It’s been a roller-coaster month

We had a roller-coaster month of May in terms of central bank expectations. The month began with the Federal Reserve’s (Fed) decision to hold the interest rates steady, and Jerome Powell saying that the Fed’s next move will probably NOT be a rate hike. The latter had sent the markets rallying with enthusiasm. Then, the US jobs data came in softer-than-expected, and inflation didn’t surprise to the upside for the 4th straight month – but producer prices came in hotter-than-expected, and the Fed members kept giving hawkish speeches one after the other, repeating insistently that the rates are good where they are and that cutting them is not necessarily a good idea. Markets’ bull had an ear on the avalanche of Fed comments without necessarily putting too much focus on them, until last week’s Fed minutes revealed an inconvenient truth: that ‘many’ Fed members questioned whether keeping the rates high for longer is enough restrictive to continue the inflation battle, and if hiking rates wouldn’t be more effective. And the mood finally darkened. This is where we are right now.

While last week began on optimism that inflation could allow the Fed to cut rates as early as in September, this week begins on pessimism that the latter will probably not be possible. The US markets are closed today, but the US 2-year yield ended last week near 4.95% and the probability of a September cut fell to a coin flip. But regardless, the US stock markets continue to trade near record levels. The S&P500 and Nasdaq both closed last week a few points below their ATH levels, boosted by a fresh shot of energy after Nvidia reported another set of blowout results and a strong forecast – under these conditions, it will be hard for the tech rally to expand to the rest of the market.

In China and nearby, the CSI 300 and HSI index are better bid this Monday morning following a correction last week – which brought sellers back to the market before the HSI index got the opportunity to test the 20K psychological resistance. The Chinese stimulus measures are supportive of gains, but the rising tensions with the West are threatening the Chinese companies’ revenue expectations. In this beautiful context of rising trade tensions, G7 leaders took the opportunity to further escalate tensions with China at their weekend summit – after the US re-imposed tariffs on hundreds of goods (Biden’s only hope to improve his popularity for the November election). China’s EV makers are on the front line as China became the world’s biggest car exporter. The latest news are about to derail the BYD rally. The stock is preparing to test the 200 support to the downside.

Here in Europe, investors will also be focused on fresh inflation data for May. The headline inflation may have advanced from 2.4% to 2.5% while core inflation is seen steady near the 2.7% level. The European Central Bank (ECB) is expected to start cutting the rates next month. Therefore, if this week’s inflation data shows no surprise, the dovish divergence between the ECB and the Fed should prevent the EURUSD from clearing the 1.09 offers. Against sterling, the euro is sitting on a critical support, the 0.85 level. A hotter-than-expected inflation report from the UK brought the Bank of England (BoE) hawks to the battle field last week, but uncertainties surrounding an upcoming and a too-early general election in the UK will hardly let the pair gain momentum below this level. Elsewhere, the yen is slightly better bid this morning as the Bank of Japan (BoJ) Governor Ueda said that he doesn’t have a ‘big problem’ after the Japan 10-year yield hit a 12-year high last week. If the BoJ leaves the yields to themselves, north is the only possible direction as the country’s debt-to-GDP is at least double the other G7 nations. But we know that they won’t do that – and we also know that the BoJ can’t sustainably counter the yen selloff. As such, buying the Japanese yen still doesn’t look convincing – even at the current levels.

Elsewhere, US crude fell to and rebounded from $76.40pb on Friday on waning reflation trade (due to a significant retreat in Fed cut expectations). OPEC countries will meet this week and probably announce to extend supply cuts into the second half of the year in an attempt to set a floor under the actual selloff. But if the global central banks don’t play along, it will be hard for OPEC to keep oil prices sustained. US crude could extend losses toward the $75pb level if OPEC fails to boost appetite at this week’s announcement.