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30 May 2022
- The Federal Reserve minutes of the May meeting indicated the willingness of all members to raise rates by 50 basis points at subsequent meetings in an effort to bring interest rates to a neutral level that neither inhibits nor stimulates economic growth. There was no mention of 75-basis-point moves that had become the base case for a few Wall Street banks at the end of April.
- FOMC is strongly focused on data, so the policy will depend on inflation trajectory and progress toward correcting the supply and demand imbalances in the labor market. The core personal consumption expenditures price index came in at 4.9%, on an annual basis, a moderation from March’s 5.2% reading. Including food and energy, headline PCE increased 6.3% in April from a year ago. That also was a deceleration from the 6.6% pace in the previous month. Personal consumption expenditures grew at a faster pace than inflation, increasing 0.9% sequentially in April.
- ECB chief Christine Lagarde is starting to side with hawkish colleagues, confirming an early end to the ECB’s bond-buying program in the third quarter and making her first explicit call for interest rate increases. “I expect net purchases under the asset purchase program to end very early in the third quarter,” she wrote in her blog post. “This would allow us a rate lift-off at our meeting in July, in line with our forward guidance. Based on the current outlook, we are likely to be in a position to exit negative interest rates by the end of the third quarter.”
- In the UK, Bank of England (BoE) Chief Economist Huw Pill suggested that further rate hikes would be necessary to curb record inflation, but that too much tightening may run the risk of a deep recession.
Indices
After seven weeks of declines, US stocks posted very good gains, with all three major indices adding more than 6%. Every sector in the S&P 500 advanced, with consumer discretionary and energy stocks performing especially well. This cross-sector strength appeared to reflect an optimism that inflationary pressures could be peaking.
Much of the week’s gains came on Thursday and Friday. Stocks rallied with strong retail earnings and a slowing inflation report sparking hopes entering the three-day weekend that the Federal Reserve’s tightening policy can avoid tipping the U.S. economy into a recession.
European stocks also ended the week in the black. Investors’ optimism stemmed mainly from the fact that interest rate increases will be gradual thanks to a possible peak in inflation. Stocks thus appreciated despite below-average volumes on the markets. The pan-European STOXX Europe 600 Index ended the week 2.98% higher, France’s CAC 40 Index climbed 3.67%, Germany’s DAX Index advanced 3.44% and the UK’s FTSE 100 Index rose 2.65%.
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US30 +6.24% |
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US100 +7.15% |
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US500 +6.58% |
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GER40 +3.44% |
Commodities
Oil prices have hit two-month highs and continue to rise as uncertainty continues to grip the market over a possible EU deal on agreement on banning Russian oil imports. Prices rose especially in the second half of the week due to uncertainty in the US market, as markets continued to fret over tight US galena and diesel supplies ahead of the summer driving season. News is also emerging that suggests OPEC+ will only raise production next week by the previously agreed 432,000 bpd, providing another supportive factor in a tight market.
Gold gained slightly on investor hopes that the US Fed could ease the pace of interest rate hikes thanks to good numbers on Core Personal Consumption Expenditure (PCE), the Fed’s favorite inflation reading. The subsequent weakening of the dollar is helping gold to rise.
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Gold +0.40% |
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Silver +1.43% |
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BRENT +6.11% |
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NATGAS +7.91% |
Forex
After the strongest bullish trend since 2015, when it reached its highest level in two decades, the U.S. dollar fell for the second week in a row and is on track for its first monthly drop in five months. Investors have scaled back bets that rising U.S. rates will spur further gains and as fears of a global recession have receded a little. Positive U.S. consumer data and the easing lockdowns in China are helping kindle hopes about global growth, which tends to support exporters’ currencies at the dollar’s expense.
The Russian dollar has been losing ground after rising strongly to long-term highs over the past week. The weekly loss of more than 11% was mainly due to the central bank’s interest rate cut to 11%, the third 300 basis point cut in a row. The rouble lost the support of the month-end tax period that usually sees export-focused companies convert foreign currency into roubles to pay local liabilities.
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EUR/USD +1.65% |
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USD/JPY -0.67% |
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GBP/USD +1.08% |
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USD/CAD -0.91% |
Macro
US new home sales fell 16.6% to the lowest level since April 2020, mainly due to rising construction costs and more expensive mortgages. All regions saw declines. Preliminary US PMI data also missed expectations due to rising input costs. The S&P Global Flash manufacturing PMI fell to 57.5 points from 59.2 in April. On the services side of the economy, the flash PMI reading came in at 53.5 (55.6 in April), when sales growth slowed down, while input costs increased to the highest level on record.
The US economy contracted an annualized 1.5% on quarter in the first three months of 2022, slightly worse than initial estimates of a 1.4% decline, with the biggest drag coming from trade. Private inventory and residential investment were revised down, partly offsetting an upward revision in consumer spending. New orders for the US manufactured durable goods increased 0.4% month-over-month to $265.3 billion in April of 2022, following a downwardly revised 0.6% rise in March and below forecasts of 0.6%, in a sign business spending moderated.
The S&P Global Flash Eurozone Composite PMI, a monthly gauge of the services and manufacturing industries, dipped to 54.9 from 55.8 in May. Business activity in the private sector held up better than feared in May amid strong demand for services, particularly from households. In the UK, weak PMI data show that private sector growth slumps weakest since the winter 2021 lockdown as the cost of living crisis hits customer demand in May. The S&P Global/CIPS Flash PMI Composite Output Index was 51.8 in May, down from 58.2 in April.
What to watch out for this week
- The most anticipated report of the week will be Friday’s NFP report for May, with economists expecting the economy to have added 320,000 jobs in May, slowing from 428,000 in April. Labour market remains robust, but still, it would represent the smallest job growth in around a year. The unemployment rate is seen drifting to 3.5% from 3.6%. In addition to NFP, labour market data from ADP, JOLTS job openings and weekly statistics on initial jobless claims will be published.
- PMI in manufacturing and service of ISM will show us the impact of rising prices and supply chain issues a there will also be reports on consumer confidence, construction spending, factory orders, and auto sales.
- We will also get guidance from several policymakers, speaking about the economic outlook. Fed Governor Christopher Waller is due to speak on Monday, New York Fed President John Williams and St. Louis Fed President James Bullard, are both due to speak on Wednesday, followed on Thursday by Cleveland Fed President Loretta Mester. On Wednesday, the latest Beige book, which tracks economic developments in each of the Fed’s 12 districts, will be published.
- Preliminary inflation data for the euro area will be reported on Tuesday, with economists expecting the consumer price index to hit another record high of 7.7% in May, after 7.4% in April. The high inflation will confirm economists and investors that the ECB will start monetary policy normalisation at its next meeting on June 9. It is widely expected that the ECB will make its first 0.25% hike in July, but a very strong inflation reading could fuel talk of a bigger move.
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