Weekly Market Update 3 July– Dollar Holds Steady at 102.9 as PCE Data Dampen Rate Expectations
Weekly Market Update 3 July- Dollar Holds Steady at 102.9 as PCE Data Dampen Rate Expectations
1. The DXY index remained unchanged at 102.9 after the release of cooling PCE price index data. The CB Consumer Confidence survey reported a reading of 109.7 on Tuesday, surpassing market estimates of 103.9, which helped recover earlier losses caused by China’s currency intervention. Fed Chair Powell’s speech on Wednesday emphasized the need for additional rate hikes and did not rule out an increase in borrowing costs in July. However, concerns about the stability of the banking industry and vulnerabilities in the commercial real estate sector weakened the DXY. The resilient final GDP data showing 2.0% growth reversed the losses, leading to a 13bps rise in the 2Y Treasury yield as market prices in further rate hikes. Additionally, unemployment claims fell to 239K. However, the core PCE price index m/m remained in line with expectations at 0.3% growth, resulting in a y/y growth of 4.6% instead of the forecasted 4.7% and causing the dollar to decline back to 102.9 after its earlier rally. This week, market focus will be on the ISM manufacturing PMI for business condition assessment, FOMC meeting minutes for rate decision insights, and employment data for further evaluation of the labour market.
2. The euro gained strength against the dollar and ended the week above $1.09 following a hawkish speech by ECB President Lagarde. The German ifo Business Climate reported lower readings of 88.7, indicating a slowdown in production and pessimism among businesses. However, the euro recovered from its losses after the German Bundesbank’s monthly report suggested the recession would end in Q2 2023. President Lagarde’s speech reiterated a hawkish and data-dependent stance. Lagarde confirmed expectations for rate increase in July. While German Prelim CPI showed a 0.3% growth, CPI Flash Estimates indicated a moderation in inflation at 5.5% compared to the expected 5.6%. This week, market attention will be on PMI data within the eurozone, providing insights into the impact of rate hikes on these sectors and potentially shedding light on future rate decisions in Europe.
3. The pound sterling weakened against the dollar due to mounting concerns of a recession, while BOE Governor Bailey maintained a hawkish stance. His comments on Wednesday suggested that interest rates could remain at elevated levels for a longer period than anticipated by traders. It is expected that rates will be held steady for at least six months, with the first quarter-point cut potentially occurring by September next year. Going forward, economic data will play a crucial role in determining interest rate decisions, as Governor Bailey takes an “evidence-driven” approach. Market focus will be on manufacturing and services PMI data to assess the condition of the UK economy and whether it warrants a rate hike. This will also provide insights into the future trajectory of the UK economy.
4. The Loonie declined against the US dollar, reaching above $1.32, as CPI growth slowed. Canada’s CPI y/y increased by 3.4% in May, marking its slowest pace in two years. This annual rate aligns with the BOC’s expectation of inflation cooling to around 3% by mid-year. However, some of the losses were offset as the Canadian economy’s regained momentum in May. Money markets currently indicate a 59% probability of a 25bps hike in July. Employment data this week will provide insight into wage inflationary pressure within the economy. The aussie depreciated against the US dollar, ending the week below $0.67, following subdued inflation data. With a notable decline in fuel prices, the CPI y/y came in at 5.6%, falling short of market expectations of 6.1%. Consequently, market focus will be on the cash rate decision on Wednesday, with expectations that the RBA will pause rate hikes and maintain the cash rate at 4.1%. The kiwi initially declined against the dollar but later stabilized to close the week unchanged at $0.61. Major banks in New Zealand are predicting a second recession starting in Q4 2023 and Q1 2024, primarily due to mortgage refinancing in a higher interest rate environment. The introduction of the Deposit Takers Bill has boosted consumer confidence in depositary institutions, offsetting the initial decline.
5. Brent crude oil rose slightly above $75 per barrel as weekly US crude stockpile consumption exceeded expectations. Concerns about further interest rate hikes raised by central bank leaders during their discussion at ECB forum, as well as China’s slowing economic recovery, dampened demand for crude oil. Additionally, the six-month spread for Brent contracts shifted into contango for the first time since December, indicating a near-term decline in crude prices. However, losses were mitigated, and prices surged due to increased consumption of US crude stockpiles, indicating sustained oil demand. The OPEC forum this week will provide insights into global crude oil demand and supply dynamics. Gold dipped below $1,910 per ounce as the Federal Reserve’s hawkish stance dimmed the attractiveness for non-yielding precious metals amongst buyers. The key PCE price gauges showed persistent inflation, supporting the case for a 25bps rate hike in July, exerting bearish pressure on the bullion.
