Weekly Market Update 29 May – Dollar Index Surges to 104.3 as Debt Ceiling Negotiations Spark Optimism
Weekly Market Update 29 May – Dollar Index Surges to 104.3 as Debt Ceiling Negotiations Spark Optimism
1. The Dollar index rose from 102.9 to 104.3 last week, upon optimism on debt ceiling negotiations. While challenges of default risks persist, President Biden and House Speaker McCarthy are confident that their debt ceiling deal will pass in Congress. Flash manufacturing PMI declined to 48.5, below market forecasts, while services PMI increased above estimates to 55.1. The Department of Labour reported 229K in unemployment claims, when the markets were expecting 249K claims, underlining the resilient labour market. Prelim GDP q/q surprised markets, growing by 1.3% for Q1 2023. FOMC meeting minutes revealed underlying hawkishness within the different governors upon stubborn data on inflation and demand for data-dependent approach. The Core PCE m/m grew by 0.4%, above the market forecast, which underlines the persistent inflationary pressures. Over the weekend, Republicans voted for suspension, while Democrats agreed to curb federal spending for the next two years, suspending the debt ceiling until January 1, 2025. This week, markets will keep a close eye on the process of passing the bill to avoid default as June 5, the new “X-date” according to US Secretary Yellen, approaches. Markets expect data on JOLTS job openings, and unemployment change to assess labour market conditions. Markets also await data on CB consumer confidence and ISM Manufacturing PMI to analyse the US economy’s outlook.
2. The euro extended its decline against the dollar last week, holding just above $1.07 in face of continued dollar strength. Despite ECB members speaking separately on the need for further rate hikes, euro bears remained in control of the market. Markets have fully priced in two final 25bps rate hikes in June and July meetings. ECB members, however, are raising the possibility of hikes continuing till its September meeting. While the ECB’s rate hike cycle is expected to persist beyond the Fed’s, the economic outlook in the Eurozone is casting doubts on the extent of the tightening cycles. Germany’s revised Q1 2023 GDP figures showed that Europe’s largest economy sank into a recession, recording a 0.3% drop in Q1 2023 preceded by the 0.5% fall in Q4 2022. Germany’s manufacturing PMI also continued its decline, as May flash estimate slid to 42.9. This week will see CPI data released for Spain, Germany, and the euro area, where persistent inflationary pressures could support further rate hikes from the ECB and provide support for the euro.
3. The sterling slumped below $1.24 against the dollar last week, reaching $1.23 midweek before paring some losses. Inflation falling below double digits in the UK was cold comfort to the BoE, with CPI y/y remaining stubbornly high at 8.7%, above forecasts of 8.2%. Traders are now pricing in a peak rate of 5.5%, which is a full percentage point above the current rate and implies four consecutive 25bps hikes ahead. There are also growing signs that the causes of inflation are becoming domestic, as Chancellor Hunt recently met with food manufacturers to keep prices affordable while Prime Minister Sunak introduced work visas for more immigrant workers to keep wage costs down. Investors can look to Monetary Policy Committee member Mann’s speech this Wednesday for further clues on the BoE’s rate path.
4. The loonie slid against the dollar, with USDCAD surging to $1.36, on the back of weak IPPI data. IPPI m/m contracted 0.2% in April, below market forecast of 0.2% growth, pushing the narrative that BoC may ease up on their tightening policy. Driven by rise in crude oil prices, RMPI m/m came in beyond estimates, growing by 2.9%. However, price gains on crude oil got erased upon worsening global economic conditions. Markets will be watching GDP and Manufacturing PMI this week for more insights on Canada’s economic outlook. The aussie slid against the US dollar, nearing $0.65, upon worsening PMI and retail sales data. The flash manufacturing PMI stayed unchanged at 48, while the flash service PMI, albeit growing, declined to 51.8. Retail Sales m/m came in at 0% growth, below market forecast of 0.3%. Overall, softening domestic economic data bolstered bets that the Reserve Bank of Australia would pause its interest rate hikes next month. Markets await RBA governor Lowe speech and CPI y/y data for guidance on future rate decisions. The kiwi slumped against the dollar, nearing $0.60, upon announcement of an end to RBNZ’s tightening cycle. Retail Sales q/q came in below estimates, at minus 1.4%. As expected, the RBNZ hiked its cash rate by 25 basis points to 5.5%. However, RBNZ surprised markets by declaring an end to its tightening cycle, causing weakness for the kiwi. Governor Orr believes that New Zealand will return to its inflation target by next year. This week, markets can expect ANZ business confidence survey and overseas trade index q/q data to further assess the economic situation in New Zealand.
5. Brent crude surged and closed above $77 per barrel last week. Meetings between President Biden and House Speaker Kevin McCarthy on Friday gave markets confidence on debt ceiling impasse as Biden remarked that he is “very optimistic” as he left the White House for Camp David. Furthermore, the announcement of a delayed “X date”, June 5th, by US Secretary Yellen, reassured markets. Later this week, investors are bracing for an OPEC+ meeting to seek further insights on global oil production. Gold prices fell to $1945 per ounce against the strengthening dollar, upon hawkish economic data released last week. Resilient economic data on consumer and labour markets led the Fed to keep rates high for an extended length of time, dampening the appeal of the dollar-denominated bullion.
