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22 May 2023
- Federal Reserve Chair Jerome Powell indicated his willingness to halt interest-rate increases in the upcoming month and acknowledged that tighter credit conditions could result in a lower peak for the policy. Speaking at the Federal Reserve conference in Washington, Powell stated, “We have made significant progress in tightening our policy, and the current stance is restrictive. However, there are uncertainties regarding the delayed effects of our previous tightening measures and the extent of credit tightening due to recent banking stresses.” He further emphasized the importance of analyzing data and the evolving economic outlook before making careful assessments.
- On Friday, European Central Bank (ECB) board member Isabel Schnabel urged the ECB to persistently combat inflation due to rising wages, overly generous fiscal policies, and persistently high inflation expectations. In a similar vein, ECB President Christine Lagarde emphasized the ECB’s determination to take necessary and courageous measures to overcome inflationary pressures.
- During their meeting on Saturday, Group of Seven (G7) leaders reached an agreement to launch a new initiative aimed at countering economic coercion. They pledged to take action to prevent any attempts to exploit economic dependence and stated that such actors would not succeed and would face consequences. The initiative, known as the Coordination Platform on Economic Coercion, will facilitate early warning systems and prompt sharing of information on economic coercion.
Indices
The promising advancements in artificial intelligence are instilling a sense of hope regarding the future productivity of businesses. These advancements are also having a significant positive impact on the stock market, as evidenced by the substantial rise in the largest tech index in the United States last week. Moreover, the outperformance of tech companies played a major role in the other two major US indices. In Europe, stocks made gains fueled by the optimistic belief that interest rates may soon reach their peak and that the United States would avoid a debt default. The pan-European STOXX Europe 600 Index concluded the week with a 0.72% increase when measured in local currency. Among the major markets, Germany’s DAX experienced a notable surge of 2.27%, while the UK’s FTSE 100 Index recorded only marginal gains last week.
US30 +0.38% |
US100 +3.47% |
US500 +1.65% |
GER40 +2.27% |
Commodities
On Friday, Brent crude futures rallied and closed above $75.5 per barrel, bouncing back from earlier losses of over 2%. The market was fueled by renewed concerns surrounding a possible US debt default, as high-stakes discussions on raising the debt limit abruptly came to a halt. Despite this uncertainty, the Brent crude benchmark recorded a weekly gain of 2.14%, marking the first positive weekly performance in over a month. Investors are anticipating an oil market deficit in the latter half of the year, contributing to the upward momentum. According to projections by the International Energy Agency (IEA), demand is expected to surpass supply by 2 million barrels per day in the second part of 2023, with a significant portion of the demand stemming from China. Meanwhile, the price of gold managed to hold steady around $1,960 per ounce on Friday, as increasing optimism regarding the US debt ceiling negotiations and hawkish signals from the Federal Reserve put pressure on the precious metal. US President Joe Biden and House Speaker Kevin McCarthy expressed confidence in averting a US default, with McCarthy even suggesting the possibility of a potential agreement to raise the US debt ceiling as early as next week.
NATGAS +14.12% |
Forex
In the early European trading session on Friday, the U.S. dollar experienced a slight decline but remained close to a two-month high. This was attributed to robust labor data and growing optimism that a potential U.S. debt default could be avoided, indicating that the Federal Reserve might maintain its tight monetary policy for a longer duration. Concerns surrounding the U.S. banking sector seem to have diminished, and recent inflation data has shown resilience. Additionally, Thursday’s jobless claims indicated a labor market that remains constrained, as the number of Americans filing new claims for unemployment benefits dropped more than anticipated. As a result, the USD/JPY pair declined by 0.4% to 137.95 following the release of data revealing that Japanese consumer inflation had reached a 40-year high in April, exerting pressure on the Bank of Japan to reconsider its ultra-loose monetary policy.
EUR/USD -0.42% |
USD/JPY +1.65% |
GBP/USD -0.10% |
USD/CAD -0.37% |
Macro
UK:
Bank of England (BoE) Governor Andrew Bailey restated during his speech that monetary policy would need to tighten further if there were indications of more persistent inflationary pressures. He anticipated a significant slowdown in inflation starting from April as the annual calculations no longer incorporate energy price hikes. However, Bailey emphasized that policymakers still considered the risks to inflation to be largely skewed to the upside. He noted that unwinding the second-round effects of inflation would take longer than their initial emergence.
