away from consensus.
US CPI Inflation data. Headline inflation expected to rise 0.1%, the lowest reading since last October. The year-on-year reading is expected at 3.4%. Core CPI expected at 0.3% with annualised rate at 3.5%. USD and US assets very sensitive to this release.
US FOMC policy decision. No change expected with rates remaining at 5.25 – 5.50%. Guidance about future rate cuts is what the market craves. The Press Conference at 7:30pm will be helpful. US Dollar, US, and Global assets sensitive to this announcement.
Thursday
US Core PPI. A measure of prices for good and services at the factory gate. Expect a decline to +0.3% monthly reading following last month’s surprise jump.
Friday
Japan Bank of Japan policy meeting. Expect no change in interest rates this meeting. Forward swaps market implies a 70% probability of a rate hike in July meeting. Concern remains about the weakness of the Japanese yen could prompt intervention if USDJPY breaches 160 level. JPY sensitive to this announcement.
US University of Michigan Consumer Sentiment. A rebound following last month’s surprisingly weak number. Perhaps an aberration. USD sensitive.
