Global Economic Outlook | Week #26

Internationally, it was also a busy week, particularly with central bank meetings. The Reserve Bank of Australia (RBA) held its policy rate at 4.35% and offered hawkish commentary. Both the People's Bank of China (PBoC) and the Bank of England (BoE) maintained their rates, while the Swiss National Bank (SNB) cut its rates by another 25 basis points as the Swiss franc strengthened and inflation fell. In the week ahead, we will have more central bank meetings and key inflation numbers to monitor on the international front.

 

Next week: 

USA: CB Consumer Confidence (Tue), New Home Sales (Wed.), Fed Bank Stress Test Results (Wed.) Durable Goods Orders (Thu.), Personal Income & Spending (Fri.)

International: BoJ Core CPI (Tue.), Canada Inflation (Tue.), Riksbank Policy Rate (Thu.), Banxico Policy Rate (Thu.), CBRT Policy Rate (Thu.), Tokyo CPI (Fri.), UK GDP (Fri.).

 

 

Wall Street

 The US stock markets are showing inconsistency. On one hand, the S&P 500 and Nasdaq are continually reaching new record highs, while on the other hand, the Dow Jones is moving sideways. The recent gains have been driven primarily by AI and tech-based stocks, rather than a broad market movement. Given this, it is not unrealistic to say the market may be overpriced, and fundamentals may not sustain the rally, especially since the Federal Reserve is hesitant to start cutting rates.

 

In terms of macroeconomic data, the Congressional Budget Office (CBO) report published last week is also noteworthy. In its update to the 10-year budget projections, the CBO reaffirmed an already challenging fiscal outlook. The CBO increased its fiscal year 2024 U.S. budget deficit estimate to $1.9 trillion, up from $1.5 trillion in the previous projections from February.

 

Additionally, the Leading Economic Index (LEI) for the U.S. declined by 0.5% in May. This index, based on ten indicators, serves as a gauge of economic health, signaling whether the economy is improving or worsening. The LEI is now just a touch above its pandemic low, at odds with an economy that continues to expand.

 

Uncertainty surrounding Fed policy, the upcoming U.S. election, and the macroeconomic trajectory are also curbing the capital expenditure intentions of many firms, holding back investors from making new plans.

 

Overall, headwinds in most sectors remain prohibitive in the near term. However, future tailwinds from the recent manufacturing construction boom and expected rate cuts later this year provide a source of optimism. The performance of tech and AI-based stocks will also need more time to show their effects on other sectors.

 

On Tuesday this week, we have the Conference Board (CB) Consumer Confidence report. After increasing to 102.0 in May from 97.5 in April, we expect the level of consumer confidence in economic activity to fall to 100 in June.

 

On Wednesday, we expect a slow recovery in new home sales for May. After a 4.7% fall in April, we anticipate home sales to increase by 1.5% in May, reaching about 650K new sales, as lower mortgage rates likely supported a modest rebound in sales activity. Additionally, rising inventories in the resale market are weighing on new home sales as buyers have more options. Overall, we are expecting positive data for the housing market.

 

On Thursday, Durable Goods Orders will help us understand how consumers and businesses are spending their budgets. Durable goods orders have increased in each of the past three months, yet the level is still down about 1.2% since the start of the year, and retail sales have also weakened in recent months. In the business sector, particularly in aircraft orders, we can expect a significant decline, which will cause the headline number to fall by 1.6%. However, excluding transportation, we anticipate total durable goods orders to post a modest gain of 0.3%.

 

Despite the importance of the above data, investors and market participants will focus on Friday's Personal Income and Spending numbers. As noted, retail sales have shown signs of weakness in recent months, which could affect personal spending. However, with the labor market still resilient and incomes strong, we should not worry for now about personal income and spending numbers.

 

The market expects a 0.4% increase in income and a 0.3% rise in spending. The Fed's preferred measure of consumer inflation, the PCE deflator, is expected to rise just 0.1% in May, translating to a 2.6% annual rate. If this holds true, it would be another step forward in the fight against inflation, but the Fed will need to see more progress and evidence before easing policy.

 

The fundamental data we discussed collectively do not support the US stock markets, and technically, there are ongoing challenges as well. Both the Relative Strength Index (RSI) and On-Balance Volume (OBV) indicate lower interest in buying positions. The first support level is at 5,440, with the second support at 5,410. Breaching these levels, especially falling below the pivot point at 5,380, could pave the way for significantly lower values.

