Following some early week jitters, we’ve now seen a return to business-as-usual in global equities. Markets are taking some comfort from US economic indicators which are showing no signs of an imminent ‘hard landing’ with regards to growth. US home sales data, consumer confidence and durable goods data all painted a rather pretty picture of the economy.
However, if the data continues to reflect economic robustness, it probably won’t be long before financial markets again start to fret about the interest rate implications. There continues to be a disconnect between where the FOMC sees rates by year end versus where the market hopes rates will be. If the data continues a trend to the upside, markets may have to grudgingly accept the FOMC’s prediction of two further rate hikes by year end.
Comments by the Chinese Premier concerning growth prospects were reasonably constructive. Though as the saying goes, talk is cheap and as such traders are waiting for concrete measures from the PBOC to address the struggles of the world’s second largest economy. Oil, being highly sensitive to Chinese demand, failed to find any support from Li Qiang’s comments. In a world of ascending interest rates, oil is finding that a breakout to the upside very challenging to say the least.
After rising earlier in the week on geopolitical tensions, gold gave back the gains in response to the better mood on equity markets and a move higher in US treasury yields. Fuelled FOMC interest rate expectations, yields remain elevated which is hurting the appeal of gold in the current environment of hawkish central banks. The precious metal is so far managing to keep above the psychological US$1900 level, though this could be tested if macro indicators continue to be supportive of further monetary policy tightening.
The Aussie Dollar took a dive after the latest CPI print shifted lower. May CPI came in at 5.6% which demonstrates some cooling of inflation levels following the prior 6.8% reading. Given that the latest RBA decision to raise rates was marginal, this southward move in the CPI likely substantiates the case for a pause in July. In response, the AUD sank around half a cent lower due to the reassessment of the interest rate outlook. Elsewhere, Australian equities cheered the lower CPI print with the ASX200 posting a day of solid gains.
Next, attention will turn to Portugal and upcoming speeches by the heads of the FOMC, ECB, BOE and BOJ at the European Central Bank Forum. Central banks remain very much in the spotlight given the recent guidance on interest rates, and if messaging from the FOMC, ECB and BOE reaffirms that we are on a road to higher interest rates this could lead to some risk being taken off the table heading into month (and quarter) end.