Weekly Market Update 22 May – Dollar Slips as Debt Ceiling Impasse and Fed’s Dovish Stance Diminish Optimism
Weekly Market Update 22 May – Dollar slips as debt ceiling impasse and Fed’s dovish stance diminish optimism
1. Dollar slips as debt ceiling impasse and Fed’s dovish stance diminish optimism. The DXY surged to highs of 103.6 on the back of debt ceiling optimism, before losing strength to end the week at 103.2 upon debt ceiling uncertainty and dovish speech delivered by Fed Chairman Powell. Empire State Manufacturing Index came in below estimates at -31.8, against the forecasted -3.7. U.S retail sales m/m disappointed markets, coming in at 0.4% against the forecasted 0.8% growth. Unemployment claims fell by 22K to 242K, below market forecasts, indicating at a resilient, yet tight, labour market. Fed Chairman Powell signalled that he is not keen to pursue aggressive rate hikes, citing headwinds to the economy stemming from the collapse of regional banks. He also mentioned about the reduced need for rate hikes due to credit tightening by banks. Moreover, the mid-day halt during Friday’s debt ceiling meeting from the republican walk-out waned market’s optimism surrounding the debt ceiling, resulting in weakness in the dollar. This week, markets can look forward to data like PMI and prelim GDP q/q to gauge US economic health. Markets can gain insights on inflation and interest rate decisions on upcoming events like Core PCE Price Index m/m and FOMC meeting minutes.
2. The Euro weakened against the dollar, to close the week at $1.08, upon worsening German ZEW economic sentiment. Survey results from the ZEW indicator of economic sentiment for Germany recorded a significant decline at minus 10.7 points, below market forecast of minus 5.4 points. Flash employment change q/q revealed upside surprise of 0.6%, beating market forecasts of 0.4%. Meanwhile, GDP q/q and final CPI y/y came in as estimated at 0.1% and 7% respectively. ECB President Lagarde maintains a hawkish stance, signalling potential actions to combat inflation, as headline CPI remains significantly above the ECB’s 2% target. ECB’s Vice President Guindos highlighted the prominence of the services sector as an inflationary pressure. Markets await Euro zone’s services and manufacturing PMI data this week to gauge the ECB’s future rate hikes. Markets expect services industry to cool, while manufacturing industry is set to expand.
3. The pound sterling stayed flat against the dollar, ending the week at $1.24. UK claimant count change rose significantly by 46.7K claims in April, surpassing the estimated 31.2K. The unemployment rate in the UK rose to 3.9%, exceeding market forecasts of 3.8%. Moreover, the average earnings index grew 5.8% for the three months leading up to March. On Wednesday, BoE Governor Bailey emphasized that if inflation persists, there will be further rate hikes. However, he also acknowledged signs of a loosening labour market in the UK, which might alleviate price pressures. This week, markets anticipate the release of PMI and CPI data, where markets are expecting a general contraction of inflationary pressures. BoE Governor Bailey is scheduled to speak on Wednesday, providing insight into the BoE’s perspective on future rate hike decisions in light of the revealed PMI and CPI figures.
4. The loonie strengthened against the dollar, with USDCAD ending the week at $1.34, as hotter-than-expected inflation data prompted BOC’s future rate hikes. Driven by gasoline prices, CPI m/m rose above market forecast of 0.5%, coming in at 0.7%. BoC Governor Macklem’s hawkish comments reinforced the strength of the loonie, emphasizing that it’s premature to consider interest-rate cuts. This week, markets await economic data regarding manufacturers like the IPPI m/m and RMPI m/m, to seek guidance on consumer inflation. The aussie slid against the US dollar, nearing $0.66, as indications of a loosening labour market emerged. The wage price index q/q growth of 0.8% fell short of the market’s expectations. Employment change data surprised the market with a decrease of 4.3K jobs while the unemployment rate of 3.7% shocked the markets. Overall, the labour market’s loosening prompted weakness for the aussie. Markets await PMI and retail sales m/m data to confirm service inflation and consumer spending trends. The kiwi soared against the dollar, climbing to $0.63, upon positive trade surplus recorded in April. The GDT price index was down 0.9%, compared to 2.5% growth in the previous month. But economists emphasised unchanged demand and supply dynamics in the agriculture sector, ensuring sustained growth and demand. However, PPI q/q input and output came in under forecasts, at 0.2% and 0.3% respectively. Surplus of 427m in trade balance strengthened the kiwi against the dollar. Markets can expect data on retail sales q/q and official cash rate decision from RBNZ. Markets are expecting a 25bps hike from RBNZ.
5. Brent crude rose and closed near $75 per barrel amidst debt ceiling optimism last week. Crude markets were buoyed by the Biden administration’s plan to refill the Strategic Petroleum Reserve and increased U.S. fuel demand. The IEA expects no supply changes from the G7 nations’ efforts to counter price evasion in Russian energy. Gold prices tumbled against strengthening dollar, bolstered by debt ceiling optimism, but pared some losses upon dovish speech from Fed Chairman Powell and debt ceiling impasse, ending the week at $1,975 an ounce. Gold prices in the short run will depend on market confidence regarding the debt ceiling impasse and expectations regarding the next Federal rate decisions. Currently, markets are expecting a 36% chance of a 25bps hike in the fed funds rate in June.
