Oil remains volatile but below pre-US regional banking crisis range

It’s been a very choppy week in oil markets, with traders forced to digest the latest compromise deal from OPEC+ against the backdrop of more interest rate hikes and dampening prospects for the global economy. Resilience in the economy now is impressive but the longer it lasts, the more it will be met with higher interest rates that could ultimately deliver a harder landing.

That oil failed to break back into the band it was trading in between December and March despite a further cut from Saudi Arabia says everything about traders’ views on the economy. Not to mention that it will infuriate the Saudis who have once more failed to manipulate the price higher. What more can they realistically do?

Brent has been firmly entrenched in the $70-$80 range for more than a month now and if Saudi Arabia can’t get the rest of the alliance on board before the end of the year, you have to wonder what the bullish case for crude will be. Stronger growth is obviously one but that isn’t exactly conducive to ongoing rate hikes and stubbornly high inflation.

Gold choppy ahead of US inflation and the Fed next week

Gold has also been very choppy in recent weeks with the lack of conviction in the economic data not helpful in tipping the balance one way or another. The yellow metal has broadly traded between $1,940 and $1,980 and traders may now have an eye on the US inflation data on Tuesday, a day before the Fed meeting.

These events may ultimately determine whether gold breaks higher once more with potential record high ambitions or continues to correct lower, having so far fallen almost 7% from the March highs.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

European stocks ended the day relatively flat while tech is enjoying a bounce in the US on the back of a spike in jobless claims, perhaps an early sign of the labor market weakening.

A well-timed spike in US jobless claims

Jobless claims spiked last week in what could be the start of another trend higher after stabilizing over the last few months. Claims had been expected to rise much earlier than this but for one reason or another, they’ve stayed remarkably steady. It’s also worth noting that this is only one release so unless it’s backed up by more of the same, we can’t read much into it. But the timing ahead of next week’s Fed meeting is interesting as it may add just a tad more comfort to policymakers leaning towards holding rates steady.

Bitcoin reaping the rewards of safe haven status

It’s been a rough week for the crypto space, with the SEC lawsuit against Binance and Coinbase causing significant uncertainty about what this means for exchanges and the coins traded on them. Of course, this was always likely at some stage with the two sides having not seen eye to eye in the past and this could ultimately lead to a clearer regulatory regime and less hostile environment in the future. But at what cost?

Bitcoin has held up surprisingly well, with crypto traders seemingly seeking out more established cryptos that appear relatively shielded from the SEC action in times of such uncertainty, rather than abandoning the space altogether. If the situation intensifies, that may change, but for now, bitcoin appears to be reaping the benefits of being cryptos safe haven.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

OANDA Senior Market Analyst Craig Erlam discusses the latest moves in USDCAD after the Bank of Canada surprised markets by restarting its tightening cycle.

• US jobless claims jump to 261,000
• Eurozone GDP posts back-to-back quarterly declines
• EUR/USD climbs sharply

The euro has posted strong gains on Thursday. In the North American session, EUR/USD is trading at 1.0777, up 0.74% on the day.

US jobless claims send US dollar lower

The currency markets were relatively quiet in the Asian and European sessions, but the US dollar has retreated against the major currencies in North American trade. The driver behind the greenback’s downturn was a jump in US initial unemployment claims. Last week’s reading rose to 261,000, up from 233,000 and above the consensus of 235,000. This marked the highest level since October 2021.

Traders and investors shouldn’t assume too much from one reading, as weekly releases tend to fluctuate from week to week, especially around the holiday season (last week was Memorial Day). Continuing unemployment claims, which are considered a better gauge of the job market, actually fell to their lowest level in February.

Today’s jump in jobless claims may not have been all that significant but it marked another negative signal after the jump in the unemployment rate in May and that has the markets worried that the labor market may be cooling down, which could allow the Fed to ease up on rate policy.

In Europe, the news wasn’t good, as the eurozone GDP contracted in the first quarter by 0.1% q/q, a repeat of GDP in Q4 2022 and below the consensus of 0%. Technically, two consecutive quarters of negative growth signify a recession, but the decline is so slight that “stagnation” seems a more appropriate description of eurozone growth. On an annualized basis, Q1 growth slowed to 1%, down from the 1.2% consensus and well off the Q4 2022 reading of 1.8%.

