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Macro Matters – Weekly review, w/c June 5

Macro Matters – Weekly review, w/c June 5

TradeDay Macro Matters

Macroeconomic / Geopolitical developments

  • The Fed will likely “skip” a hike in June
  • Investors can finally look past the debt ceiling 

Will the Fed “skip” a rate hike in June?

As the Fed moves into its “blackout period” in front of the FOMC meeting announcement on 14th June, markets are having to consider pricing for some rather dovish Fed speak. Patrick Harker (2023 voter, centrist) said on Thursday that it was “time to at least hit the stop button”. Philip Jefferson, who is a Fed Governor (so is a permanent voter) and who is historically a shade hawkish, has spoken about the potential to “skip” a rate hike in June.

Markets have taken this as an indication that a June hike is unlikely. Having priced the probability of a 25bps June rate hike just over a week ago, the probability now sits at an unlikely 25%.

However, whilst June seems to be sliding off the table, if we “skip” forward to July, then the pricing for a rate hike is far more likely at 62%. This has been made even more assured following Friday’s strong beat on the headline jobs number in the payrolls report (see below).   

Investors ready to move on from the debt ceiling

The debt ceiling has been lifted and the US has avoided a calamitous default. We can now all breathe a sigh of relief and mercifully, we don’t have to worry about this until 1st January 2025. Of course, this sets up markets for what could potentially be a fun, volatility-packed Christmas next year, but please let’s not think about that now.

The impact of raising the debt ceiling has been risk-positive. It is releasing some of the pent-up tension in equity markets, driving Wall Street (and peers in Europe) higher. A risk rally is now taking hold. The e-minis for both S&P 500 futures and NASDAQ 100 futures are looking to break higher again. We will be keeping a close eye on what this does to NASDAQ especially this week as there have been several exhaustion signals creeping into the rally recently. Support at 14250 will be an initial key level to watch.

United States

  • Nonfarm Payrolls beat expectations, yet again
  • ISM Manufacturing data points to a growing slowdown
  • Watching lower volatility but also lower liquidity in equity markets

The impact of Nonfarm Payrolls

It will be interesting to see how the May payrolls report changes things. The headline jobs number smashed expectations by 144,000, with big upward revisions of 93,000 from the previous two months. Subsequently, there were 237,000 more jobs created by the US economy than had been expected. However, unemployment jumped, average hourly earnings dipped unexpectedly and the hours worked were also lower. Wage growth is falling is encouraging for the Fed. It could therefore be argued that May had a bit of something for hawks and doves alike.

However, purely by taking market reaction, the lean is towards a mild hawkish bias. After all, this is now 14 months in a row where there has been an upside surprise. This is reflected in the hawkish positioning on the interest rate futures curve, helping to bake in one more hike (towards peak rates at 5.25%) at some stage in the next couple of meetings, whilst also pushing out rate cuts into 2024. The Fed Funds futures are around 5.00% by the year-end. There is one final important data point before the FOMC decision, with US CPI on Tuesday 13th June.

ISM Manufacturing points towards recession

Looking at the ISM Manufacturing data, there is a decisive slowdown that is taking hold of the US manufacturing sector. Aside from the index falling lower than had been forecast (albeit only marginally), there were also big negative surprises into contraction for new orders, imports, inventories and supplier deliveries. There was also a sharp reduction in the prices paid component which will likely feed through into the disinflation being felt in the Producer Prices Index.

The flip side is that employment has improved and is marginally expanding. This once more reflects what we have also been seeing in the payrolls report, where the labor market continues to add jobs. It will be interesting if the ISM Services also reflects this on Monday.

This remains a curious slowdown in the US, where most indicators are pointing towards the direction of a recession, but the labor market continues to hold ground. Just how long this continues to be the case, remains to be seen.     

Lower volatility but also lower liquidity

With investors no longer having to price in the risk of a US default, we continue to see volatility plunge. A sharp move lower has brought the VIX Index down as low as 15. This is as low as it has been since COVID. Is this complacency or just plain bullish?

I have to admit to being somewhat cautious though. The Advance/Decline lines of US equity markets continue to suggest that it has only been a small number of heavy-weight stocks that have been driving market gains (big tech mostly).

There is also evidence to suggest that liquidity is also draining from the equity market too. Analysis of dark pools trading data shows the proportion of “off-exchange” trades (i.e. that take place in dark pools) has dropped from 44% to 39% recently. It means that big trades are facing a “flight to transparency” as the liquidity is not there to cover them in the dark pools. This could be a warning sign of stress in the market.

What’s next?

On the face of it, it could be a fairly subdued week ahead. The Fed is into its blackout period in front of the FOMC announcement on the 14th June. It is pretty quiet for the US on the economic calendar with just the ISM Services data on Monday and jobless claims to watch for on Thursday. We’re also through earnings season so there is little by way of corporate drivers either.  

