Signs point to Fed pause and congress approves deal on raising the debt ceiling
This week, markets were focused on developments in Washington, where policymakers were inching towards a deal on raising the debt ceiling before a June deadline to avoid an unprecedented government default. There was a collective cheer late on Thursday when the US Senate passed legislation that lifts the government’s $31.4 trillion debt ceiling. Markets were further boosted by rising expectations the Federal Reserve will pause interest rates hikes. This fuelled a risk-on rally which took hold in Asia and continued as European markets opened.
US and UK markets returned from their long weekend on Tuesday after US stocks hit a nine-month high last Friday propelled by solid economic data optimism regarding the debt ceiling. The Nasdaq was particularly strong as AI related stocks continued to rally.
Inflation figures out of the US, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index came in higher than expectations of 3.9%, at 4.4% year-on-year up from 4.2% in April; this reignited fear of further rate rises which, coupled with debt ceiling concerns, led to choppy markets during the week. However, dovish rhetoric from Fed officials helped temper rate rise concerns.
Elsewhere in Europe, Euro zone inflation eased more than expected last month as underlying price growth also slowed, fuelling a debate about the need for further European Central Bank rate hikes beyond an increase later this month. Inflation eased to 6.1% in May from 7.0% in April, below expectations of 6.3%. Subsequent statements from the ECB President Christine Lagarde essentially committed the ECB to another 25-basis point hike in June given high underlying price pressures.
As of 12pm London time, the US market ended the week in positive territory, returning 0.37% with the technology index continuing its strong performance, delivering 0.97% over the week. European equities declined 0.76% over the week with the UK index falling 0.90% although losses were tempered by this morning’s risk-on equity rally. Over in Asia we had the sharpest rally in Chinese equities in 3-months with Chinese equities rallying 4.5% ending the week up 0.55% led by technology companies. And in Japan, Japanese equities continued their hot run ending the week up 1.72%.
All eyes will now turn on the US Labor Department’s unemployment report for May which is due later on today, with the data helping to determine whether the central bank sticks to its aggressive monetary policy.
Global Government Bonds Rally
Global bonds rallied over the week as yields declined (yields moves inversely to price). US Treasury yields declined reflecting growing optimism about the federal government’s ability to pay its debts and declining expectations of a rate hike by the US Federal Reserve later this month. Yields extended their decline on Thursday (yields moves inversely to price) on news of an extended drop in new manufacturing orders and lower labour costs, while a debt-ceiling bill advanced in Washington. The 10-year Treasury note yield fell to 3.6104% down -4.95 bps.
Business surveys for May showed on Thursday that sluggish global demand deepened the decline in manufacturing activity across Europe and the United States and remained a major challenge for many of Asia’s big exporters.
The 10-year German bund yield fell 10.2 bps to 2.279% and over in the UK, Gilt yields rallied over the week boosted by a slowdown in eurozone inflation with the UK 10-year gilts yield falling to 4.3bps to 4.148%.
Crude declines and Gold rises.
The oil price declined over ahead of the OPEC+ meeting on Sunday due to concerns over souring inventories with WTI Crude falling 2.45% to $70.89 a barrel and Brent Crude falling 231% to $75.17 a barrel.
The gold price rose 1.49% over the week to $1,992.4 per ounce after the dollar fell on cooling rate hike expectations.
Turkish Lira declines as Erdogan wins a historic third term
The Turkish lira slumped to yet another all-time low on Tuesday, extending its slide after the re-election of incumbent President Recep Tayyip Erdogan. Mehmet Simsek is now the favourite top return as Turkey’s former finance minister; Simsek is known for his market friendly policies.