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Happy Memorial Day,

Liquidity is low in today’s bank holiday session, but volatility can still get as high as Powell may plan to hike after this week’s employment data.

Stocks are rising after news of the debt ceiling deal, firm CEOs are dropping like flies and the monthly unemployment report is released Friday.

Let’s dive in.

Economy Heat Check

As of 5/26/2023 market close, unless otherwise stated.

Friday Flashback

• Odds of a 25 bps June Fed hike increased to 50.2% (up from 17.4% one week ago) after upwardly revised Q1 GDP, inflation and jobs data.

• The RBNZ delivered a dovish 25 bps hike to 5.5%, suggesting it may be their last hike this cycle due to falling demand and cooling budget fears.

• Strong UK inflation data kept the pressure on the BOE to hike at least one or two more times this cycle.

• Deflationary forces continue to appear across Asia, with South Korean producer prices (a key export economy) falling to 1.7% y/y and -0.1% m/m.

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Bullish & Bearish

↑ Stock Market: Wall Street posted strong gains on Friday with debt-ceiling optimism restored.

↑ Currencies: NZD was the weakest FX major whilst USD was the strongest.

↓ Gold: US economic data hammered gold’s price as markets gear up for a rate hike in June.

↓ Oil: WTI suffered its worst day in three weeks on Thursday after Russia played down the chances of further OPEC+ oil supply cuts, with it rolling over from $74.

↑ Crypto: The US debt ceiling deal pushed Bitcoin to the highest level in over two weeks.

↑ Money-Markets: Debt-limit concerns pushed funds to a fresh record ($5.4T in assets).

Week Ahead: Signal to Noise

This week’s market outlook and whether you should actually care.

Signals

Markets React to Debt Ceiling Deal

S&P bears were caught short Friday in their extreme positioning. News broke over the weekend, with rumblings before, that Washington reached a debt ceiling deal. That quickly drove a strong rally in the financial markets, particularly for risk assets, the Nasdaq and S&P 500.

The agreement, if passed by Congress this Wednesday, avoids a payments default and financial collapse. Don’t get too hyped. It also adds fresh headwinds to the US economy, which is already pretty burdened by high interest rates and reduced credit access. But when you’re a hardworking politician, how can we expect them to notice the rising prices of eggs when Jeeves does all the grocery shopping.

The deal imposes spending limits, which could dampen the impetus of federal spending that has supported US growth in recent quarters. Some economists previously calculated a 65% chance of a recession in the coming year. The spending cap should also influence Fed policy, as it updates its projections for growth and interest rates.

The debt ceiling deal provides some relief, but don’t expect to be able to move out of your downsized apartment any time soon. The spending limits pose minimal fiscal headwinds, but some worry they fall short of the major restraint required to put public debt on a downward path. Regardless, the deal will affect money markets and liquidity, as the Treasury will increase sales of Treasury bills to rebuild its cash balance. That would effectively drain liquidity from the financial system. So watch the combination of spending limits and the Fed's liquidity reduction in the coming weeks and months.

US Employment (Nonfarm payrolls, Challenger layoffs, JOLTS and Claims)

The debt ceiling deal was dead to Wall Street before it was even finalized. Hopefully Powell had some friends outside academia and government so he could enjoy a Hamptons bank holiday, because his relaxation is the only thing more dead than attention on the debt deal. Focus has shifted to the Fed's rate announcement on June 14 and early signals of which way Powell may hike next.

This week’s employment data is the first of two major signs of which road Powell may be hiking up (with inflation being the second). As markets gear up for Friday's Nonfarm Payrolls report, Thursday will serve as a warm-up with JOLTS job openings, Challenger layoffs and the ADP employment report.

Seems like traders have finally decided that the Fed won't be hitting the snooze button in June, so economic figures will be scrutinized more than ever. Odds currently stand at a 25 basis-point Fed hike. If JOLTS job openings don't suddenly take a dive on Wednesday, it could be the green light for another Fed hike.

Unless there's some serious weakness in Thursday’s data points, the job market will continue to be deemed "tight" by the Fed. That would bolster the US dollar and leave traders anticipating another hike or two in Powell’s marathon.

Australian Inflation Report

Australia’s rate decisions have been as “finely balanced” as an intern at the end-of-summer party. At least, that’s the term recently thrown around with the Reserve Bank of Australia's (RBA) decisions. That’s the thinking heading into the RBA’s rate decision in June. This week’s inflation data could tip the Australian economy well off that balance.

The RBA’s surprise 25 basis-point hike in rates to 3.85% after a single meeting, driven by "high inflation," highlighted its data dependency between meetings. So, Wednesday's inflation report has become a focal point for traders.

Australia’s Bureau of Statistics doesn't provide a direct measure of services inflation, but electricity prices and rents are two signals to monitor. Each serves as a non-tradable item that’s unaffected by international trade and is integral to household budgets. The year-over-year increases in both electricity (15.7%) and rents (5.7%), as of May, flag potential concerns. If Australia’s central bank and traders can agree on one thing, it’s the hope those numbers soften to help avoid further rate hikes.

But recent economic events didn’t want the RBA to have to think too hard. The Reserve Bank of New Zealand decided to signal a peak rate of 5.5%. Then, Australia released a modestly weak employment report. Both mean the RBA might have some flexibility to pause once again.

Noise

Monday, May 29:

• Global: Market holiday

• Japan: Unemployment rate

Tuesday, May 30:

• US: Consumer confidence; Dallas Fed Mfg Business Index

• Australia: Building approvals

• EU: Money-M3 Annual Growth; Loans to households; CPI (Germany); GDP (Switzerland); KOF Indicator (Switzerland)

• Canada: Current account

• Japan: Industrial Output Prelim; Retail sales

Wednesday, May 31:

• US: Chicago PMI; Dallas Fed Services Revenues

• China: NBS Manufacturing PMI

• Australia: Construction works; Judo Bank Mfg PMI

• Japan: Consumer confidence; Construction orders; Housing starts; Foreign investment, CAPEX, Foreign reserves

• EU: NW State CPI (Germany); Import prices (Germany); Unemployment (Germany); Official reserves assets (Switzerland)

• Canada: GDP

Thursday, June 1:

• Global: Manufacturing PMIs

• US: S&P Global Mfg PMI; ISM Manufacturing PMI; Construction spending; All car/truck sales

• Japan: Monetary base

• Australia: Capital expenditure

• China: Caixim Mfg PMI

• EU: Retail sales (Germany); Manufacturing PMI (Switzerland); HCOB Mfg

• UK: S&P Global Mfg PMI

• New Zealand: Terms of trade

• Canada: S&P Global Mfg PMI

Friday, June 2:

• Australia: Housing and investment lending

Lit's Picks

• Farmland is making its way into portfolios as a diversifier and potential hedge against inflation.

• The Apple-Broadcom deal is putting many tech, software and semiconductor ETFs in focus.

• Rumors that China will ban US chip maker Micron Technology from key infrastructure projects should weigh heavily on sentiment in the sector.

• TikTok has been quietly rolling out beta testing for two potential new features: in-app storefronts or creator-affiliate commerce. 

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