                 

 

Currency Market
 

In the week ahead, while we do not expect significant data releases, we will have various minor data points and several speeches from central bank policymakers that could create a volatile market. Even a small correction in the dollar's value could ease its dominance in the FX market, allowing other currencies to regain some of their losses.

 

USD
 

The USD ended the week with a slight gain of 0.25%. Despite economic data signaling weaker growth and potential rate cuts, the greenback benefits from its safe-haven status. In the coming week, ongoing geopolitical tensions, such as the Israeli-Palestinian conflict and the potential for an Israeli attack on Lebanon, coupled with strained US-China relations, could sustain the safe-haven demand for the USD and slow down the expected bearish movement.

 

However, if the Core and headline PCE rates slow down on Friday, the USD may weaken as this would imply easing inflationary pressures in the US economy and could bolster market expectations for the Fed to proceed with two rate cuts this year.

 

From a technical standpoint, the US Dollar Index continues to move in a clear uptrend with strong support at 104.70 and a key pivot at the 104.00 mark.

 

EUR
 

The EUR ended the week slightly lower against the USD but seems to be gaining ground against the GBP and JPY. The Eurozone and the euro are facing significant challenges, making it difficult to attract long-term investor confidence.

 

The results of the EU Parliament elections have intensified centrifugal forces within the EU, raising questions about the union's future if more right-wing parties gain power. While this does not imply the dissolution of the union, it suggests a potential need for a new order of management and planning within it.

 

In addition to the uncertain political outlook, we must consider the escalating trade war between the EU and China, along with the ongoing economic effects of the war in Ukraine. Recently, the EU announced it would impose tariffs on Chinese EVs. Although China has yet to respond, any forthcoming response could be harsh, potentially causing the common currency to slip.

 

In the coming week, minimal data releases from most Eurozone members are expected. However, we believe the ECB will need more time to discuss its next rate cut, which could help support the euro and prevent it from falling further against its rivals.

 

From the technical point of view also, the trend remains bearish with with S2 and S3 as its next targets sitting at 1.06 and 1.051.

 

Gold

 
The yellow metal continues to rise. News from the Middle East signaling increased tensions has driven the XAU/USD pair higher, with the price breaking through the resistance level of $2,330.00 before retreating in the last trading hours of the week.

 

Growing tensions in the Middle East, the South China Sea, and Ukraine are boosting gold's safe-haven demand. Additionally, rising expectations for a rate cut in the United States this year—possibly more than once—could pressure the USD and support gold bulls. Data published last week indicate moderate economic activity in the second quarter, while inflation appears to be easing.

 

In the week ahead, US economic data, especially Friday's Personal Income and Spending and the Fed's preferred inflation measure, the Core PCE number, will provide more clarity on gold's next trend.

 

From a technical standpoint, gold appears to be in a correction phase, but the 38.2% Fibonacci level ($2,270) seems to offer strong support. The overall trend remains bullish.

 

Oil

Oil prices have risen in recent days, as widely expected, driven by summer demand. The US Energy Information Administration's (EIA) report shows that gasoline demand has hit its highest level of the year, pushing oil prices up by 5% this month to their highest level since April.

 

Currently, strong demand numbers for energy are lifting overall oil demand expectations and signaling a potential tightening of oil and product supply in the coming weeks.

 

US gasoline exports to Europe are soaring. European importers have also drawn further support from a sharp fall on the Atlantic coast, where stocks fell by 2.7 million barrels or 4.5%. In the US, diesel demand increased by 328,000 barrels a day to 3.977 million barrels, reflecting stronger US manufacturing and farmers' fieldwork.

 

While fundamental data largely supports the current price levels, technical charts indicate a possible correction after a strong recovery.

 

Bitcoin
 

Bitcoin (BTC) is struggling to stay above $65,000. However, recent news from MicroStrategy has positively influenced overall market sentiment.

 

MicroStrategy, led by Bitcoin advocate Michael Saylor, announced on Thursday the acquisition of an additional 11,931 BTC worth approximately $786 million, further cementing its status as a major institutional holder of the digital asset. This acquisition raises the company’s total Bitcoin holdings to 226,331 BTC, purchased at a total cost of $8.3 billion, now valued at approximately $14.9 billion. Despite this significant move, market sentiment towards Bitcoin remains mixed.

 

Economic data and market sentiment indexes do not provide a clear indication of Bitcoin's future direction. From a technical standpoint, the uptrend has been broken. However, to confirm a trend reversal, we need to see the price fall below its main support at $62,000.