Macro Matters – Weekly review, w/c June 19

Macroeconomic / Geopolitical Developments

• Central banks lean towards hawkish policies to tackle inflation.

• Inflation remains high but shows signs of disinflation in major economies.

An Extension of a Hawkish Bias to Central Bank Decisions

Central banks continue their hawkish stance. Last week, both the Reserve Bank of Australia and the Bank of Canada surprised markets with unexpected rate hikes. The Fed’s “hawkish hold” in June and the ECB’s rate hike suggest further tightening is likely. However, market reactions have been mixed. Yields on 2-year and 10-year bonds remain subdued, and the USD has turned lower, indicating skepticism about sustained rate hikes. Markets now look ahead to decisions from the Bank of England and the Swiss National Bank, with the former poised for a particularly hawkish move due to persistently high inflation.

Inflation Is Falling, Albeit Not Everywhere

Disinflationary forces are taking hold globally. In China, inflation has been declining since September, and similar trends are evident in the US, Canada, and the Eurozone. While central banks remain cautious due to the slow pace of disinflation, Producer Price Index (PPI) data suggests further declines in inflation are on the way.

United States

• Could a “Soft Landing” Be Coming After All?

Despite concerns over a US banking crisis and recession warnings in manufacturing and housing, recent data suggests resilience. Jobs growth, retail sales, and falling inflation support the possibility of a “soft landing.” These trends are fueling a rally in equities but weakening the USD.

• USD Falls Despite the “Hawkish Hold”

The Fed’s dot plots hint at two more rate hikes this year, yet markets remain unconvinced. Expectations for additional hikes are modest, and rate cuts have been pushed into 2024. The USD continues to weaken, with other major currencies like the EUR and GBP gaining strength.

• US Equities: A Broader-Based Rally

The rally in US equities, led by tech stocks, has now broadened to include the Dow and Russell 1000 indices, signaling healthier market conditions. Market breadth improvements suggest the rally can continue for longer.

What’s Next?

• Limited US data this week, with Fed Chair Powell’s Congressional testimonies as the focal point.

Europe

• EUR Rebounds After a Hawkish ECB

The ECB hiked rates by 25bps, with President Lagarde signaling more hikes are likely. However, the outlook depends on inflation trends, with a downside surprise potentially capping EUR gains. EUR/USD resistance at 1.1095 remains key.

• A Hawkish BoE Likely to Support GBP

The Bank of England is expected to hike rates by 25bps to 4.75%, with markets pricing rates above 6% before peaking. Recent inflation and wage growth data bolster hawkish expectations, supporting GBP strength against major currencies.

What’s Next?

• UK CPI on Wednesday and the Bank of England rate decision on Thursday are key.

Asia

• The JPY Struggles as the BoJ Holds Steady

The Bank of Japan maintained its ultra-loose policy, leading to continued underperformance of the JPY. The USD remains the only major currency gaining against the JPY.

• New Zealand Confirms Recession

New Zealand entered a technical recession in Q1, and the Reserve Bank of New Zealand is expected to maintain its record-high rate of 5.50% into 2024. The NZD remains under pressure, particularly against the AUD.

What’s Next?

• It is a quiet week for Asian markets on the calendar, with Australian flash PMIs on Friday as a focus.

Commodities

• Oil Futures Rebound but Remain in a Choppy Range

Oil markets lack clear direction, with traders focusing on short-term moves. A rally in NYMEX oil futures brings resistance at $73.90 into view, with support at $66.80 firming.

• Gold Futures Rally on USD Weakness

Gold prices have rebounded as the USD weakens, but resistance between $1970/$1983 limits gains. With a hawkish stance from other central banks, gold faces downward pressure.

What’s Next?

• US data is light this week, but Fed Chair Powell’s testimony could trigger market moves. Central bank decisions from the Swiss National Bank and Bank of England will also drive sentiment.

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