The ECB isn’t terribly distressed by the soft GDP report as it needs the economy to cool before it can pause from more rate hikes. Inflation has fallen sharply in the eurozone, from a peak of 10.6% last year to 6.1% in May. This has fuelled speculation that the ECB could be near the end of its rate-hike cycle, but ECB President Lagarde has dampened these expectations, saying that there is no clear evidence that core inflation has peaked. The markets are expecting a 25-basis point hike at the June 15^th meeting.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0780. Above, there is resistance at 1.0851
• 1.0707 and 1.0636 are providing support

• Bank of Canada raises rates by 25 basis points
• US unemployment claims surprise to the upside
• Canada releases employment report on Friday

The Canadian dollar is in positive territory on Thursday, after posting gains for two straight days. In the North American session, USD/CAD is trading at 1.3346, down 0.22% on the day. The Canadian dollar hit a high of 1.3320 on Wednesday, its highest level in a month.

Bank of Canada surprise

The Bank of Canada surprised the markets and delivered a 25-basis point hike on Wednesday. The markets had expected a third successive pause in rate hikes. The BoC has said that its “conditional pause” stance would be data-dependent and the acceleration in inflation and GDP was too much to ignore and the Bank felt it had to act. The rate statement highlighted the upswing in inflation and GDP as well as concerns over sticky core inflation and the possibility of inflation becoming entrenched above the 2% target.

The Canadian dollar climbed about 60 points after the BoC decision but pared most of these gains. Still, the Canadian dollar has looked sharp in June, with gains of 1.6%.

Market attention has shifted to Canada’s May employment report, which will be released on Friday. Job creation has been solid and came in at 41,400 in April, and the May estimate stands at 23,200. The BoC, which highlighted the tight labour market in yesterday’s rate statement will also be keeping an eye on wage growth, an important driver of inflation.

In the US, unemployment claims rose to 261,000, up from 233,000 prior. The US labour market has been surprisingly resilient in the face of relentless rate hikes from the Fed, but there have been some cracks, such as a jump in the unemployment rate in the May report. The sharp rise in unemployment claims may raise speculation that the Fed’s tightening is finally cooling down the hot labour market.                                 .

USD/CAD Technical

• There is support at 1.3375 and 1.3250
• 1.3496 and 1.3585 are the next resistance lines

• AUD/USD hits one-month high
• Lowe warns inflation is too high
• China releases inflation on Friday

The Australian dollar has bounced back on Thursday after losing ground on Wednesday. AUD/USD is trading at 0.6681, up 0.42% on the day. The Australian dollar touched a high of 0.6690 on Wednesday, its highest level in a month.

Lowe warns inflation is too high

The RBA surprised the markets with a rate hike on Wednesday, noting that inflation had unexpectedly risen in April and GDP in the first quarter was higher than the RBA had predicted. The RBA statement said that more tightening might be needed “to ensure that inflation returns to target in a reasonable timeframe”.

Lowe was even more candid in remarks at a public engagement on Wednesday, saying that the Bank has been patient in the battle to get inflation back to the 2-3% target “but our patience has a limit and the risks are testing that limit.” Lowe appeared to be referring to the upside risk in inflation, and he could be hinting at a “higher and longer” stance with rate policy until inflation returns closer to target. Inflation has peaked, but at the current level of 7%, Lowe may be sending a message that inflation is falling far too slowly and he’s prepared to keep raising rates, even if this results in a hard landing for the economy.

China will release inflation data on Friday. Inflation is projected to rise to 0.3% in May, up from 0.1% in April. An improvement from the April reading would reduce concerns that China could be facing disinflation and may have to respond by cutting interest rates. On Wednesday, China released soft trade data, which showed exports fell by 7.5%. This has raised doubts about China’s economic recovery. The Australian dollar, which is highly sensitive to Chinese data, lost ground following the release.

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AUD/USD Technical

• AUD/USD continues to test resistance at 0.6677. Above, there is resistance at 0.6749
• There is support at 0.6568 and 0.6496

OANDA Senior Market Analyst Craig Erlam joins Jonny Hart and Trader Nick to discuss the big stories of the day. They talk about the Chinese trade data, Australia GDP, Bank of Canada, Oil, Gold and the SEC lawsuit against Binance and Coinbase.

