Gold, S&P 500, US Dollar; Powell, Debt Ceiling, Australia Jobs, Germany ZEW, China Data

The US dollar rebounded sharply in the past week after hawkish comments from US Federal Reserve and still-elevated inflation raised doubts on whether the US central bank will pause at its next meeting in June. The US dollar index (DXY index) jumped by 0.4%. The Swedish Krona was the worst-performing currency, plunging 2.1% against the US dollar in the past week followed by the New Zealand down 1.6%, and the Euro sliding 1.5% within the G10 space.

Global equity markets slipped on more evidence of weakness in the post-Covid recovery in China, worries regarding the US debt ceiling, and lingering US regional banking concerns. US markets were mostly lower, led by the Dow Jones Industrial Average losing 1.1%. The MSCI All-Country World Index fell 0.5%. The S&P 500 fell 0.3%, while the Nasdaq 100 index rose 0.6%. The German DAX 40 and the UK FTSE 100 dropped 0.3%, and the Hang Seng index declined 2.1%, while Japan’s Nikkei 225 jumped 0.8%.

Past week market performance

Source Data: Bloomberg; chart prepared in excel.

Note: Global Bonds proxy used is Bloomberg Global Aggregate Total Return Index Unhedged USD; Commodities proxy used is BBG Commodity Total Return; Hedge Funds proxy used is HFRX Global Hedge Fund Index.

A spate of Fed speeches is scheduled through the coming week, including Fed Chair Jerome Powell on Friday. Recent Fed speak has tilted toward the hawkish side. Fed Governor Michelle Bowman said on Friday the US central bank probably will likely need to raise interest rates further if inflation stays high.

This follows remarks from New York Federal Reserve President John Williams on Tuesday that the Fed may not be done raising rates. US CPI and PPI data showed inflationary pressures are subsiding, but probably not fast enough, prompting a repricing in Fed rate expectations. Markets are pricing in a 15% chance of a 25 bps Fed rate hike at the June meeting up from 8% a week ago, according to the CME FedWatch tool.

US core inflation measures

Source Data: Bloomberg; chart prepared in excel.

Meanwhile, US Congressional Budget Office said on Friday the US faces a “significant risk” of defaulting on payment obligations within the first two weeks of June without a debt ceiling increase. A debt limit meeting between US President Joe Biden and top lawmakers that was meant to be on Friday had been postponed to next week.

Outside of the US, China’s producer price deflation deepened while consumer prices rose at a slower pace in April. The data is another piece of evidence after last week’s data that showed an unexpected contraction in China’s manufacturing activity, reinforcing the patchy post-Covid economic recovery. Concerns regarding slowing demand in the world’s second-largest economy weighed on Asia ex-Japan and Emerging Market equities, commodity prices, and commodity-sensitive currencies like the Australian dollar and the New Zealand dollar.

Global inflation

Source Data: Bloomberg; chart prepared in excel.

As the US earnings season draws to a close, the positive drivers for equity markets are dwindling. So far, 92% of the companies in the S&P 500 have reported earnings for the first quarter. Of these 78% have reported actual EPS above estimates, according to FactSet. Key market focus in the coming week includes China industrial output and retail sales data, minutes of the recent Reserve Bank of Australia’s meeting, Germany ZEW sentiment index, UK jobs, and US industrial output and retail sales data are due on Tuesday; Japan GDP and Euro area inflation are due on Wednesday; Australia jobs data on Thursday; Japan inflation on Friday.

Forecasts:

BRITISH POUND (GBP) WEEKLY FORECAST: GBP Bulls Eye Fresh Catalyst with UK Employment Data

The British Pound has seen a positive week on the data front but losses against the greenback to end the week has added a bitter taste. 1.2460 holds the key for bullish continuation with UK Employment data in the week ahead.

Australian Dollar Outlook: AUD Crunched with US Dollar Back on Top

The Australian Dollar collapsed to end last week with the US Dollar finding favour with increasing bets that the Fed will be cutting the target rate later this year.

Gold Weekly Forecast: XAU/USD Holds up Amid Sudden Dollar Rally

Gold prices eased into the weekend as yesterday’s dollar appreciation gains momentum on surprise inflation statistic. Safe haven demand likely to keep gold afloat.

Crude Oil Market Outlook Darkened by Debt Ceiling Debacle and Recession Risks

Crude oil prices are likely to remain subdued in the near term, with growing U.S. recession fears and the debt ceiling impasse weighing on market sentiment and risk appetite.

— Article Body Written by Manish Jaradi, Strategist for DailyFX.com

— Individual Articles Composed by DailyFX Team Members

— Contact and follow Jaradi on Twitter: @JaradiManish