US Dollar

Smaller and more cyclical stocks in the Russell 2000 index led a buoyant stock market following passage of the debt ceiling bill, sending the measure to President Biden for his signature. Much stronger than expected payroll numbers failed to dampen enthusiasm. Small cap stocks led the rally, taking up leadership from tech stocks. Gold fell back and oil rallied.

In this week’s edition, we discuss the EUR/USD, AUD/USD and USD/CAD forecast and look forward to the macro events in the week ahead.

Stocks remained under pressure today ahead of an expected House of Representatives vote on the debt ceiling deal this evening that would then send the bill to the Senate. Any hint of a slip in approving the deal would spook financial markets. Domestic jobs market data was surprisingly strong, suggesting the next move in interest rates will be up. There was more disappointing economic data out of China, hitting the energy, metals and agricultural commodity markets.

Aside from a continuing surge in AI stocks boosting the Nadaq 100, stocks were generally mixed this morning as work on the Hill turned to turning the debt ceiling deal into a final agreement in both houses on Congress. Don’t crack the champagne just yet – the deal isn’t sealed yet. Crude oil prices were down by more than 4% on the growth outlook if the US defaults, and skepticism about further supply cuts this week's OPEC+ meeting.

US equities are poised to continue the past 2-month rally after today’s Memorial day holiday, with the Nasdaq 100 likely to benefit most. Of major markets open today, the Nikkei 225 was up over 1% (clocking a 20% rise for the year.) US stock futures rose modestly. The VIX, Wall Street’s fear index, fell to 17 this morning, on debt ceiling news.

Nasdaq 100 lead equity markets higher even as bond markets dipped. Markets reacted positively to the belief that a deal on the debt ceiling is close (surprise surprise), but better than expected economic data led to higher expectations for rates (something not expected a few months ago.) The US dollar held on to recent gains, gold was unchanged, and oil bounced back after recent profit taking.

The macro, micro and technical outlook for base metals has been pretty bearish, and it is not surprising that the base metals price index has fallen to six months lows. Market sentiment towards the outlook for a rebound in economic growth within China weakened this year with the release of disappointing economic data.

The Nasdaq 100 rebounded this morning as traders become more optimistic on an agreement to raise the US debt ceiling, while Fitch became the first rating agency in this cycle to put US debt on negative watch in case it didn’t. Revised GDP data shows that the consumer spent more on goods and services in the first quarter than early reports, and today’s economic data also suggests the economy is gaining momentum and the job sector is still tight. Fed fund futures are now pricing in the likelihood of one to two more rate hikes this year, now becoming baked into market sentiment.

The Dow Jones and NASDAQ 100 slipped by midday as earlier optimism on a Debt Ceiling agreement was offset by the fear that interest rates might rise again after a later speech by Fed Reserve Chair Jerome Powell. Fed fund futures moved to a more bearish position, now pricing in near equal odds of another rate hike at the June meeting earlier this week, and odds of another rate hike falling to just 18%.

The NASDAQ 100 and Dow Jones moved higher this morning as optimism grew that a Debt Ceiling agreement will be reached, and despite a growing number of people on Wall Street thinking that the Federal Reserve may have more rate hikes in store for the US economy. The VIX, Wall Street’s fear index, fell back to recent lows, reinforcing the calm mood.

The S&P 500 rose on optimism that the White House and House Republicans will reach a deal to avert a debt crisis, after House Speaker Kevin McCarthy said that now the two sides are sitting down for discussions he believes that the US will not default on its debt. Regional bank stocks were leading today’s gains, reflecting easing concerns for that sector, seemingly ending a three-month decline.

Stocks and gold traded weaker for much of the morning on better-than-expected economic data, as traders continue to monitor today's debt ceiling meeting between President Biden and House Speaker McCarthy. Core retail sales were strong in this morning's data, while industrial output came in much stronger than expected, and the housing index exceeded expectations as well. Data from China suggests a slow recovery from its post-COVID lockdown.

Optimism is growing that the White House will reach an agreement with the Republican House. Traders are also monitoring a plethora of Federal Reserve members speaking publicly this week, with one already going on record to suggest more rate hikes are possible. Fed fund futures currently predict an assumed pause in rate hikes going forward, with rate cuts starting in September, with up to three overall cuts in place by the end of the year. Manufacturing data for New York State provided a reminder that recession could be around the corner.

Wall Street enjoyed “risk-on” sentiment this morning as regional bank shares stabilized, but stocks turned lower by midday on weaker consumer sentiment data released today, and weak economic data out of China, rekindled recession fears. Gold and the Dollar stood out as the safe haven assets.

Inflation data mixed for Indices, markets remain calm Today's news was generally negative, with mixed inflation data, a continuing US debt ceiling negotiations standoff, and data showing that many regional banks are tightening credit availability. Nonetheless, equity indices erased early losses to push modestly higher following the release of this morning’s consumer price index data. Bulls point to the decline in headline Inflation and jobs data were positive for the major Indices, but risks are still all too evident. Regional bank worries are again the spotlight on Wall Street, pressuring stock prices after PacWest Bancorp reported a drop in deposits last week that sent its stock down 24%. We are seeing two equity markets: the tech-heavy NASDAQ hit an eight-month high yesterday, while the KBW Regional Bank Index is down 50% in the year-to-date, with no sign that the sell-off is over.

Inflation data mixed for Indices, markets remain calm Today's news was generally negative, with mixed inflation data, a continuing US debt ceiling negotiations standoff, and data showing that many regional banks are tightening credit availability. Nonetheless, equity indices erased early losses to push modestly higher following the release of this morning’s consumer price index data. Bulls point to the decline in headline inflation, down to a 4.9% annual rate, while bears would highlight less progress on reducing sticky core inflation after more volatile food and energy prices are excluded at a 5.5% annual rate. While not enough to prompt the Fed to raise rates, the data also suggest that rate cuts might not be on its agenda anytime soon.

Today's focus on the debt ceiling talks combined with poor earnings to weigh on stocks this morning, with Regional Banks struggling to recover from an early sell-off. Inflation and deficit talks weigh heavy on market sentiment, with both being risks to a major sell-off (if a low probability.)