Financial Markets’ Weekly Recap: Markets will focus on inflation data next week

Throughout the week ending June 21, the market’s attention fixated on the Federal Reserve’s future interest rate decisions. Investor focus centered on everything influencing interest rate expectations, including economic data releases, developments within the US economy, and statements from the Federal Reserve itself.

Last week saw the release of several key sets of US data, including figures on consumer spending and labor market conditions.

Six members of the Federal Open Market Committee (FOMC) made public statements that elicited varied market reactions. These statements generally supported the existing expectation, both official and unofficial, of a rate cut by year’s end.

DXY Index

The Dollar Index, DXY, which measures the performance of the US currency against a basket of major currencies, reached 105.82 points in the week ending Friday, June 21. This is up from the last weekly close of 105.52 points. The index fluctuated between a low of 105.32 points and a high of 105.90 points during that period.

This rise in the dollar index followed the market’s acceptance of the Federal Reserve’s official projections. These projections, based on the June Federal Open Market Committee vote, indicated a potential 25 basis point interest rate cut by year’s end.

Fedspeak

Several Federal Reserve presidents offered their perspectives on the possibility of a rate cut. Statements by one Fed official, on Tuesday, emphasized the need for “a longer string of positive inflation data” before considering a cut. Similarly, another Fed official suggested waiting over the weekend, stating it would be “reasonable” to gather more data. He highlighted that the Fed has until December to make a decision and is in a strong position to do so.

A third Fed official, however, expressed a more cautious view on Monday. The statements indicated that the Fed might need to maintain current interest rates for longer than the market currently anticipates.

On Tuesday, a fourth Fed official indicated that he expects interest rates to gradually decline as inflation subsides. In a similar vein, A fifth Fed official acknowledged the progress made in controlling inflation, but emphasized that price growth remains above the Federal Reserve’s 2.00% target.

Fed officials also urged caution in interpreting the latest inflation data, emphasizing that it’s too early to determine if inflation is definitively on a downward trend towards 2.00%.
On Tuesday, this sentiment was echoed again by fresh statements acknowledging that progress on curbing inflation remains gradual. However, the Federal Reserve anticipates only a modest decline in the US labour market as higher interest rates begin to reduce inflationary pressures.

One last Fed official cautioned that it could take several months or even quarters before the Federal Reserve’s policies fully address above-target inflation, despite the current rate being set at 2.00%.

Other statements were echoing previous remarks by Fed members describing recent data suggesting a slowdown in inflation as “encouraging” on Tuesday. However, overall statements emphasized the need for the Fed to maintain a cautious and patient approach to interest rate policy.

Satisfaction with the latest Consumer Price Index (CPI) inflation data was expressed by the Fed, calling it “excellent” and indicating hope for similar positive results in future inflation reports.

Economic data

US retail sales rose by 0.1% in May, compared to a decline of 0.2% in April. This increase was lower than expectations, which had predicted a stronger gain of 0.2%.

US retail sales excluding cars fell by 0.1% in May compared to April. This decline was unexpected, as market analysts had predicted a slight increase of 0.2%.

US weekly jobless claims decreased by about 5,000 to 238,000 in the week ending June 14th. This was higher than market expectations, which had predicted a rise to 235,000 claims. The previous week’s reading was 243,000 claims.

The drop in consumer spending suggests a weakening in consumer demand, potentially leading to lower inflation in the coming months. This has raised expectations of an interest rate cut by the Federal Reserve, which could weaken the US dollar.

However, positive employment data countered the impact of retail sales on interest rate expectations. Continued improvement in the labor market might dissuade the Fed from cutting rates.

S&P Global reported a slight increase in the flash US Composite PMI Output Index to 54.6, the highest level since April 2022. This was due to an increase in employment and a decrease in price pressures. Gold’s gains were reversed following higher-than-expected PMI data, showing strong activity levels in US Manufacturing and Services in June. This suggests that inflation and interest rates will remain higher for longer, causing gold to drop off a cliff and trade in the $2,330s on Friday, down -1.14%.

Sino-EU Trade Dispute

The EU and China are reportedly in a trade war over electric vehicles, with both sides facing significant risks of escalation. While China has publicly opposed such a war, analysts believe Europe would not fare well in one. Diplomatic efforts are underway to prevent this conflict, but positions remain deep. German Economy Minister Robert Habeck visited Beijing to explain the EU’s position on electric car tariffs and mitigate China’s reaction.

