Gold, S&P 500, US Dollar; Powell, Debt Ceiling, Australia Jobs, Germany ZEW, China Data

The US dollar rebounded sharply last week after hawkish rhetoric from the US Federal Reserve and persistent inflation raised doubts about whether the US central bank will pause at its next meeting in June. The US dollar index (DXY index) jumped 1.4%. The Swedish Krona was the worst-performing currency, falling 2.1% against the US dollar in the past week, followed by New Zealand down 1.6% and the Euro down 1.5% within the G10 range.

Global stock markets fell on more evidence of weakness in China’s post-Covid recovery, concerns about the US debt ceiling, and ongoing regional banking concerns in the US. US markets were mostly lower, led by the Dow Jones Industrial Average, which lost 1.1%. The MSCI World All Country Index fell 0.5%. The S&P 500 fell 0.3%, while the Nasdaq 100 rose 0.6%. Germany’s DAX 40 and Britain’s FTSE 100 fell 0.3%, Hang Seng fell 2.1%, while Japan’s Nikkei 225 jumped 0.8%.

Market performance in the past week

Source data: Bloomberg; The graph is prepared in Excel.

Note: The global bond proxy used is the Bloomberg Global Total Return Unhedged Index American dollar; The Commodity Agent used is BBG Commodity Total Return; The hedge fund agent used is HFRX Global Hedge Fund Index.

A series of Fed speeches are scheduled over the next week, including Fed Chair Jerome Powell on Friday. The Fed’s recent rhetoric leans towards the hawkish side. Federal Reserve Governor Michelle Bowman said on Friday that the US central bank will likely need to raise interest rates further if inflation remains high.

This follows comments from New York Federal Reserve President John Williams on Tuesday that the Fed may not raise interest rates. US CPI and PPI data showed that inflationary pressures are easing, but likely not fast enough, prompting a repricing of Fed rate expectations. Markets are pricing in a 15% chance of a 25bp rate hike at the June meeting from 8% last week, according to CME FedWatch.

Measures of core inflation in the United States

Source data: Bloomberg; The graph is prepared in Excel.

Meanwhile, the US Congressional Budget Office said on Friday that the US faces a “significant risk” of defaulting on its obligations during the first two weeks of June without an increase in the debt ceiling. A meeting on debt reduction between US President Joe Biden and top lawmakers that was supposed to take place on Friday has been postponed to next week.

Outside the US, producer price deflation deepened in China while consumer prices rose at a slower pace in April. The data is further evidence after last week’s data showed an unexpected contraction in manufacturing activity in China, fueling an uneven post-Covid economic recovery. Concerns about slowing demand in the world’s second-largest economy weighed on Asian stocks excluding Japan, emerging markets, commodity prices and commodity-sensitive currencies such as the Australian and New Zealand dollars.

global inflation

Source data: Bloomberg; The graph is prepared in Excel.

As US earnings season draws to a close, positive impulses for stock markets are waning. So far, 92% of companies in the S&P 500 have reported earnings for the first quarter. Of those, 78% reported actual EPS estimates that are higher than estimates, according to FactSet. The main focus of the market next week includes Chinese industrial production and retail sales data, minutes from the latest Reserve Bank of Australia meeting, German ZEW Sentiment, UK jobs, US industrial production and retail sales data are due out on Tuesday. Japan’s GDP and Eurozone inflation are due on Wednesday. jobs data in Australia on Thursday; Japan inflation on Friday.

Forecasting:

British Pound (GBP) Weekly Forecast: GBP Bulls Eye Fresh Catalyst with UK employment data

The British Pound had a positive week on the data front, but losses against the US dollar towards the end of the week added a bitter aftertaste. 1.2460 holds the key to the bullish continuation with British employment data next week.

Australian Dollar Forecast: The Australian dollar is swinging as the US dollar is back on top

The Australian dollar collapsed to end last week as the greenback found favor as bets mounted that the Federal Reserve would cut its rate target later this year.

Gold Weekly Outlook: XAU/USD is holding up amid a sudden rally in the dollar

Gold prices fell at the weekend as yesterday’s dollar rally gained momentum on the back of a surprising inflation statistic. Safe-haven demand is likely to keep gold afloat.

The outlook for the crude oil market was darkened by debt ceiling prospects and recession risks

Crude oil prices are likely to remain subdued in the near term, with rising recession fears in the US and debt ceiling impasse weighing on market sentiment and risk appetite.

– Text of the article by Manish Gradi, Strategist for DailyFX.com

— Individual articles written by members of the DailyFX team

Connect with Jaradi and follow her on Twitter: @JaradiManish