Stocks are declining after investors got spooked when the Bank of Canada restarted their rate hiking campaign. Canada’s central bank is viewed as one of the leaders when it comes to being proactive with monetary policy. ​ They were the first to raise rates in 2022 and then put them on hold earlier this year. ​ The BOC is signaling that more rate hikes could come and that has everyone rethinking that the Fed will be done after the July hike. ​ ​ ​

Oil

Crude prices are higher after the EIA report signaled the US will see strong travel demand this summer. ​ Oil has been sluggish given all the growth concerns from China, but that should stabilize as their central bank is poised to deliver significant stimulus fairly soon.

The EIA report posted a modest draw of 452,000 bpd, a bump in production, and strong demand for crude oil and gasoline. ​ The report does highlight some bearish drivers as production hit the highest levels since April 2020 and as crude exports tumbled.

With global bond yields rising sharply today, that might drive concerns that the market has mistimed the end of tightening, and that might lead to a weaker crude demand outlook. ​ Until we see stimulus from the PBOC, Brent crude might trade between $72 and $82. ​ WTI crude seems poised to be rangebound between the $67 and $75 levels.

Gold

Gold is getting crushed as the bond market signals rate hiking cycles are not ready to end. ​ The Bank of Canada rate decision sent a shiver down the spine of most gold bulls as they are the leading central bank when it comes to action since COVID-19. ​ The BOC was the first major bank to hike and hold, which means today’s message that more hikes are coming is resetting many peak terminal rate bets.

Gold is facing critical support at the $1950 level and if that breaks, bearish momentum could eye the $1935 region. ​

Wall Street has been on a heightened watch to see if major central banks might be unleashing significantly more tightening and over who will sign Leonel Messi?  At the 10am hour in New York, we got answers to both questions.  The BBC reported that Lionel Messi has decided not to return to Barcelona and join Inter Miami.  Inter Miami has been struggling all season long and saw their odds go from 150/1 to 25/1 to win MLS Cup 2023.  If confirmed, this would be massive for consumer spending as MLS games involving will be sold out in addition to record breaking merchandise sales.

Treasury yields surged shortly after a surprise BOC hike and Messi news.

BOC resumes hiking as interest rate differential with the US narrows

The Bank of Canada is a leading central bank.  They were the first major central bank to raise rates in 2023 and they were the first ones this year to pause their tightening cycle this year. The BOC restarted its tightening cycle and will likely be delivering more rate hikes given the recent trends with inflation, growth, and housing data.

The interest rate differential is steadily disappearing between the US and Canada.  Global bond yields are rising now that we’ve seen both Australia and Canada have to resume their respective rate hiking cycles.

The Canadian dollar is getting a boost from the BOC rate hike and as oil prices rebound.  Since October USD/CAD has been trading between 1.32 and 1.38, but that could change if the Canadian economy continues to outperform.

• Bank of Canada likely to pause at today’s meeting
• Fed expected to pause next week

The Canadian dollar is unchanged, trading at 1.3400 in the North American session.

Bank of Canada expected to hold rates

The Bank of Canada meets later today, and the money markets are expecting another pause, which would leave the benchmark rate at 4.5%. The BoC’s rate-tightening cycle has been on a “conditional pause”, which is another way of saying that rate decisions are data-dependent, especially on inflation and employment reports.

The Bank has kept rates on hold since March and is expected to follow suit today, but there have been signals that the rate-hike cycle may not be over. First, April inflation report surprised on the upside after it ticked upwards to 4.4%, up from 4.3% annually, and rose from 0.3% to 0.7% month-to-month. The upswing will be of concern to BoC policy makers, as the central bank is intent on wrestling inflation back to the 2% target.

The second concern is GDP, which hit 3.1% y/y in the first quarter, beating the BoC’s forecast of 2.3% growth. Consumer spending has been stronger than anticipated, as many households have sizeable savings from the pandemic which they are spending now that the economy has reopened. BoC policy makers are concerned about the rise in inflation and GDP, and we could see hints about future rate hikes even if the Bank opts to pause at today’s meeting.

The Fed meets next week and with a blackout period in place on Fed public engagements, the markets are hunting for clues. Market pricing has been on a roller-coaster as divisions within the Fed over rate policy have made it difficult to determine what the Fed has planned. Currently, the markets are predicting a 78% chance of a pause, which would mark the first hold in rates after 10 straight rate increases.

