Take Five: Inflation Watch

Economic

Summary:

Inflation data will guide rate decisions in the U.S., euro zone, and Japan. The U.S. moves to one-day trade settlements. South Africa's election could impact markets.

Inflation data from the U.S., the euro zone and Japan in the days ahead will guide investors' expectations over the scale and pace of interest rate changes to come in major economies.

Markets are bracing for the shortening of trade settlements for U.S. securities, while South Africans will head to the polls in the most uncertain election in decades.

Here's your look at what's happening in markets this coming week from Rae Wee in Singapore, Lewis Krauskopf in New York, and Naomi Rovnick, Sinead Cruise and Marc Jones in London.

1/PRICING POWER

Key U.S. inflation data - the personal consumption expenditures (PCE) price index - due on May 31 will give the next hints about whether the Federal Reserve is in position to start lowering interest rates later this year.

It follows separate data earlier this month that showed monthly consumer prices increasing less than expected, which kept alive investors' hopes for rate cuts at some point this year, after hotter-than-expected inflation reports in the first quarter.

Minutes of the last meeting showed Fed officials indicated they still had faith price pressures would ease, if only slowly. But they also said the Fed should wait several more months to ensure inflation is back on track to its 2% target before any moves.

2/BEYOND JUNE

The European Central Bank has all but promised to cut its deposit rate from a record high of 4% in June. But it's expected to keep markets guessing about how far and fast it will lower borrowing costs after that, particularly if monthly inflation data out on May 31 shows price pressures remain volatile.

Economists polled by Reuters expect euro zone inflation to have risen to 2.5% in May year-on-year, from 2.4% in April.

Societe Generale economists predicted the ECB will cut rates in June and September but then pause to wait for the Fed to implement its first rate cut and assess inflationary risks from rising wages. Market pricing is less clear on when that second rate cut might come.

"With wage growth running high and the Fed forced to hold off rate cuts for now, we expect the language from the ECB to remain hawkish," the SocGen team said. Take Five: Inflation Watch_2

3/KEEPING WATCH

Consumer prices across Japan are in the spotlight as markets try to gauge when the Bank of Japan (BOJ) could next raise rates, with Tokyo inflation data scheduled for May 31 taking centre stage.

The figures come two weeks before the BOJ's next monetary policy meeting, where some are betting the central bank could deliver its second rate rise after March's historic move.

Policymakers have thus far remained reticent on how soon further hikes could come, but they face increasing pressure to do so as a fragile yen continues to cripple weak consumption.

May 31 will also see the periodic release of the Ministry of Finance's intervention data which covers the recent rounds of suspected intervention and the BOJ's bond buying schedule, where traders will look out for cuts in the amount of central bank purchasing.

4/A DASH FOR DOLLARS?

A Wall Street boom confounding the old 'sell in May and go away' investment adage is adding to worries among those tasked with ensuring a smooth transition from two-day to one-day trade settlement in the United States, Canada and Mexico on May 28 for U.S. stocks, corporate and municipal bonds, and other securities.

As trading activity climbs, so too do the risks of so-called trade "fails" - when intermediaries don't have necessary instructions to settle on behalf of clients within the tighter time frame. This might trigger a rush for dollars among non-U.S. investors who need to borrow at short notice to cover any temporary mismatch in inflows and outgoings.

Any disruption is expected to be temporary, and the move to T+1 is broadly considered a crucial step towards more liquid and efficient financial markets. But given time zones, the move to T+1 trade settlement is effectively T+0 for many in Asia, where preparations are seen lagging other regions.

Risks with T1 settlement cycle

5/ ANC YOU ON WEDNESDAY

South Africans vote in a national election on Wednesday and, for the first time since the end of apartheid 30 years ago, polls suggest the ruling African National Congress party (ANC) is at risk of losing its parliamentary majority.

If the ANC gets less than 50%, or even 45%, support it would have to seek one or more coalition partners to govern.

Get the more business friendly Democratic Alliance (DA) on board and the rand and other South African assets are likely to take it in their stride. But any hint that it might be the far-left Marxist Economic Freedom Fighters (EFF) or recently-formed MK, led by ex-President Jacob Zuma, then that stride might suddenly become a stumble.

The drama might not end there either. President Cyril Ramaphosa could face an internal leadership challenge if the ANC is perceived to have performed poorly.

