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Week Ahead:
Monday: Holiday in China, Japanese GDP data
Tuesday: US Consumer Price Index, UK Job Report, API Weekly Report, OPEC Monthly Report, EIA Short-Term Energy Outlook
Wednesday: US Producer Price Index, China Consumer Inflation, German CPI, UK Monthly GDP, FOMC Meeting
Thursday: US Producer Price Index, Australian Employment, Eurozone Industrial Production
Friday: Bank of Japan Meeting, US Trade Data, Russia CPI, Quarterly GDP
Wall Street Overview
The strong job market, coupled with a rebound in average hourly earnings in May, has shifted the focus to this week's and next month's inflation numbers for the Federal Reserve's decision. The upcoming CPI report and the FOMC's Summary of Economic Projections are critical and should be closely monitored. Last week, in addition to the employment data, PMI reports unexpectedly dropped. The ISM Manufacturing PMI for May indicated a deeper contraction in the production sector, darkening the macroeconomic outlook for the U.S. economy. In contrast, the Non-Manufacturing PMI for the same month rose, suggesting a faster expansion in the services sector and indicating overall steady activity in this area.
While the U.S. labor market data was impressive, the detailed figures were less optimistic. Employers added 272,000 net new jobs in May, exceeding all estimates. However, despite the surprise in hiring, the unemployment rate rose to 4.0% from 3.9% in April. Additionally, the household survey of employment showed a decrease of 408,000 jobs, labor force participation softened to 62.5%, and the average workweek held steady, revealing a weaker underlying picture.
Before Friday's NFP report, Wednesday's JOLTs data showed that labor demand continues to soften. Total JOLTS job openings in April fell to their lowest level since February 2021, with only 1.2 job openings per unemployed worker. This is consistent with the pre-pandemic ratio but significantly lower than a few months ago when the ratio exceeded 2.
The headline gain in payrolls cannot be ignored, aligning fairly well with the recent monthly trend. However, it should be viewed within the broader context of a labor market that shows clear signs of moderation.
Despite the market's quick reaction and pricing in just one rate cut by year-end, FOMC policymakers will need to see more consistent reports of slowing inflation to make a decision.
On the inflation front, we expect the CPI to increase at a slower pace of 0.2% in May, compared to 0.3% in April. However, Core CPI is expected to remain resilient with an unchanged 0.3% monthly gain. The Producer Price Index (PPI) should also be watched for a better understanding of future inflation trends. Compared to the 0.5% growth in April, we anticipate a slower PPI growth of only 0.2%.
At the upcoming Fed meeting, we do not expect a rate cut. However, the quarterly reports, dot plots, and Fed Chair Powell's speech will provide more insight. While a dovish stance is not anticipated, the hawkish tone may be less pronounced than Friday's sentiment.
The S&P 500 increased by just over 1% last week, capped by Friday's NFP report. Based on the expectations mentioned, we anticipate a soft downward trend for the week ahead.
From a technical perspective, the US500 is in a clear uptrend with a strong pivot at 5,300. With the RSI now below the 50 level and the OBV declining, a trend change under the pivot point of 5,300 is possible.
Currency Overview
US Dollar
The USD ended the week higher against its counterparts. We align with market expectations, emphasizing the Federal Reserve's hawkish guidance and the dot plot. The market currently sees a more than 55% chance of a rate cut starting in September, with a clearer signal for another potential cut in December. If the Fed indicates its readiness to maintain high rates for an extended period, we expect the USD to strengthen further, albeit gradually and not too aggressively.
Conversely, a predisposition for two rate cuts this year could weaken the USD, as it would align with market expectations for less hawkish policies ahead.
As we approach the November US Presidential elections, especially in light of former President Trump's conviction, the resulting political tension and uncertainty could increase safe-haven demand for the USD. In such scenarios, more investors may prefer holding cash over uncertain stock markets.