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USD/CAD Technical

• 1.3375 is a weak support line, followed by 1.3250
• 1.3496 and 1.3585 are the next resistance lines

• Hang Seng Index, Hang Seng TECH Index, and Hang Seng China Enterprises Index have outperformed US and Asia Pacific Ex Japan in the near term.
• China’s thematic exchange-traded funds listed in the US have recorded their best outperformance against the MSCI All-World Index since January/March 2023.
• An impending cut in China’s major banks’ deposit rates and a weak balance of trade data for May have increased the expectations of a cut to the one-year MLF interest rate next week.

Since last Wednesday, 31 May, there has been a minor resurgence of positive animal spirits in the China stock market and its proxies.

The Hang Seng Index, Hang Seng TECH Index, and Hang Seng China Enterprises Index have staged rallies of +5.8%, +7.6%, and +6.5% from last Wednesday’s lows to Tuesday, 6 June closing levels that outperformed the US S&P 500 (+2.8%) and MSCI Asia Pacific ex Japan (4.8%) over the same period.

Also, a similar positive performance behaviour can be seen in major China’s thematic exchange-traded funds (ETFs) listed in the US stock exchanges quoted in US dollars.

China’s thematic exchange-traded funds listed in the US have started to show signs of outperformance

Fig 1: Ratios of China Large-Cap ETF and Golden Dragon China ETF against MSCI All-World Index ETF as of 6 Jun 2023

(Source: TradingView, click to enlarge chart)

From a relative strength analysis standpoint, the ratio charts of iShares China Large-Cap ETF and Invesco Golden Dragon ETF consisting of China Big Tech ADRs over the MSCI All-Country World Index ETF  have indicated significant outperformance where the 5-day rolling performances of the iShares China Large-Cap/ MSCI All-Country World Index ratio and Invesco Golden Dragon/ MSCI All-Country World Index ratio jumped to their highest levels in around two and four months respectively as of yesterday, 6 June.

Rumours of impending new stimulus measures

The reasons for such positive performances are due to impending new stimulus measures that market participants are expecting from China’s top policymakers to be introduced soon to shore up confidence and reverse the recent economic growth decline trend since February.

Last Friday, 2 June, several media reports mentioned that China’s top policymakers are working on a new basket of measures to support the faltering property market after existing policies failed to sustain a rebound and stabilize the property sector. Potential stimulative measures include a reduction in mortgage down payment in non-core neighbourhoods of major cities and further relaxation in the restrictions for residential purchases.

Yesterday, it has been reported that China’s central bank, PBoC may instruct major banks in China to cut time deposit rates as soon as this week, the second time in less than a year. A reduction of 5 basis points and 10 basis points on three-year and five-year time deposits respectively based on media reports. These measures are made to stimulate consumer confidence, and increased credit supply so that there will be lesser funds inflow into the banks’ fixed deposit products and lower the cost of funding for banks which in turn can incentivize a reduction in lending rates.

Recent key economic data have continued to flash weakening growth conditions

Also, China’s latest balance of trade data for May has continued to show a deterioration in external demand while internal consumption in China is still in a lacklustre condition. Exports growth has shrunk by -7.5% year-on-year to a three-month low, a reversal from a gain of 8.5% in April, way below consensus estimates of -0.4% while imports continued to contract for a third consecutive month to -4.5% year-on-year from -7.9% in April.

The 10-week rally in USD/CNH has reached an overbought condition

Fig 2: USD/CNH medium-term trend as of 7 Jun 2023 (Source: TradingView, click to enlarge chart)

USD/CNH (offshore yuan)’s medium-term up move from the 23 March 2023 low of 6.8103 has almost reached the lower limit of the 7.1445/7.1730 key medium-term resistance zone (printed a high of 7.1443 on 6 June) with a bearish divergence seen in the daily RSI oscillator at its overbought zone.

These observations suggest that this medium-term up move may be overstretched and the USD strength against the CNH is at risk of a pull-back or consolidation which can translate to a potential uptick in China stock indices and its proxies given their recent high indirect correlation.

Given this latest set of weak economic data and the impending major banks’ deposit rates cut, expectations of a PBoC’s rate cut next Thursday, 15 June on its one-year medium-term lending facility (MLF) interest rate have grown as PBoC has left the MLF interest rate unchanged at 2.75% since August 2022.

Hence, coupled with the positive momentum factor seen so far in China proxies stock indices and ETFs as well as the possibility of a short-term pull-back in US dollar strength, the bullish animal spirits may continue to persist for a while at least in the short-term.

