After an eventful week for the Nasdaq100, S&P500, Nikkei225, DAX40 and the U.S. dollarTraders should be alert for more reversals in market action this week.
Sometime last week, better than feared US data and some slightly hawkish talks from the Fed had led to US interest rate futures pricing in a 40% chance of a rate hike at the June FOMC meeting. The USD naturally benefited from this pricing. But after Jay Powell’s speech on Friday, market prices are again firmly convinced that the Fed will pause. Looking at the flow of data coming up over the coming week, I’m wondering how the outcome might affect market pricing for June Fed action (and another disruption in the yield curve) and what that means for the USD, equities and that means gold.
However, one still has the impression that the US debt ceiling and price developments at US banks will dominate the narrative.
In the art of risk management, it is believed that in order to get a deal, we need to experience greater market volatility and so far we haven’t seen any real stress outside of US Treasury bills. That could change this week, and while last week’s headlines were largely that a deal was within reach, the failure of Republican negotiators’ talks on Friday has many thinking we may be forced to the June deadline before we see an agreement. Where, in the spirit of political negotiation, politicians simply have to get straight to the point to give the impression that they really were fighting for the best deal.
While volatility markets are calm, don’t be surprised if that changes this week.
Big event risks for the coming week
UK Global Manufacturing & Services PMI – Tuesday
Market expects index to come in at 48.0 for manufacturing and 55.5 (55.9) for services. This series of data is unlikely to have a significant impact on interest rate expectations for the June BoE meeting. So again I don’t expect this to affect the GBP in any way but of course that depends on the outcome.
EU PMI for global manufacturing and services – Tuesday
The market sees a slight improvement in the pace of contraction in manufacturing, with the diffusion index at 46.0 (45.8). Services PMI is estimated at 55.5 (56.2), which would indicate a healthy pace of growth. EURUSD is likely to be sold in rallies this week, although higher volatility due to tightening debt ceiling negotiations could see the USD offered.
S&P Global US Manufacturing and Services PMI – Tuesday
The market has already moved on this data release and a better than consensus reading could push the USD higher. With US growth data points in the spotlight, let’s see if manufacturing is growing or shrinking (mom) and how it compares to UK and EU PMIs. Consensus leaves manufacturing at 50 (down from 50.2) and services at 52.5 (down from 53.6).
Above 50 shows expansion month-on-month. Below 50 indicates a contraction.
Reserve Bank of New Zealand meeting – Wednesday
The market is pricing in a 33 basis point hike (a 32% chance of a 50 basis point hike), with 16/17 economists calling for a 25 basis point hike. With the economist community anticipating a 25 basis point hike, there is a risk of a rapid fall in NZD (given the small premium for a 50 basis point hike). We saw traders cover NZD shorts in the session with the NZD being the best performer in G10 FX last week. Are we nearing the end of the migration cycle? The market is pricing in a 25 basis point rate hike at this session and at least one more rate hike by October.
UK CPI – Wednesday
The market expects headline inflation to fall quickly to 8.2% (from 10.1%), while core inflation is likely to remain stable at 6.2% (6.2%). The shape guide points to a moderate risk of a better-than-consensus result and could be relevant at the Bank of England (BoE) meeting on June 22, where the market credits an 80% chance of a rate hike. GBPUSD support is seen at 1.2355 and weak pressure could see this tested.
May – Thursday FOMC Minutes
Although the minutes are retrospective in nature, they may give us some understanding of the desire within the Fed ranks to take a break at the June 14th FOMC meeting.
CPI Tokyo – Friday
The market is expecting headline inflation to come in at 3.4% and core inflation at 3.9% (up from 3.8%) – last week the JPY saw a good selling stream as the carry trade kicked in in earnest. Again, much depends on the US debt ceiling sentiment as the JPY is likely to be the best long trade if we see higher volatility heading into June 1st.
US Core PCE – Friday
The market expects core PCE to come in at 4.6% YoY, with economists’ estimates ranging from 4.7% to 4.2%. Any reading below 4.4% could weigh on the USD, while above 4.7% the USD should find buyers. Much, of course, depends on the latest news surrounding the US debt ceiling.
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