Various indicators showing the progress of South Africa in the last 25 years Line chart showing the movement of per capita GDP of South Africa compared to other emerging market countries Take Five: Inflation Watch_5

Source: Reuters

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Cohen

Economic

Political

In a year of elections worldwide, June turns up the heat several notches and will test global markets' seemingly nonchalance toward the process to date.

With European Parliament elections as an early appetizer on June 6-9, Britain heads to the hustings next month too ahead of July 4's freshly scheduled poll and U.S. presidential candidates look set to start their campaigns earlier than usual with a first televised debate on June 27. Mexico also heads to the ballot box during the month.

So far, with global business picking up steam again and interest rates plateauing, world markets seem in no mood to pay much heed in popular votes in the major economies. Major stock markets are at all-time records and volatility gauges on a range of assets and currency prices are all but asleep.

In thrall to the central bank metronome for two years, equity and credit markets even seem to have broken that spell this year - accepting a likely long period of relatively high interest rates ahead and focused instead on the buoyant economy, earnings and unfolding themes like artificial intelligence.

But June should give that a reality check, or at least reveal investor interest in potential shifts in democratic power in some of the big economies.

With critical geopolitical, trade and fiscal issues at stake, there are no shortages of potentially market-moving issues - most obviously in the re-run of 2020's U.S. race between Democratic President Joe Biden and Republican challenger Donald Trump.

All the more surprising then that currency market volatility at large is less than half what it was a year ago.

And six-month implied volatility in major dollar exchange rates, that now covers the U.S. election date is about two full points below where it was a year ago - easing substantially again over the past month.

And that's not to mention equity volatility at four-year lows and even bond volatility subsiding to its lowest in two years.

A moment to hedge?

According to a quarterly survey of 250 finance officials at UK and U.S. companies conducted by FX platform MillTechFX nearly half said they plan on increasing currency hedging length in options or forward rates due to elections around the world.

And yet there's scant sign of that showing up in prices so far. June to Test Markets' Election Nonchalance_1

Flickers of Sensitivity

Many investors have long argued that markets tend to ignore elections until the final throes - screening out much of the political noise of campaigning and wilder early polling.

As election dates get nearer, the number and frequency of opinion polls ratchets higher - which improves their average accuracy but also ups the risks of periodic rogue readings.

And perhaps there was the merest flicker of that effect this week in the surprise UK announcement of a July vote - two or three months ahead of the date that many had bet on.

Two-month sterling volatility, levels popped higher on the news - albeit from historic lows in the case of euro/sterling levels.

And yet strategists queued up on Thursday to detail why the outcome shouldn't necessarily affect sterling or UK bond levels - with the opposition Labour Party more than 20 points ahead in opinion polls for many months. The Labour Party is the overwhelming favourite in betting markets to take power for the first time in 14 years and has few curve balls in its manifesto for markets to latch on to.

A bigger disturbance from the June campaign at this stage may well be if polls showed the incumbent Conservatives can hang onto office.

It's a different matter stateside however.

Biden and Trump remain tied in popular surveys with attention being paid to swing states. There are clearly huge gaps between the two in domestic and international policy - as well as on the independence of the Federal Reserve, the value of the dollar, trade tariffs and tax cuts.

Noel Dixon, global macro strategist at State Street Global Markets, thinks the TV debates next month may be the starting gun for greater market attention - earlier than the traditional post-Labor Day klaxon.

What's more, he says State Street's models monitoring the asset market sensitivity to various media narratives surrounding the election are already picking up.

"There's definitely more market attention being paid this time around than there was at the same stage in 2020," Dixon said. "Because they're moving the TV debates up, Trump now gets a chance to clarify his stance on some of the more alarming media stories about what he may do."

"If he doubles down on those issues next month, there's going to be a lot more market attention," he said, referring to media reports about how his team are planning to reduce Fed independence and how his former trade adviser Robert Lighthizer advocates actively weakening the dollar for trade advantage.

How all that plays out in terms of price direction rather than volatility per se is harder to parse and perhaps why speculation on the outcome is so limited.

But even if investors have been intent on blurring out political noise in favor of focusing on the current state of economy, it may be harder to ignore it all a month from now. June to Test Markets' Election Nonchalance_4

June to Test Markets' Election Nonchalance_4

Source: Reuters

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Alex

Commodity

Hedge fund manager Pierre Andurand expects the price of copper to almost quadruple to $40,000 a tonne in the next few years as soaring demand causes global stockpiles of the red metal to run low.