• AUD/USD powers to 1-month high
• Australian GDP dips to 0.2%
• RBA expected to deliver more rate hikes

The Australian dollar has extended its rally on Wednesday. AUD/USD is trading at 0.6689, up 0.28%. Today’s weak GDP report and soft Chinese trade data haven’t spoiled the party, as the Australian dollar is up 1.2% this week.

Australian GDP slips

Australia’s GDP slowed to 0.2% in the first quarter, down from 0.6% in Q4 2022 and missing the consensus of 0.3%. On an annual basis, GDP fell to 2.3%, following a 2.7% gain in Q4 2022 and shy of the consensus of 2.4%.

The economy is cooling down, and that really shouldn’t come as a surprise. The cost of living crisis, rising interest rates and weaker demand have taken a bite out of economic activity. China’s reopening has faltered, as May trade data showed a decline in exports and imports. This is bad news for Australian exporters, as their largest market is China.

The GDP report was released just hours after the RBA announced a 25-basis point rate hike. The RBA has surprised the markets with two straight rate hikes as it wages a relentless war against inflation, which isn’t coming down fast enough for the central bank. Governor Lowe reiterated after the decision that the RBA would do whatever it takes to bring inflation back down to its 2-3% target, from the current 7%.

Core inflation has been stickier than expected and that means that more rate hikes can be expected. The cash rate is currently at 4.10% and the RBA has looked at different scenarios in which the cash rate peaked at 4.8%. The RBA may not actually move to that level, as the danger of a recession would be high, but there’s little doubt that more rate hikes are on the way.

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AUD/USD Technical

• AUD/USD is testing resistance at 0.6677. Above, there is resistance at 0.6749
• There is support at 0.6568 and 0.6496

European indices and US futures look a little flat following a mixed session in Asia overnight, as Chinese trade data failed to inspire while Australian GDP pointed to further pain as the RBA continues raising rates.

Disappointing trade figures increase calls for stimulus

Chinese trade data offered further evidence of weakening demand both domestically and abroad, with exports falling particularly hard last month. A 7.5% decline far exceeded the -0.4% expected, while imports actually beat forecasts, albeit while also falling 4.5% in May.

Weaker global trade is not a new story but it is surprising how quickly China’s reopening boost has faded, with backlogs of work supporting export numbers until now even as other countries have continued to see demand for their goods wane.

With China’s reopening boom flagging so quickly, pressure is set to intensify on the leadership to announce new stimulus measures in a bid to revitalize the economy again and achieve its 5% growth target. That may initially come in the form of rate cuts, perhaps targeted to those sectors under the most pressure with authorities so far reluctant to engage in broad-based easing.

Australian growth slows as high-interest rates bite

The Australian economy is slowing amid cost-of-living pressures, weaker household spending, and higher interest rates. GDP in the first quarter slipped to 0.2%, down from 0.6% in the final quarter of last year and below expectations. High-interest rates and inflation are hurting household finances and the economy is now suffering. This week’s RBA hike is going to compound this and unless we see signs of price pressures easing, there may be more to come.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

Oil remains under pressure after Saudi cut

Oil prices are falling again today as Saudi Arabia’s attempt to dress up a unilateral move as a group cut fails to have the desired impact. Crude is now trading below the level it ended at Friday which suggests that, despite the knee-jerk reaction on Monday, traders were hedging against broader action from OPEC+ and got a light version of the deal they feared.

While Saudi Arabia remains price-driven, the market is more concerned with the economic outlook, and the rest of the alliance seemingly isn’t interested in taking more action in anticipation of what may come. The commitment from the start of the next year could easily change depending on what unfolds whereas markets are forced to respond to current risks and as far as the economy is concerned, they are tilted to the downside.

Gold awaiting further data following inconclusive reports

Gold is treading water again this morning, sitting right in the middle of the roughly $1,940-$1,980 range it found itself in these past weeks. The economic data we’ve had recently has been far from conclusive and that creates a lot of uncertainty around the policy path for interest rates and therefore appetite for the yellow metal.