From a technical perspective, the US Dollar Index has moved above the 50-level after a prolonged period below it. With OBV also showing a bullish trend, trading above 104.60 can sustain the current bullish momentum for a longer duration.
JPY
At its upcoming meeting, the Bank of Japan (BoJ) is not expected to deliver a policy rate hike. However, we anticipate an announcement regarding a reduction in the monthly pace of bond buying. Although inflation has been somewhat volatile, it is generally slowing. Economic growth signals remain weak, with inflation not significantly above the BoJ's 2% target and GDP contracting at a 2.0% quarter-over-quarter annualized rate. Consumer spending and business investment are shrinking, suggesting that the BoJ will likely continue its dovish policies to support economic growth and markets.
Following the recent sharp weakness of the yen, the BoJ might adjust its policy stance by reducing the pace of bond purchases at Friday's meeting. The current pace of bond buying is approximately 6 trillion yen per month, which could be reduced to around 5 trillion yen per month.
These expected decisions could theoretically support the Japanese Yen (JPY). However, it remains doubtful whether the BoJ can convincingly signal hawkish intentions to the markets. If the BoJ fails to gain market confidence, the JPY might continue to lose ground against its counterparts.
From a technical perspective, bullish momentum for the USD/JPY pair appears to be waning. However, to confirm any trend change, we need to see the USD/JPY fall below 155.
Commodities Overview
Gold (XAU/USD)
Following stronger-than-expected job reports in the US, which boosted the US dollar index by 1% on Friday, XAU/USD dropped approximately 4% on Friday alone, resulting in a 1.3% decline weekly. Despite this recent fall, we anticipate that gold will hit another record high this year. Factors such as the ongoing trade war between the US and China, geopolitical tensions in Taiwan, conflicts in Ukraine and the Middle East, and the potential for imminent rate cuts are likely to drive increased demand and higher gold prices.
From a technical perspective, the recent decline can still be considered a correction as long as gold trades above its 50% Fibonacci retracement level of $2,219. Maintaining a position above $2,275 could signal a potential for new record highs. Conversely, falling below the 38.2% Fibonacci level could extend the correction phase for a longer period.
Oil
Oil prices have experienced three consecutive weeks of losses as concerns about a weakening global economy weigh on demand estimates and market prices. Despite the overall decline, there was some recovery in the latter part of the week, spurred by rate cuts from the Bank of Canada (BoC) and the European Central Bank (ECB). This has raised hopes that the Federal Reserve might also cut rates, even if not immediately.
On Monday, oil prices fell sharply following the previous Sunday's OPEC and OPEC+ meetings. However, market participants soon realized they had misinterpreted the OPEC+ plan regarding production cuts. Russia and Saudi Arabia emphasized that the market overreacted to their announcement and clarified that the tapering of production cuts would only proceed if demand growth materialized.
OPEC+ signaled that from October 2024 to September 2025, ahead of the winter demand period, they expect to see a supply deficit. During this period, some countries that have volunteered production cuts might start to incrementally add a few barrels back to the market.
In addition to economic data and the Fed meeting, this week includes the OPEC monthly meeting, the EIA Short-Term Energy Outlook, and the IEA Monthly Report. These reports can provide a better understanding of overall market conditions and demand-supply estimates.
In the week ahead, overall market conditions will be directly influenced by the Federal Reserve's decisions and the market's reaction, which are not expected to be very positive.
From a technical perspective, the recent correction in oil prices can only reverse the trend if prices move above $77.
Cryptocurrencies
Ethereum ETFs are poised to begin trading soon, and many investors believe that the potential launch of a spot ETF for Ethereum could significantly influence the market. This forecast comes amid a broader crypto market rally, with Bitcoin (BTC) recently surging to over $71,000. However, there are contrasting views and expectations. For instance, JPMorgan predicts that the Ethereum ETFs might attract much lower inflows than anticipated, estimating only $3 billion for ETH products this year.
Should profit-taking and fears of stunted growth not trigger short-selling, moving above the previous high could position $100,000 as the next target price for BTC.
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