No surprises on inflation

Thoughts of the Day

The US Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure Price Index, showed that inflation continues to moderate. Although the outcomes were pretty much as expected by the market, the Core Index (which excludes the more volatile energy and food components) showed that prices in April rose +2.8% when compared to that of last year’s April, the lowest increase since March 2021. 

The bright spot was the monthly increase in the Core index was merely +0.2% (vs expected and previous increase of +0.3%). However, this is likely not enough for the Fed to be confident that inflation is headed firmly towards the 2% target soon. As such, the Fed is still likely to be waiting for more data before committing to interest rate cuts in the near future.

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Tradertainment

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Week Ahead

Monday:

Tuesday:

  • JOLTS Job Openings (8.35M expected vs 8.488M prev)

Wednesday:

  • Australian GDP (+1.2% YoY expected vs +1.5% prev, +0.2% MoM expected and prev)
  • Bank of Canada Monetary Policy Decision (Rates expected to lower to 4.75% vs 5.00% current)
  • US ADP Employment Change (+180k expected vs +192k prev)

Thursday:

  • European Central Bank Monetary Policy Decision (Rates expected to lower to 4.25% vs 4.50% current)

Friday:

  • US Nonfarm Payrolls (+180k vs +175k prev)
  • US Unemployment Rate (3.9% expected and prev)
  • US Average Hourly Earnings YoY (+3.9% expected and prev)
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What Happened Yesterday

Market Movements as of New York Close 31 May 24 (2 Jun for Crypto)

[Euro Area Inflation]
Headline: Prices rose +2.6% Year-on-Year (vs +2.5% expected and +2.4% prev).
Core which excludes the more volatile energy and food components: +2.9% YoY (vs +2.7% expected and prev)
Despite the higher than expected inflation, reaction in the EURUSD was muted.

[US PCE Price Index – the US Federal Reserve’s preferred measure of inflation]
Headline: Prices rose +2.7% YoY as expected (previous was also +2.7%)
+0.3% Month-on-Month as expected and prev
Core: +2.8% YoY as expected and prev
+0.2% MoM a touch lower than expected and the previous observation (vs expected and previous +0.3%)
Personal Spending: +0.2% MoM vs +0.3% expected and +0.7% prev
The S&P 500 futures rose +0.34% in reaction to the weaker personal spending which indicated a weakening spending from the US consumer.

The US stock market opened slightly higher from Thursday. It then fell in the early session due to poor earnings results from MongoDB (-23.9%) and Dell Technologies (-17.9%) which triggered a selloff in the broader tech sector. However, stocks started to recover mid session possibly due to month-end rebalancing. The S&P 500 rose +0.80% (high: +0.86%, low: -0.84%), the Dow Jones increased +1.51% (high: +1.60%, low: -0.05%) while the Nasdaq edged -0.01% lower (high: +0.19%, low: -1.88%).

The crypto market was muted and traded mixed over the weekend with Bitcoin down -0.86% and Ether up +0.91%.
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Headlines & Market Impact

Japan confirms first currency intervention since 2022 with $62 billion in spending

Notable Snippet: Data from Japan’s Ministry of Finance on Friday confirmed the country’s first currency intervention since 2022, after the yen plunged to a 34-year-low in April.

The ministry on Friday stated Japan spent 9.7885 trillion yen ($62.25 billion) on currency intervention between April 26 and May 29, according to a Google-translated statement.

This is the first time that the Japanese government has undertaken such a market measure since October 2022, according to ministry records.

The timeline of the government step coincides with a sharp rebound in the Japanese currency in recent weeks, after the yen plunged to a 34-year-low of 160.03 against the U.S. dollar on April 29.

It later bounced to 156 levels later in that session, heating speculation of a potential intervention by Japanese authorities. The currency further strengthened by more than 2% within days.

Earlier this month, Japanese Finance Minister Shunichi Suzuki backed the need for interventions, if sharp currency moves started to impact households and companies. He declined to comment at the time when asked whether the ministry had stepped in to prop up the yen.

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Biden’s Gaza plan ‘not a good deal’ but Israel accepts it, Netanyahu aide says

Notable Snippet: In an interview with Britain’s Sunday Times, Ophir Falk, chief foreign policy advisor to Netanyahu, said Biden’s proposal was “a deal we agreed to — it’s not a good deal but we dearly want the hostages released, all of them”.

“There are a lot of details to be worked out,” he said, adding that Israeli conditions, including “the release of the hostages and the destruction of Hamas as a genocidal terrorist organisation” have not changed.

Biden, whose initial lockstep support for Israel’s offensive has given way to open censure of the operation’s high civilian death toll, on Friday aired what he described as a three-phase plan submitted by the Netanyahu government to end the war.

The first phase entails a truce and the return of some hostages held by Hamas, after which the sides would negotiate on an open-ended cessation of hostilities for a second phase in which remaining live captives would go free, Biden said.

That sequencing appears to imply that Hamas would continue to play a role in incremental arrangements mediated by Egypt and Qatar – a potential clash with Israel’s determination to resume the campaign to eliminate the Iranian-backed Islamist group.

Biden has hailed several ceasefire proposals over the past several months, each with similar frameworks to the one he outlined on Friday, all of which collapsed. In February he said Israel had agreed to halt fighting by Ramadan, the Muslim holy month that began on March 10. No such truce materialised.

The primary sticking point has been Israel’s insistence that it would discuss only temporary pauses to fighting until Hamas is destroyed. Hamas, which shows no sign of stepping aside, says it will free hostages only under a path to a permanent end to the war.

Netanyahu is under pressure to keep his coalition government intact. Two far-right partners have threatened to bolt in protest at any deal they deem to spare Hamas. A centrist partner, ex-general Benny Gantz, wants the deal considered.

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OPEC+ extends deep oil production cuts into 2025

Notable Snippet: OPEC+ agreed on Sunday to extend most of its deep oil output cuts well into 2025 as the group seeks to shore up the market amid tepid demand growth, high interest rates and rising rival U.S. production.

Brent crude oil prices have been trading near $80 per barrel in recent days, below what many OPEC+ members need to balance their budgets. Worries over slow demand growth in top oil importer China have weighed on prices alongside rising oil stocks in developed economies.

The Organization of the Petroleum Exporting Countries and allies led by Russia, together known as OPEC+, have made a series of deep output cuts since late 2022.

OPEC+ members are currently cutting output by a total of 5.86 million barrels per day (bpd), or about 5.7% of global demand.

Those include 3.66 million bpd of cuts, which were due to expire at the end of 2024, and voluntary cuts by eight members of 2.2 million bpd, expiring at the end of June 2024.

On Sunday, OPEC+ agreed to extend the cuts of 3.66 million bpd by a year until the end of 2025 and prolong the cuts of 2.2 million bpd by three months until the end of September 2024.

OPEC+ will gradually phase out the cuts of 2.2 million bpd over the course of a year from October 2024 to September 2025.

“We are waiting for interest rates to come down and a better trajectory when it comes to economic growth … not pockets of growth here and there,” Saudi Energy Minister Prince Abdulaziz bin Salman told reporters.

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Best,
Phan Vee Leung
CIO & Founder, TrackRecord