Economic data released in the US yesterday further fueled the hawkish Federal Reserve (Fed) bets. The US Q1 GDP was revised up from 1.3% to 2%, while analysts had penciled in an improvement to 1.4%. The surprise jump came from a quickened growth in exports and consumer spending, which jumped 4.2% in the Q1. 4.2%! Corporate profits fell, but they fell less than expected, as initial jobless claims fell by the most since 2021. The only good news for the Fed, and its inflation battle, was a slightly softer than expected core PCE figure, which extended to 4.9%, a bit less than 5% expected by analysts. But the rest of the data pointed in the same direction than in the past days and weeks: the US economy seems to be doing FINE! Combined with the Fed’s bank stress test results comforting that the big US lenders are in a position to shoulder further shocks, like recession and chaos in real estate, the US 2-year yield jumped more than 3% to 4.90% for the first time since the mini banking crisis. The probability of a 25bp hike from the Fed in the July meeting jumped to 87%, while the pricing in the market suggests that the Fed’s two rate hikes are now likelier than not.
And perhaps because the aggressive Fed tightening doesn’t impact economic strength as badly ass expected, stock investors saw no urgence in selling their stocks on rising hawkish Fed expectations. The S&P500 advanced 0.45%, Nasdaq was slightly lower, as the small caps of Russell 2000 outperformed with a 1.23% rise yesterday. The US dollar index rallied past its 100-DMA and broke above a one-month descending channel top. Trend and momentum indicators turned positive hinting that a further advance in the US dollar is likely against major currencies in the run up to next week’s all important jobs report, especially if today’s PCE data, the Fed’s gauge of inflation, shows further advance in inflation from 4.4% to 4.6%.
Yet, a further rise in US yields could weigh on stock appetite before the weekly closing bell.
In the Eurozone, investor mood was a bit tricky because inflation data released this week in the Eurozone revealed that inflation in Italy eased more than expected, inflation in Spain eased below the European Central Bank’s (ECB) 2% policy target, but inflation in Germany ticked higher this month, to 6.8%, because of an unfavourable base effect from last year, when Germany offered its citizens ultra-cheap rail tickets. French, and the eurozone’s aggregate preliminary inflation data for June is due today.
The EZ inflation is expected to have eased to 5.6%, and the divergence between Germany and the others may not be a long-term concern, but the ECB will certainly remain well alert, and well hawkish into this summer.
More importantly, the end of ECB’s cheap loans should increase the yield spread between the Eurozone’s core and periphery and weigh on the EURUSD. The pair is now testing the 50-DMA to the downside, and if the Fed hawks continue gaining field, which seems to be the most likely scenario before next week’s US jobs data, we could see the pair correct deeper toward the 1.08/1.0820 region.
In China, the latest economic data didn’t enchant investors. Chinese manufacturing PMI remained below 50, in the contraction zone, for the third consecutive month, despite recurrent policy easing from the People’s Bank of China (PBoC). Nothing seems to be boosting the Chinese recovery because consumer and investor confidence have been severely damaged as a result of government crackdowns and Covid.
The initial forecast for this year – US recession and Chinese rebound – is not happening. On the contrary, the US is growing, and China is slowing. At this point, the Chinese government has no choice but to regain people’s and investors’ confidence if it doesn’t want to become too old before becoming rich enough.
