Global Economic Outlook | Week#25

In the upcoming week, key data releases in the US include Retail Sales (Tue.), Industrial Production (Tue.), Existing Home Sales, and PMIs (Fri.). Internationally, important events include China's Retail Sales and Industrial Output (Mon.), the Reserve Bank of Australia meeting (Tue.), and interest rate decisions from the Bank of England, BCB, SNP, and PBoC (Thu.).

 

Wall Street

The May CPI data showed that consumer prices remained unchanged for the month. Excluding food and energy, the core CPI increased by only 0.2%, marking the smallest monthly rise since August 2021. This general decrease in inflation is encouraging, with sticky inflation in the service sector showing signs of easing. Although progress on the inflation front has been frustratingly slow, it is evident. With the Producer Price Index (PPI) falling, we can expect even weaker CPI numbers in the coming months. The PPI declined by 0.2% in May, the largest contraction since October 2023.

 

Analyzing the published data, Fed dot plots, and projections, there appears to be an equal chance of one or two rate cuts in 2024, contingent on further data. Since the possibility of a rate hike is not being considered and the market anticipates a rate cut with increasing confidence, the S&P 500 and other indices have the opportunity to reach new records.

 

Following last week's optimistic data, the upcoming week is quieter, with a focus on Fed speakers. On the data front, we have retail sales, industrial production, PMIs, and housing market numbers.

 

Retail has been one of the sectors consistently performing well despite inflation and income challenges. However, we can expect more difficulties for consumers in the second half of the year. Retail sales eased in April, and real personal consumption of durable goods was sharply revised lower, with almost a 2% annualized contraction in the first quarter. With the personal saving rate declining, consumer credit growth slowing, delinquencies increasing, and more signs of a weaker labor market, consumers are likely to become more cautious with their spending. We anticipate a modest 0.3% increase in May retail sales.

 

On the industrial front, given the falling PPI, we can expect weaker output and production. After stagnating in April with 0% growth, we project a 0.2% increase in industrial output, which does not significantly alter the overall weak picture.

 

Existing home sales fell by 3.7% in March and 1.9% in April, and we expect this trend to continue in May. The primary issue is affordability. Although the average 30-year fixed mortgage rate has recently dipped below 7%, home prices continue to rise, and mortgage purchase applications have declined by 2% over the same period. As a result, existing home sales are likely to remain subdued due to persistent affordability challenges.

 

Given the expected weakness in the data, market participants will likely focus on Fed speakers to gauge their views on economic conditions and the potential rate cut path. Market movements in the week ahead will depend significantly on investor reactions to FOMC members' speeches.

 

From a technical perspective, the first support level is at 5,380, with a pivot at 5,300. As long as we remain above these levels, the bull run can continue. However, falling below the pivot point could shift the trend downward.             

 

Currencies

 
The currency market is expected to be highly volatile in the week ahead due to several central bank meetings. The Bank of England (BoE), Banco Central do Brasil (BCB), Swiss National Bank (SNB), Reserve Bank of Australia (RBA), and People's Bank of China (PBoC) are among the most prominent central banks scheduled to hold their monetary policy meetings and announce their interest rate decisions.

 

USD

The Fed is expected to maintain higher interest rates for an extended period. The FOMC statement indicates that policymakers are concerned that, despite easing inflation over the past year, it remains elevated. Overall, Fed Chair Powell’s comments have been interpreted as relatively hawkish, and we anticipate a similar tone in other Fed members' speeches. Following the Fed meeting, the USD not only recovered all its losses after the CPI numbers but also rose significantly, solidifying its position as a reliable currency.

 

While the movement of the DXY in the week ahead will depend largely on Fed speakers, similar to Wall Street, we generally do not expect any significant decline considering the overall condition of financial markets and other major currencies. However, bullish momentum may be limited by weaker-than-expected economic data.

 

From a technical perspective, the US dollar index is in a clear uptrend, particularly as long as it stays above the 104.0 mark, with the first support at 104.70. Bulls could be capped at 106.50 if the index rises further, though this seems less likely at the moment.