Andurand’s conviction on the copper market has helped his $1.3bn Commodities Discretionary Enhanced fund rebound from a 55 per cent loss last year that came as his bullish oil wagers backfired badly. The fund is up 83 per cent this year, with the gains coming from a broad range of commodities, according to people familiar with the performance.

Copper, a critical metal at the heart of the energy transition, has risen almost 20 per cent this year, touching a record $11,000 a tonne this week. But Andurand, one of the world’s best-known commodity traders, thinks the rally has much farther to run, as supply struggles to keep up with demand.

“We are moving towards a doubling of demand growth for copper due to the electrification of the world, including electric vehicles, solar panels, wind farms, but also military usage and data centres,” he told the Financial Times.

“I think we could end up to $40,000 per tonne over the next four years or so. I’m not saying it will stay there then; eventually we will get a supply response, but that supply response will take more than five years.”

Miner BHP’s bid for rival Anglo American has also been seen as a sign that it is more difficult and expensive to build new supply than to buy a rival with copper mines.

Andurand, a former Goldman Sachs trader who co-founded BlueGold Capital before launching Andurand Capital, believes that digging deeper and faster in current mines will not be enough to keep up with growing demand for copper. The industry estimates it typically takes 15 years to develop a new mine.

Andurand also said he had been chastened by a prediction that oil prices would rise to $140 a barrel, which failed to pay off despite conflicts in Ukraine and the Middle East.

“I think oil traders have learned to be quite cautious about getting excited about potential supply disruptions,” he said. “I think we all lost a lot of money, expecting supply disruption that did not happen. You remember that pain.”

Brent crude trades at $81.50 a barrel, well below a peak of nearly $98 in September. The Frenchman, who made huge gains in energy markets during the coronavirus pandemic and the early stages of the Ukraine war, said he no longer expects a large run-up in crude prices.

“The geopolitical risks such as Russia and Gaza have not had an impact on supply, so I think that is why the oil price has been relatively stable, and I expect it to remain that way. I do not expect a large move in oil prices,” he said.

Despite last year’s losses, the fund’s annualised net return from inception in June 2019 is 34 per cent, according to a source who has seen the numbers.

Andurand also has a bullish view on other commodities, including cocoa, which tripled in price from the start of the year to mid-April, and aluminium, which he thinks will keep rising in price for similar reasons to copper, as it can be substituted for the red metal.

Source:Financial Times

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Remarks of Officials

On May 23, local time, Luis de Guindos, vice president of the ECB, said in an interview as follows:

Q1: Is the cut in rates a certainty? By 0.25 or 0.50 percentage points? How many rate cuts can we expect by the end of 2024?

A1: We have been very transparent about the decision at the June meeting. And we are taking a prudent approach, which would argue in favor of a reduction of 25 basis points. There is a huge degree of uncertainty about the economic outlook. We have made no decisions on the number of interest rate cuts or their size. We will see how economic data evolves.

Q2: Is it possible that interest rates will be increased again in the coming months?

A2: That is not our base scenario. It depends on how inflation develops. We believe that it will fluctuate in the short term and will sustainably converge to our definition of price stability, i.e., 2%, in 2025. But there are some risks: how wages are evolving, what is happening with productivity, unit labor costs, and declining profit margins, to name the main factors. Added to that are geopolitical risks and uncertainties – Russia's war in Ukraine, the conflict in the Middle East, and possible tensions in Southeast Asia. We must remain very cautious. Nothing is predetermined with regard to cuts or changes in interest rates.

Q3: There was criticism that the ECB was too slow to react. What lessons does the ECB draw?

A3: Our monetary policy has worked. Consider that as recently as in October 2022 we had inflation of more than 10%. It now stands at 2.4%. But again: there are massive uncertainties, for political reasons and in respect of wages, productivity, etc. We need a prudent monetary policy.

Q4: Inflation varies widely across the euro area and is relatively high in Austria. Does this need to be changed? When will we actually see inflation reach 2% – in the euro area and in Austria?

A4: We always look at the euro area as a whole. Inflation differentials in the euro area were wider a year ago and have since narrowed. According to our projections, we will reach a stable level of 2% in mid-2025. I assume that it won't be much different in Austria.

