
1. The dollar index rallied to a two-month high in May, from a low of 101 to above 104. After the Fed hiked rates to its terminal rate of 5.25%, markets turned their attention to the debt ceiling standoff that was unfolding between the Democrats and Republicans. Treasury Secretary Yellen’s repeated warnings that the US government would run out of cash in early June also caused investors to flock to the dollar as a safe haven, in the case of a US default. Inflation remained persistent in May, as the Fed’s preferred inflation metric, the core PCE price index m/m, reaccelerated, while core CPI m/m was unchanged but came in higher than forecast. Worryingly, inflation expectations hit a 12-year high, which could invite further hawkishness from the Fed. The Fed has continued reiterating the need to bring inflation back down to target, but Fed Chair Powell stated that tightening credit conditions could keep interest rates from rising even higher, while his colleagues Jefferson and Harker both raised the possibility of a hawkish pause at the Fed’s next June meeting. The unemployment rate surprised markets by falling back down to the record low, while JOLTS job openings exceeded expectations, both underscoring the tightness of the US labour market. With the debt ceiling crisis nearly out of the way, markets are now weighing US economic performance against the rest of the world, which could see the US dollar continue its climb.
2. The euro slumped to $1.06 against the dollar, as inflation showed signs of easing in the euro-area. Markets were originally pricing in two more 25bps rate hikes in June and July, but a slew of negative economic data led to a reversal in bets. Spain’s inflation fell near a two-year low, while France’s fell to a year-low, and Germany’s turned negative for the second time this year. Only Italy surprised experts by posting inflation numbers that were higher than expected, although it declined from the previous reading. The eurozone’s largest economy, Germany, fell into a recession after posting negative GDP growth for two consecutive quarters. While markets are sceptical of the ECB’s resolve to carry on with rate hikes till September, ECB policymakers are reluctant to call an end to their tightening cycle before then, given their delayed start compared to their central bank peers.
3. The pound sterling ranged between $1.26 and $1.23 against the dollar, before ending the month at $1.24. Economic headwinds remain present in the UK, as GDP shrank m/m, while core inflation was the highest in over 30 years. With the UK having the highest inflation figures among the major economies, markets have priced in four more consecutive 25bps rate hikes as the BoE attempts to rein in inflation. Other government leaders are pitching in as well, with Prime Minister Sunak and Chancellor Hunt intervening in supermarket prices. BoE policymakers remain tight-lipped about the future rate path, which would add to the pound’s volatility in the short-term.
4. The aussie pared initial gains and weakened against the dollar, falling to $0.65. Economic data hinted at an easing of the labour markets, with wages subdued beyond expectations and unemployment rates heightened. PMI reported decline in business conditions. Therefore, despite the surprise rise in cash rate to 3.85%, worsening economic outlook weakened the case for further rate hikes, causing the aussie to decline. NZD weakened significantly against the dollar, nearing to $0.60, weighed down by the greenback's strength, softer economic outlook and RBNZ's decision to end its tightening cycle following a 25bps rate hike in its latest meeting to 5.5%.
5. Brent crude fell to a two-month low of $71 per barrel after China’s post-Covid-zero recovery weakened further, dampening demand expectations for oil. The Fed’s continued tightening added to pessimism about future demand. OPEC+ will be meeting this month to confer about output levels, which could bring to the fore Russia’s continued oil exports to Asia despite its insistence that it has implemented production cuts that it promised OPEC+ partners. Gold tested its all-time high in May, climbing above $2070 per ounce before falling below a two-month low of $1940 per ounce. With inflation expected to remain sticky in the near-future and the Fed unlikely to cut rates soon, the attractiveness of non-yielding bullion is likely to remain diminished.
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