According to the national statistics office, the UK’s unemployment rate inched up to 3.9% in the three months leading up to March, compared to 3.8% in the preceding three months. However, wage growth remained relatively steady during the period, with average weekly pay excluding bonuses increasing by 6.7% compared to the previous year’s figures, up from 6.6%.
EU:
Official data further indicated a potential slide into an industrial recession in Europe. Eurozone industrial production contracted by 4.1% on a sequential basis in March, following a 1.5% increase in February. Year-on-year, industrial output declined by 1.4% after a 2.0% expansion in the previous month.
In Germany, the ZEW economic research institute reported a third consecutive monthly decline in investor sentiment in May. The sentiment index entered negative territory for the first time since the end of 2022, driven by concerns about rising interest rates. ZEW President Achim Wambach warned that Germany could experience a mild recession.
The European Commission revised its forecasts for economic growth in the eurozone, projecting an increase for this and the next year while predicting persistently high inflation. The latest projection anticipates a gross domestic product (GDP) expansion of 1.1% in 2023 and 1.6% in 2024, up from the previous estimates of 0.9% and 1.5% growth, respectively. Wage increases are expected to contribute to higher inflation, with estimates of 5.8% in 2023 and 2.8% in 2024, revised from the previous figures of 5.6% and 2.5%, respectively.
US:
The primary driver behind the week’s market gains seemed to be a notable change in the tone surrounding the negotiations on the debt ceiling. Following a meeting at the White House on Wednesday, President Joe Biden expressed confidence in avoiding a default, while Republican House Speaker Kevin McCarthy described reaching a deal as “doable,” and Democratic Senate Leader Chuck Schumer emphasized the necessity of a bipartisan agreement.
While much of the economic data released during the week aligned with consensus expectations, investors appeared to react to certain unexpected outcomes. Retail sales in April increased by 0.4%, falling below consensus expectations and marking the slowest year-over-year growth (1.6%) since the early stages of the pandemic. Considering that the data is reported on a nominal basis and the consumer price index rose by 5.5% during the same period, real spending, adjusted for inflation, experienced a sharp decline.
On the other hand, industrial production in April rose by 0.5%, surpassing expectations of a flat reading, with the increase partially driven by heightened auto manufacturing activity. The week also revealed surprising resilience in the labour market. Weekly jobless claims came in at 242,000, below expectations and lower than the previous week’s figure of 264,000, which had been the highest level since late 2021. Additionally, continuing claims reached their lowest level in nine weeks.
What to watch out for this week
- In the US, the ongoing debt ceiling negotiations will be closely monitored by investors. However, hopes for a swift resolution were dashed on Friday when Republican negotiators abruptly left the meeting, citing unreasonable demands from the White House. Additionally, market attention will be focused on the release of the Federal Reserve meeting minutes and speeches by various Fed officials. Strong economic data throughout the week increased expectations for another interest rate hike. However, on Friday, Fed Chair Powell suggested that due to banking sector stress, raising rates to curb inflation may not be necessary.Furthermore, several important data releases are anticipated, including personal outlays and income data, durable goods orders, flash PMI data from S&P Global, and new and pending home sales. It is expected that consumer spending will experience a slight increase in April following a period of stagnation in the previous month. On the other hand, orders for US-manufactured durable goods are likely to decline after a notable rise in March. Traders will also closely monitor the advance estimate of wholesale inventories and the second estimates of first-quarter GDP figures.
- In Germany, investors are eagerly awaiting the final GDP numbers. Additionally, the Ifo Business Climate indicator is expected to decrease from April’s 14-month high, while the GfK Consumer Climate Indicator is likely to increase for the eighth consecutive month, reaching its highest level since April 2022. In the Euro Area, flash estimates suggest an improvement in consumer morale to a 15-month high. Flash PMI data is also expected to indicate continued monthly expansion in economic activity, extending the positive momentum observed since the beginning of 2023.
- In the United Kingdom, the economic calendar is filled with significant releases on inflation, retail sales, public sector net borrowing, and CBI gauges for factory orders and distributive trends. Headline inflation is projected to have grown by 0.8% month-on-month in April, resulting in an annual rate of 8.3%, which would mark a 13-month low compared to the previous rate of 10.1%. Retail sales are estimated to have rebounded from declines in the past two months, while the PMI survey is expected to indicate a solid expansion in the service sector and a milder contraction in manufacturing.
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