Speech of Guindos

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Owen Li

Economic

The UK's most authoritative survey of consumer confidence continues to show an ongoing improvement, led by firming household finances and expectations for the economy.

The GfK Consumer Confidence Index increased two points to -17 in May. Four measures were up and one was down in comparison to last month's announcement.

The biggest driver of the improvement was the 5-point rise in the outlook for personal finances, with expectations for the UK's general economic situation also improving markedly.

The only negative in May is the slight dip in our major purchase measure (down one point to -26).

"With the latest drop in headline inflation and the prospect of interest rate cuts in due course, the trend is certainly positive after a long period of stasis which has seen the Overall Index Score stuck in the doldrums. All in all, consumers are clearly sensing that conditions are improving. This good result anticipates further growth in confidence in the months to come," says Joe Staton, Client Strategy Director GfK.

Consumer Confidence Continues to Improve: GfK_1

"Falling inflation and still strong wage growth are combining to drive a recovery in consumer confidence that should keep the economy humming along," says Rob Wood, Chief UK Economist atPantheon Macroeconomics.

The UK reported headline inflation had fallen to 2.3% year-on-year in April, which brings it to within touching distance of the Bank of England's target.

However, the fall in inflation and improving consumer confidence is yet to translate into a material uptick in retail sales, which suggests ongoing caution.

"Consumers remain reluctant to splash out on a major purchase until the Bank of England starts cutting interest rates. We still expect the MPC's first cut in August, with one more following in November," says Woods.

It was announced Friday that UK retail sales fell a sharp 2.3% year-on-year in April, although the ONS ascribed much of the disappointment to the month's poor weather.

Pantheon Macroeconomics expects consumers' confidence in their personal finances and their spending to keep rising as real wage growth improves.

Woods points out that real average weekly earnings growth excluding bonuses rose to 2.5% year-over-year in the three months to March—the latest month for which wage data are available—and will likely rise further by June as inflation falls faster than wage growth.

Source: Pound Sterling

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FXOpen

Commodity

Economic

Important Takeaways for Gold and Oil Prices Analysis Today

Gold price climbed higher toward the $2,450 zone before there was a sharp decline against the US Dollar.
A key bearish trend line is forming with resistance near $2,375 on the hourly chart of gold at FXOpen.
Crude oil prices extended downsides below the $78.00 support zone.
A major bearish trend line is forming with resistance near $78.00 on the hourly chart of XTI/USD at FXOpen.

Gold Price Technical Analysis

On the hourly chart of Gold at FXOpen, the price rallied heavily above the $2,350 resistance. The price even spiked above $2,425 before the bears appeared.

A high was formed near $2,450 before there was a major decline. There was a move below the $2,400 support level. The bears even pushed the price below the $2,355 support and the 50-hour simple moving average.

Gold Price and Crude Oil Price Signal Bearish Acceleration_1

It tested the $2,325 zone. A low is formed near $2,326 and the price is now showing bearish signs. Immediate resistance is near the 23.6% Fib retracement level of the downward move from the $2,450 swing high to the $2,326 low at $2,355.

The next major resistance is near a bearish trend line at $2,375. The trend line is close to the 50-hour simple moving average.

The main resistance could be $2,388 and the 50% Fib retracement level of the downward move from the $2,450 swing high to the $2,326 low, above which the price could test the $2,410 resistance. The next major resistance is $2,450.

An upside break above the $2,450 resistance could send Gold price toward $2,480. Any more gains may perhaps set the pace for an increase toward the $2,500 level.

Initial support on the downside is near the $2,325 level. The first major support is near the $2,312 level. If there is a downside break below the $2,312 support, the price might decline further. In the stated case, the price might drop toward the $2,250 support.

Oil Price Technical Analysis

On the hourly chart of WTI Crude Oil at FXOpen, the price struggled to continue higher above $80.00 against the US Dollar. The price formed a short-term top and started a fresh decline below $78.00.

There was a steady decline below the $77.40 pivot level. The bears even pushed the price below $76.50 and the 50-hour simple moving average. Finally, the price tested the $76.30 zone. The recent swing low was formed near $76.31, and the price is now consolidating losses.

