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In Asia, the Japanese Yen continues to weaken, and rising inflation signals potential policy adjustments from the Bank of Japan in the coming months. In China, economic indicators remain disappointing; the manufacturing PMI has declined sharply, indicating a return to contraction in the manufacturing sector. Despite recent changes to housing purchase regulations, the local property market continues to slow down.
Next week:
USA: ISM Manufacturing Index (Mon.), JOLTS (Tue.), Employment (Fri.)
Out of the US: Mexico Presidential Election (Sun.), Bank of Canada (Wed.), European Central Bank (Thu.)
Wall Street
Last week, alongside other data and reports, the Fed Beige Book was also published. The latest Beige Book confirmed the slowing economy by reflecting a more pessimistic outlook amid rising uncertainty and greater downside risks. Since the beginning of 2024, economists have been looking for any signs of the first rate cut and the potential number of cuts this year. With the PCE and Core PCE price indexes remaining unchanged from the previous month and the PPI increasing, inflation expectations have also risen, which has lifted bond yields.
In the housing market, last week’s existing and new home sales data clearly showed the effects of higher rates: higher prices and fewer sales, confirming a contraction in the housing market.
In the week ahead, we anticipate a busy schedule focusing on labor market data, while the ISM surveys should also be closely watched.
Despite slow growth in recent months, the ISM manufacturing index fell below the 50 level in April, signaling more concerns in an economy that is expanding at a modest rate. Like retail sales and the housing market, higher rates have also affected the manufacturing sector. For May, we expect the ISM manufacturing PMI to remain below 50.
We have the JOLTS report on Tuesday and the Nonfarm Payrolls report on Friday in the labor market. The Job Openings and Labor Turnover Survey (JOLTS) has recently declined, a trend expected to continue in April’s numbers. The JOLTS report also includes the quit rate. A higher quit rate typically indicates a stronger economy and job market, as employees believe they can find better opportunities, and vice versa. Therefore, the recent weakness in JOLTS numbers and fewer quits confirm a weaker job market.
On Friday, we will have the Nonfarm Payrolls report. With fewer than 200,000 new jobs expected, the unemployment rate will remain unchanged at 3.9%. Average earnings are also expected to increase by 2-3%.
These expected numbers could support two rate cuts, potentially occurring at the September and November meetings, which would be positive news for US stock markets. However, stronger-than-expected labor market data on Friday could alter this scenario.
Despite Friday's rise, the S&P 500 continues to move in a soft downtrend that began on May 22. There is strong support around 5,230; if it breaks, we should prepare for much deeper levels. Conversely, trading stably above this level could signal potential new peaks.
Forex Market
Due to upcoming US labor market data and several central bank monetary policy meetings, we anticipate volatile days ahead in the forex market.
USD
Last week, the main driver for the US dollar was the US Personal Income and Spending report. Personal income and spending grew in April, but after adjusting for inflation, the income gain was muted, and real expenditure fell by 0.1%. Despite a slower monthly pace, the Core PCE at 2.8%, with a 0.2% monthly increase, may not show significant progress in combating inflation, but it signals a cooling trend—a welcome reversal from Q1 price data. The PCE Price Index also increased by 0.3% monthly, maintaining the annual number at 2.7%. Consequently, we expect a reversal in recent movements at the start of this week, followed by quieter days leading up to Friday's NFP numbers. Stronger-than-expected data could lift the USD, and vice versa.
On a broader scale, the US dollar index fluctuates between the 104 and 105 marks on the daily chart. The market requires clearer signals from the Fed regarding its rate-cut plans to initiate movement beyond this range. A drop below 104 is more likely than an increase above 105.
EUR
Attention will be focused on the European Central Bank (ECB) meeting this week. The latest inflation numbers from the Eurozone have increased doubts regarding an ECB rate cut. Eurozone inflation in May rose more than expected, particularly in core underlying inflation. While investors believe that Eurozone inflation can continue to trend lower over time, the process may be uneven, requiring the ECB to maintain current rates longer to ensure control. However, market participants still see a higher likelihood of a 25 bps rate cut this week, with close attention to guidance on the possibility of additional future rate cuts and economic growth during the statement and President Lagarde's press conference.
Expected decisions and statements from the ECB can exert pressure on the Euro, but market participants will also await US data and Fed decisions for further movements. Considering that the Euro-Dollar has been unable to break through its first resistance at 1.09 for an extended period, a breakthrough could act as a catalyst for rapid upward growth. Conversely, remaining below the 1.09 mark for a prolonged period could increase pressure on the EURUSD.
CAD
Another major bank with a policy meeting this week is the Bank of Canada (BoC). Compared to other major central banks, there is a higher likelihood of a BoC rate cut. Inflation is decreasing in Canada, while economic growth is also softening. A 25 bps rate cut to 4.75% from the current 5% level could exert short-term pressure on the Canadian dollar against its rivals. To mitigate further declines, we anticipate a hawkish tone in the statement and press conference. As the Fed is expected to hold its rate at least until the end of the summer, the rate differentials between the BoC and the Fed should weigh on the Canadian currency in the near term.
From a technical perspective, USDCAD is moving in a soft downtrend, with 1.350 as a target and 1.390 as a strong resistance.
Commodity Markets
Gold
Last week, gold peaked at $2,449.89 per ounce on Monday, while silver also hit its highest levels in several years.
Although both metals have currently retreated from these record levels, most economists and analysts expect prices to rise again in the coming months. Potential renewed weakness in the US dollar and falling US Treasury yields could support gold demand, while geopolitical risks continue to boost the demand for safe havens.
Additionally, the significant rise in gold demand in China in the first quarter of 2024, as the world's largest consumer of yellow metal, largely contributed to the price increase. Surpassing India, China has now become the world's largest buyer of gold jewelry.
From a technical perspective, gold remains bullish with strong support at $2,300 and $2,230.
Oil
While oil prices ended the week lower, markets are anticipating decisions from the OPEC+ meeting on Sunday, June 2. Sources told Reuters that the group is working on a complex deal that could extend some of its deep oil production cuts into 2025. Additionally, Saudi Arabia invited ministers to gather in person in Riyadh for the June meeting in a last-minute change of plans.
Data shows that US crude oil production rose in March to its highest level this year. However, higher borrowing costs, along with the increase in the price of the dollar, could tie down funds and curb oil demand.
US energy firms held the oil and gas rig count steady at 600 in the week ending May 31, according to energy services firm Baker Hughes. Data indicated that oil rigs fell to 496 this week (one less than the previous week), while gas rigs increased by one to 100.
From a technical perspective, a recovery above $78 could drive prices higher. However, failure to surpass this level could maintain pressure on WTI prices for a longer period, though this scenario is less likely.
Crypto Market
In light of the uncertain value of the dollar, influenced by anticipated news and geopolitical tensions, investors are turning to tangible assets that hold their value—such as gold, silver, other precious metals, and cryptocurrencies—as hedges against inflation. With inflation showing signs of increasing and Fed policymakers emphasizing the need for interest rate cuts, holding such assets instead of cash, which can be devalued by excessive printing, seems prudent in these turbulent economic conditions.
From a technical perspective, BTCUSD remains bullish, having moved above the trend line and its strong pivot at $62,000.
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