Europe

  • Eurozone disinflation takes a grip
  • PMIs will do little to move the needle

Falling Eurozone inflation

Inflation is now beginning to finally trend lower in the Eurozone. Core HICP dropped to 5.3% in May which is the second consecutive month of decline (the first time this has happened since mid-2021). This will please the ECB but it will also question how many further rate hikes will be required. The next ECB meeting is in a couple of weeks and a 25 basis points hike is a given. However, the messaging beyond that will be key.

The EUR has been suffering from being the worst performing major currency of the past month, weighing EURXXX crosses towards important supports. I will be watching the reaction to support at 1.6130/1.6190 on EUR/AUD, 0.8545/0.8565 on EUR/GBP whilst the reaction low at 1.0633 may also be revisited on EUR/USD.

Final PMIs will be quickly looked past

The flash PMIs showed the Manufacturing sectors for European economies surprising to the downside, whilst Services were holding up fairly well. The composite PMIs for the Eurozone and the UK are all gradually easing lower around 53/54 which indicates mild but slowing expansion. This is reflected in the tepid outlook for the respective economies in the coming months. Unless there are any significant surprises in the Services PMIs, this view is fairly well baked in and should not impact markets too much.

What’s next?

There is an almost empty European economic calendar this week. However, keep an eye on the Eurozone PPI inflation data. After consumer inflation fell harder than expected, the consensus is looking for this to also be reflected in the PPI. If so, it would continue to weigh on the EUR.

Asia

  • China’s disappointing data continues
  • Looking ahead to the RBA 

China’s slowdown continues

Faltering PMIs are a reflection of what has been a faltering economic recovery in China over recent months. The official PMIs both surprised to the downside last week, although this was countered by a slight upside surprise in the Caixin data. The trend of faltering PMIs and falling inflation for China reflects the retreat in economic activity which is a drag on the wider global economy.

Furthermore, the swings in Asian markets and into the European session suggest that China’s PMI data certainly still has the power to drive the narrative for market sentiment, at least until the US session takes hold.

Reserve Bank of Australia could be set to spring a surprise

Having flipped from seemingly being on pause to recently a more hawkish stance, this is leading some to look at the recent inflation increase to pull another rate hike out of the bag. Australian monthly CPI inflation jumped to 6.8% the pressure is mounting on the RBA to hike again. Although there is more gravitas given to the quarterly inflation data, the RBA may choose to get in ahead of that.

The AUD has been on a tear in the past week, outstripping all major currencies amid the prospect of a more hawkish RBA. The consensus is expecting no change, but there is the growing risk of a hawkish surprise.   

What’s next?

Chinese inflation has been falling back sharply. The PPI is expected to continue to decline deeper into deflationary territory, with the CPI expected to begin to level off a shade above zero. 

Commodities

  • Oil rebounds as US debt default is priced out
  • Gold rally falls over around resistance

Oil rebounds again

Oil has rallied towards the end of the week as broad market sentiment has been given a near-term boost. With Congress voting through the debt ceiling bill, traders no longer need to price for the prospect of a US debt default. This helps to support oil demand and is allowing NYMEX oil futures to rally strongly from a low of $67.03.

However, the big hurdle is yet to be overcome, with the resistance between $73.90/$75.75. Technical analysis indicators show a negative bias to the outlook within what is now a multi-month trading range between $63.64/$83.53. Reaction to this mid-range resistance will be key in the coming week. 

Gold futures begin to fall over again

Moves on the USD remain key for the outlook of metals. Gold futures had been picking up as the USD fell back on the progress of the US debt ceiling bill through Congress. However, this has since taken a reversal again as the USD strengthened on the stronger payrolls report on Friday.

This means that Gold futures are continuing to build resistance around $1970/$1985 and are testing the support of an uptrend channel of the past seven months.

On the calendar

The week after Nonfarm Payrolls always tend to be a little more downbeat. For the US, the ISM Services and Weekly Jobless Claims are the ones to watch. However, there will also be some interest in what central banks have to say too. Noises have leaned towards a hawkish bias recently and as a warm-up for the big three next week, we are served up an amuse-bouche with the RBA and the Bank of Canada. 

Macro data

Date

Major Macro Data

05/06/2023

US ISM Services, US Factory Orders

06/06/2023

Reserve Bank of Australia monetary policy

07/06/2023

Australian GDP; China Trade Balance; Bank of Canada monetary policy

08/06/2023

US Weekly Jobless Claims

09/06/2023

China CPI and PPI, Canadian Unemployment, US Treasury Currency Report 


Steve Miley

Steve Miley

Co-Founder of TradeDay.
Steve is the former head of Technical Analaysis research at Merrill Lynch and Credit Suisse, and owner of the award winning research boutique Market Chartist.

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