Additional Decisions By Central Banks Worldwide

Japan’s demand-led inflation slowed in May, clouding the picture for a rate decision from the Bank of Japan. Switzerland’s SNB is leading the global rate-cutting trend among developed economy central banks, lowering borrowing costs again on Thursday. The Swiss National Bank followed up on March’s interest rate cut with another reduction to 1.25%, surprising some analysts due to a recent pick-up in Swiss growth and a mild rise in inflation to 1.4% in April. Sweden’s Riksbank lowered borrowing costs to 3.75% from 4% in May and is expected to hold them steady when it announces the next rate decision on June 27.

The Bank of England left rates unchanged at a 16-year high of 5.25% on Thursday ahead of a July 4 election, but some policymakers said their decision not to cut rates was now “finely balanced.” Money markets price in almost 50 basis points of cuts by year-end and a roughly 44% chance of a quarter point move at the next meeting in August, compared to 32% a day earlier.

Wall Street

Volatility gripped Wall Street last week as investors grappled with mixed signals on interest rate cuts. Conflicting economic data releases and pronouncements from Fed officials fueled uncertainty.

However, other factors indirectly linked to interest rates ultimately provided a lift to Wall Street. Most New York Stock Exchange indices closed the week with gains.

The S&P 500 surged last week, fueled by buying from global financial institutions and investment funds. This outperformance of the index compared to other major markets attracted significant interest.

A key survey by Bank of America revealed that international fund managers are at their most bullish in three and a half years. The bank attributes this optimism to the potential for a Federal Reserve rate cut, combined with continued economic strength and receding concerns about inflation.

With global investment funds totaling roughly $721 billion, this confluence of factors – a potential Fed rate cut, a strengthening economy, and receding inflation fears – appears to have squeezed their cash holdings to a three-year low. As a result, the bulk of this reallocated liquidity is flowing into the stock market.

Oil Prices

Oil prices gained ground for the week ending June 21. Seasonal factors typical of this time period, combined with rising demand from the world’s largest consumer, the United States, are expected to continue pushing prices higher.

The US Energy Information Administration (EIA) recently revised its 2024 global oil demand growth forecast upwards to 1.1 million barrels per day, aligning with OPEC’s optimistic outlook.
Last week’s oil price surge was fueled by forecasts of robust demand growth in 2024 from both OPEC+ and the International Energy Agency (IEA). However, weak US consumer confidence data released on Friday raises concerns about the resilience of American consumers and the economy as rising interest rates strain household savings.

Geopolitical tensions in the Middle East, fueled by ongoing concerns about a wider regional conflict, also supported the rise in oil prices. While there were signs of a de-escalation between Hezbollah and Israel earlier this week, these were overshadowed by broader anxieties.

Oil markets in Singapore, a key trading hub, were closed for a public holiday on Monday. Despite the closure, prices still managed to rise nearly $2 per barrel, reaching their highest settlement levels in over a month. This added to the gains from the previous week, as investors remained optimistic about the future demand for oil.

As usual, gasoline prices tend to rise in summer due to both increased demand and the switch to summer-blend gasoline. However, there are conflicting forces at play.

On the one hand, crude oil prices fell in Asian trading, responding to weak US consumer demand data and adjustments to China’s May energy consumption figures. China is the world’s largest crude importer. Additionally, a survey released last Friday revealed a seven-month low in US consumer sentiment for June, with households expressing concerns about personal finances and a potential return to high inflation.

On the other hand, both benchmark oil contracts posted their strongest weekly gains since last April, rising around 4%. This increase is likely driven by expectations of higher fuel demand as the summer holiday season kicks off and travel picks up.

Next week, markets will be keenly watching US inflation data, specifically the Personal Consumption Expenditures (PCE) indicators, for clues about the Federal Reserve’s future interest rate policy.

The PCE data is considered the Fed’s most reliable gauge of inflation in the United States. As such, it will be the primary focus of market attention in the coming days, as investors seek direction on potential changes in federal interest rates.

The tech sector, particularly artificial intelligence, takes center stage next week as NVIDIA and Salesforce host their annual shareholder meetings. Micron Technology will also report its quarterly earnings.