Inflation has proven to be more stubborn than hoped while the labour market remains resilient, a combination that doesn’t point to US rate cuts later this year as traders currently hope. This is a big summer and all of that may soon change but for now, that uncertainty is creating this choppiness and range trading we’re seeing in gold.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

• Treasury yields edge higher; 10-year rises 2.3bps to 3.706%
• Apple momentum stalls on skepticism with $3,499 headset
• VIX touches lowest level since 2021

Stocks

After a valiant attempt at entering a bull market, stocks are wavering as Wall Street contemplates how much more tightening will we see by the Fed. ​ Providing some support for equities was news that Secretary of State Blinken is expected to make a visit to China and meet with key officials. ​ Any progress in cooling tensions with the world’s two largest economies is a positive for risk appetite. ​

RBA

After seeing what happened with Australia overnight, investors are realizing that a Fed skip could really mean a brief hold followed by more rate hikes and not just the ‘one and done’ many are planning on. ​ The RBA held rates steady in April and many thought cooling inflation and weaker growth prospects would allow the bank to deliver one last rate hike after skipping. ​ Fast forward to June and it looks like Australia will have 4 rate hikes since the April hold. ​

The Australian dollar is rallying after the RBA surprised most analysts and the rally could accelerate whenever we see China release stimulus measures. ​

Oil

Crude prices are heavy as global growth concerns continue to suggest a much weaker crude demand outlook. ​ China is scrambling to deliver a ‘basket of support measures’ and Germany factory orders were unable to rebound. ​ It seems the Saudi-led OPEC+ production cut only deterred short-sellers for a couple of days.

The writing is on the wall that China will become more accommodative and the resilience of the US economy should suggest oil demand will stabilize soon, which means the move to $80 crude might take a while longer to unfold.

Gold

Gold prices are wavering as investors await to see what will happen with the recent stock market rally and if the disinflation process will allow the Fed to skip a rate hike next week. ​ Demand for safe-havens have somewhat eased up and traders are waiting to see if the next market risk triggers a de-risking moment.

The RBA rate decision has some investors nervous that the Fed might not be done after a July rate hike. ​ The RBA reminded investors that inflation might prove to be trickier to tackle and if global tightening isn’t quite yet near the end that would weigh on non-interest bearing gold. ​ ​

• Gensler “These trading platforms, they call themselves exchanges, are commingling a number of functions”
• Gensler “Look, we don’t need more digital currency”
• Bitcoin rebounds after falling to lowest levels since March

The SEC looks like it is playing Whac-A-Mole with crypto exchanges. ​ The first crypto exchange to get the regulatory hammer was Binance, the world’s largest crypto exchange. The next crypto exchange to get hit with an SEC lawsuit was Coinbase and it seems like this is just the beginning. ​

With most exchanges offering a wide range of cryptos, it seems the regulatory hammer will hit them all as too many of the blockchain protocol cryptos are being deemed as securities by the SEC. ​

The global crypto market cap just got a lot smaller and as the two most popular exchanges got sued and now crypto investors will have to decide if they are confident that all their offerings will remain available to trade. ​ With the SEC naming Solana, Polygon, Cardano, and BNB as securities, some traders might decide to abandon those positions on any major exchange, switch the position to a cold wallet, or just close out their position and reopen a Bitcoin one.

Bitcoin is becoming an interesting trade here as many crypto investors might just decide to give up on most altcoins and stick with what has worked best since cryptos were created.

• Eurozone and German releases were softer than expected
• ECB expected to hike at next week’s meeting

The euro has edged lower on Tuesday. EUR/USD is trading at 1.0695 in the North American session, down 0.16%.

Eurozone and German releases were soft on Tuesday. Eurozone retail sales flatlined in May on a monthly basis, up from -0.4% but shy of the consensus of 0.2%. German Factory Orders declined 0.4% m/m in May, after a dismal -10.4% reading in April, and missed the consensus of +3.0%. The silver lining in the weak releases is they may signal that the eurozone economy is cooling down, as the ECB’s aggressive rate hikes make filter through the eurozone and German economies.

ECB expected to hike next week

The ECB meets on June 15^th and President Lagarde isn’t showing any signs of softening her hawkish stance. Lagarde has stated twice within a week that “there is no clear evidence that underlying inflation has peaked”, even though eurozone core inflation showed a respectable decline in April, dropping from 5.6% to 5.3%. Lagarde said on Tuesday that future rate decisions would be data-dependent and strongly hinted that more rate hikes were coming due to high inflation. There are no tier-1 releases prior to the June meeting, and barring some unusual developments, the ECB is likely to raise rates by 25 basis points, which would bring the benchmark cash rate to an even 4.0%.