 

GBP

The Bank of England's (BoE) interest rate decision next week will be the focal point, but there are several other factors to watch carefully. Following last week's turbulence in the Euro Parliament election and its consequences across various countries, attention now shifts to the news of the July 4 election in the UK.

 

On the data front, recently published GDP and labor market data were disappointing, with GDP remaining flat in April and the unemployment rate rising to 4.4% for the three months ending in April. Additionally, average weekly earnings held steady at 5.9% year-over-year for the three months through April, and average weekly earnings excluding bonuses remained at 6.0%, while private sector average weekly earnings eased to 5.8%.

 

Based on this data, it appears the UK economy is once again teetering on the brink of recession. Consequently, attention may turn to the BoE’s interest rate decision next week. It is widely anticipated that the BoE will remain on hold, which is already priced into the market.

 

Therefore, the focus may shift to the bank’s accompanying statement and vote ratios. Investors will be keen to see if the central bank is preparing to cut interest rates, which could weigh on the pound. However, if the statement and BoE President Andrew Bailey's press conference imply some hesitancy from BoE policymakers to cut interest rates, it could be perceived as hawkish and thus support the pound.

 

On the data front, the UK’s CPI rates for May are set to be released on Wednesday, a day before the BoE meeting. Given that the central bank meeting is the following day, investors and market participants will likely avoid making any swift reactions.

 

From a technical perspective, the current uptrend has been breached, but the overall picture remains bullish above 1.2615. Only a fall below 1.25 can change the market sentiment and overall direction; otherwise, any decline could be seen as a buying opportunity.

  

Commodities

 

Gold

Despite recent records in the stock markets, the overall outlook for the gold market and its demand remains unchanged, and we continue to view gold as a buy for now.

 

From a technical perspective, after reaching its all-time high on May 19, the yellow metal has entered a correction and stabilization period. This sideways movement has significantly eroded sentiment, reducing greed and increasing bearishness. However, after soaring to extremely overbought levels in April, we expect that holding 38.2% of its Fibonacci retracement from the last trend will prepare gold for another surge higher.

 

Oil

 

After weeks of weakness, oil prices rose by 4% last week, marking the highest weekly increase in percentage terms since April, ahead of a potential summer rally.

 

Last week, we also saw the release of monthly oil reports. The U.S. Energy Information Administration (EIA) slightly upgraded its oil demand growth estimate for 2024. The Organization of the Petroleum Exporting Countries (OPEC) maintained its forecast for relatively strong growth of 2.2 million barrels per day (bpd), while the International Energy Agency (IEA) cut its demand growth forecast to under 1 million bpd.

 

However, all three forecasters predicted a supply deficit at least until the beginning of winter, reducing the likelihood of bearish trends on the charts. Additionally, the U.S. active oil rig count fell by four to 488 this week, reaching its lowest point since January 2022, indicating lower production and supportive news for prices. Furthermore, the U.S. Commodity Futures Trading Commission (CFTC) reported on Friday that money managers increased their net long U.S. crude futures and options positions in the week of June 11.

 

From a technical perspective, WTI is in a clear uptrend, with a pivot at 76.80. Despite the overall bullish picture, the RSI and OBV are both signaling a possible short-term correction.

 

Cryptocurrency

 

On-chain data indicates that Bitcoin miners are selling their BTCs. After the halving, while rewards decreased, the rising cost of operations led to some miners withdrawing from the market. In the short term, their sales can pressure prices, but as this results in less mining and supply, prices may increase again in the mid-to-long term.

 

Currently, there is no clear catalyst to drive the market in either direction. However, Gary Gensler of the SEC has signaled that a spot ETH ETF might get approved toward the end of the summer. While this would not be an immediate catalyst for BTC, a short-term correction before the next bull run is the most likely scenario.

 

From a technical perspective, we have a strong pivot at 67,000 USD. Trading below this level can maintain bearish momentum and continue the downtrend. Conversely, a reversal above 68,000 USD can bring the bulls back into play.