The US debt border drama was the biggest driver of sentiment this week, but we also saw fresh comments from the central bank and top-notch economic updates that actually upset interest rate expectations and the usual price action sentiment among markets.
Are you ready to hear what happened this week? Better check the market moving headlines first!
Notable economic news and updates:
🟢 Extensive arguments about market risk
Monthly CPI in Australia accelerated from 6.3% yoy in March to 6.8% yoy in April (vs 6.4% expected)
JOLTS US Job Opportunities in April: 10.1M vs. 9.75M in March; “The number and rate of layoffs and layoffs decreased to 1.6 million.”
ADP National Employment Report for May: +278K (+200K forecast) vs. 291K prior
The debt-reduction legislation brokered by President Joe Biden and Speaker Kevin McCarthy last weekend was approved by the House of Representatives on Wednesday night by a vote of 314-117.
Data from the American Petroleum Institute (API) showed that crude oil inventories increased by 5.202 million barrels last week, compared to an expected decrease of 1.22 million barrels. EIA Crude Oil Inventories posted a surprise increase of 4.5 million barrels instead of the estimated draw of 1.2 million barrels, indicating slowing demand.
Fed official Harker noted that consumers aren’t spending as much as they used to, so it may be time to pause in June.
France’s inflation unexpectedly fell at -0.1% m/m in May vs. 0.3% expected, and increased by 0.6% in April.
The US Senate passed a package of budget and debt ceiling cuts late Thursday evening, bringing the US one step closer to avoiding a debt default scenario.
Caixin China General Manufacturing PMI for May: 50.9 vs. 49.5 previously; First expansive reading in three months
US Nonfarm Barrios for May: +339K (+180K forecast) vs. +294K in April; the unemployment rate rose to 3.7% (expected 3.5%, prior 3.4%); Average hourly wage: +0.3% (+0.4% forecast/previous)
Extensive arguments for market exit risk
China Manufacturing PMI unexpectedly fell from 49.2 to 48.8 vs. 49.5 expected in May due to weak demand
China’s services PMI fell from 56.4 to 54.5 in May, the slowest expansion in four months.
RBA Governor Lowe: “We really want people to understand that we’re serious about this, that we’ll do what’s necessary, and not question our commitment to lower inflation. As painful as it is, we have work to do there.“
Weekly global market summary
Over the weekend, US lawmakers reached a tentative agreement that would put the $31.4 trillion debt ceiling on hold until Jan. 1, 2025. The deal was still up for a congressional vote, but lawmakers seemed optimistic the deal would pass, and markets welcomed the development.
Optimism was particularly evident during Monday’s Asian session as most European and US markets were closed for a holiday. Commodity currencies soared while the Nikkei jumped to its highest levels since 1990. This was when The Simpsons was thriving after its December 1989 release!
Traders went ‘hmm’ on Tuesday as some questioned the debt deal’s validity. It also didn’t help the risk that China released data over the weekend showing weak manufacturing profits (-18.2% y/y), casting doubt on the global economic recovery after the pandemic.
Gold traded higher and Crude Oil fell more than 4% amid uncertainty over China’s growth, the passage of the debt ceiling agreement, and the upcoming OPEC meeting.
The volatility got even crazier on Wednesday thanks to a couple of market-moving catalysts. Australia kicked off the party with a higher-than-expected monthly CPI which supported another RBA rate hike. Then China took the baton just two hours later with not one but two disappointing official PMI reports that brought back fears of lower future growth amid expectations of rising inflation and a higher interest rate environment.
Then, a slower-than-expected inflation reading from France dampened expectations of a rate hike by the European Central Bank and weighed on the lower key on the euro. The party peaked during the US session when JOLTS Employment Opportunities showed an unexpected rise in employment raising expectations of a Fed rate hike.
But that was before Federal Reserve Board members Philip Jefferson and Patrick Harker started talking about “skipping June.” In separate speeches during the US trading session on Wednesday, FOMC members indicated that the Fed will need more time to assess the lagging effect of its previous interest rate hikes.
This is likely to prompt some to price in lower odds of a rate hike in June (for example, it usually leads to some risk-off moves), but it seemed to be just enough to stabilize broad risk sentiment as there were probably a lot of traders who They remain concerned about the passage of the US debt ceiling law and lower growth indicators from China.
Thursday brought a glimmer of hope Caixin’s manufacturing PMI in China beat expectationsis associated with a rebound in oil and bond yields, as well as more stability in stocks.
European stocks also joined the party during the London session on Thursday as soft inflation updates encouraged discussions about whether the European Central Bank will still need to raise interest rates beyond this month. This despite ECB President Lagarde literally saying that they “still have a ground to cover” to raise interest rates to “enough restrictive levels” but that’s neither here nor there. I believe.
Of course, it also helped the risk-takers that the US House of Representatives approved a bipartisan bill to suspend the government’s debt ceiling of $31.5 trillion, lowering Uncle Sam’s default risk. US Treasury yields and the dollar extended their losses, while stocks, crude oil, the pound sterling, the Australian dollar and the New Zealand dollar rose. Gold rose even on the back of the weak US dollar!
Friday’s calendar was very light, but there’s no doubt that what we got was a market driver. During the US trading session, we received the highly anticipated monthly update from the US government on employment conditions, including the Nonfarm Payroll Change, Unemployment Rate, and Average Earnings Change for the month of May. The numbers showed resilience again with NFP number comes in above expectations +180k at 339k jobs added and April number is revised to 294k.
Arguably, these numbers support the notion that the risk of an economy collapsing as the Fed increases interest rates has decreased, and when combined with news The US Senate passes the debt reduction agreementUnsurprisingly, traders were in a risk position, in addition to dumping gold and buying some greenbacks on the weekend.