US Services PMI dips

The US economy has been showing signs of cooling down, as the Fed’s rate-hike cycle has dampened economic activity. There was plenty of hype around Friday’s nonfarm payroll report, which indicated that job growth remains strong. At the same time, the labor market is showing cracks, such as the jump in unemployment from 3.4% to 3.7%.

The ISM Services PMI, a key gauge of business activity, was lower than expected in May and showed almost no growth, falling from 51.9 to 50.3 points. A reading above 50 indicates growth. The Fed has raised rates by 500 basis points in the current cycle, and if consumers cut back on spending, the services sector, which has carried the US economy, might fall below 50 into contraction territory.

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EUR/USD Technical

• EUR/USD is testing at support at 1.0707. Below there is support at 1.0636
• 1.0780 and 1.0851 are the next resistance lines

• Japan’s consumer spending and income falls in April
• Ministry of Finance sends warning about weak yen

The Japanese yen is steady on Tuesday. In the European session, USD/JPY is trading at 139.81, up 0.18%.

Japan’s numbers weaker than expected

Japanese data disappointed on Tuesday. Household spending plunged 4.4% y/y in April, down from the March reading of -2.3%, and below the consensus of -0.9%. Average cash earnings for April fell to 1%, following an upwardly revised 1.3% gain, and just above the 0.9% consensus. There are big expectations for the first-quarter GDP release on Wednesday. GDP is expected to hit 1.9% y/y, after a -0.1% reading in Q4 2022. A strong reading will be a welcome sign that the Japanese economy is back on track.

The markets are keeping a close eye on the exchange rate. The yen fell below the key 140 line on Monday after breaching that level in late May for the first time since November. The yen has declined around 7% since February 1st, and the downswing triggered a warning from the Ministry of Finance (MOF) last week.

The MOF warned that it would intervene if needed and said that “excessive moves aren’t desirable”. The language was not as sharp as when the MOF intervened in September 2022, blindsiding the markets and sending the yen sharply higher. The MOF appears to be content with a dose of verbal intervention, but if the yen falls closer to 145, concerns will grow that the MOF could intervene in order to prop up the yen.

US Services PMI dips

In the US, ISM Services PMI for May surprised on the downside. The markets expected the PMI to improve from 51.9 to 52.2, but instead, it dropped to 50.3, pointing to stagnation. The decline is another signal that the Fed’s aggressive rate-tightening cycle is cooling is dampening business activity, which has continued to expand despite Covid, high inflation and rising interest rates.

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USD/JPY Technical

• There is weak resistance at 1.3979.  Above, there is resistance at 141.11
• There is support at 138.64 and 137.93

• AUD/USD rally continues for fourth straight day
• RBA surprises with 25-bp hike
• Australia releases GDP early Wednesday

The Australian dollar continues to roll and has extended its rally on Tuesday. In the European session, AUD/USD is trading at 0.6659, up 0.63% on the day. The Aussie has sparkled in June, surging 2.4%.

On the economic calendar, Australia releases GDP early on Wednesday. The markets are expecting a solid gain of 2.7% in the first quarter, up from 2.4% in Q4 2022.

RBA surprises with a hike

The markets were confident that the RBA would pause at today’s meeting, projecting a 67% chance of a hike. I wrote yesterday that although a pause was likely, Governor Lowe has a habit of surprising the markets. Well, make that the second straight month that the markets have guessed wrong about a pause, with the RBA hiking each time by 25 basis points. Even with the surprise hike, the benchmark cash rate of 4.10% remains below most of the major central banks, including the Federal Reserve.

Australian inflation has been heading in the right direction, dropping from 7.8% to 7.0% in April. This is evidently not fast enough for the RBA, which has a target of 2-3%. Governor Lowe has been hawkish and said last week that the Bank will do whatever it takes to bring inflation back down to target so perhaps the real surprise is why the markets keep expecting a pause when Lowe keeps repeating that inflation is way too high.

Lowe reiterated this position in the rate statement, saying that “inflation in Australia has passed its peak, but at 7% is still too high and it will be some time yet before it is back in the target range”. Households and businesses will feel even more pain from the hike, but that’s a price the RBA believes is necessary to beat public enemy number one – inflation.

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AUD/USD Technical

• AUD/USD tested resistance at 0.6677 earlier in the day., Above, there is resistance at 0.6749
• There is support at 0.6568 and 0.6496