Gold Price and Crude Oil Price Signal Bearish Acceleration_2

Immediate support is near the $76.30 level. The next major support on the WTI crude oil chart is near $75.00. If there is a downside break, the price might decline toward $73.50. Any more losses may perhaps open the doors for a move toward the $72.00 support zone.

On the upside, immediate resistance is near the 23.6% Fib retracement level of the downward move from the $78.52 swing high to the $76.31 low at $76.80.

The next resistance is near the 50-hour simple moving average and the 50% Fib retracement level of the downward move from the $78.52 swing high to the $76.31 low at $77.40. The main resistance is near a trend line at $78.00.

A clear move above the trend line resistance could send the price toward $79.05. The next key resistance is near $79.90. If the price climbs further higher, it could face resistance near $81.20. Any more gains might send the price toward the $82.00 level.

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Economic

Stocks

Asian shares retreated Friday after strong reports on the U.S. economy raised the possibility of interest rates staying painfully high.

U.S. futures edged higher and oil prices also rose

Japan's Nikkei 225 index lost 1.2% to 38,646.11 and the Hang Seng in Hong Kong fell 1.5% to 18,589.89.

South Korea's Kospi declined 1.2% to 2,688.60, while in Australia, the S&P/ASX 200 shed 1% to 7,734.30.

Taiwan's Taiex slipped 0.2% after hitting a record high on Thursday.

On Thursday, most U.S. stocks slumped, in the latest example of how good news for the economy can be bad for Wall Street, when strong economic reports fueled concern that the Federal Reserve might keep interest rates high to ensure there is a lid on inflation. The weakness was widespread and overshadowed another blowout profit report from market heavyweight Nvidia.

The S&P 500 fell 0.7% to 5,267.84 in its sharpest drop since Apri. The Dow Jones Industrial Average dropped 1.5% t 39,065.26, and the Nasdaq composite slipped 0.4% to 16,736.03.

Treasury yields cranked up the pressure following the stronger-than-expected reports on the U.S. economy, which forced traders to rethink bets about when the Federal Reserve could offer relief to financial markets through lower interest rates.

One report suggested growth in U.S. business activity is running at its fastest rate in more than two years. S&P Global said its preliminary data showed growth improved for businesses not only in the services sector but also in manufacturing.

A separate report showed the U.S. job market remains solid despite high interest rates. Fewer workers applied for unemployment benefits last week than economists expected, an indication that layoffs remain low.

The Fed is trying to pull off the difficult feat of slowing the economy enough through high rates to get inflation back to 2% but not so much that it forces a painful recession. It's been holding its main interest rate at the highest level in more than two decades to do so, and Wall Street is itching for some easing.

Traders already have ratcheted back their earlier, too-optimistic forecasts. Hopes are still high for at least one cut to rates this year.

The yield on the 10-year Treasury, which helps set rates for mortgages and other loans, rose to 4.47% from 4.43% late Wednesday. The two-year yield, which more closely tracks expectations for action by the Federal Reserve, climbed to 4.93% from 4.87%.

The sharpest single drop within the S&P 500 came from Live Nation Entertainment, which tumbled 7.8% after the Justice Department accused it and its Ticketmaster business of running an illegal monopoly over live events in the country.

VF Corp., the company behind The North Face, Vans, Timberland and other brands, fell 2.9% after reporting a loss for the latest quarter, along with weaker revenue than analysts expected.

They helped to more than offset a 9.3% leap for Nvidia, which delivered its latest knockout profit report late on Wednesday. Its revenue surged 262% in the latest quarter from a year earlier, and its profit leaped an eye-popping 629%. The company's chips are helping to train artificial-intelligence systems, and demand for them has been voracious.

Nvidia also increased its dividend as its CEO, Jensen Huang, touted how “the next industrial revolution has begun.”

Concern has grown that Wall Street's frenzy around the potential for AI has created a bubble where prices have soared too high and expectations have grown too tough. But Nvidia's continued skyrocketing growth tamped down some of the criticism.

In other trading, U.S. benchmark crude oil added 10 cents to $76.97 per barrel in electronic trading on the New York Mercantile Exchange. It gained 30 cents on Thursday.

Brent crude, the international standard, was up 14 cents at $81.50 per barrel.

The U.S. dollar rose to 157.06 Japanese yen, up from 156.96. The euro fell to $1.813 from $1.0817.