The rally in equity markets stalled last week after the Reserve Bank of Australia and Bank of Canada put markets on notice with further interest rate hikes. Central Banks have sent the message that they aren’t done yet whilst inflation remains high. Focus now shifts to the Federal Reserve and whether they will pause after delivering ten consecutive rate rises since March 2022. Recent US economic data has suggested resilience in the economy, including the latest non-farm payrolls which showed an addition of 339,000 jobs.
Stronger than expected Japanese GDP 2.7%yoy (1.9%yoy expected) further supported gains in the Nikkei 225, notching up new three-decade highs (+26% so far in 2023). The Bank of Japan’s two-day monetary policy meeting will conclude this Friday, BOJ Governor Ueda continues to keep markets guessing on whether they’ll end their Yield Curve Control and possibly deliver the first rate rise since 2016. The JPY continues to weaken (-9% since March against a basket of currencies) as global investors hedge their JPY exposures by selling JPY and buying their home currency. The JPY has also been a popular currency to sell throughout 2023, the classic ‘carry trade’ has worked well, where investors/traders purchase a higher yielding currency and sell the JPY with a cash rate of -0.1%.
Economic data in China has disappointed throughout May, last week’s trade data showed that exports fell by 7.5%yoy adding concerns to the Chinese economic outlook and remains a headwind for CNH, AUD and Industrial Metal prices.
What are we watching?
- FOMC: The RBA and BOC reminded markets last week that central bankers aren’t done with their fight against inflation. However recent comments from Fed Chair Powell, Philadelphia Fed Harker and WSJ Timiraos have swayed economists’ expectations towards a pause for June after delivering ten consecutive rate rises. US CPI is released on Tuesday and a low print would go a long way towards supporting a pause. US Treasury yields moved higher post RBA and BOC rate rises, implying that the Fed can do more, so the decision will be finely balanced.
- AUD/USD: Markets had been pricing a softer landing in Australia until last week’s surprise RBA rate hike. The risk going forward is economic growth slows by more and the unemployment rate increases by more than RBA forecasts. Headwinds continue for the AUD with softer Chinese economic data during the month of May, a pause in global equities and weaker EM Asian currencies in particular the Chinese Yuan.
- US equities: The US equities rally hasn’t been broad-based, much of the attention has been on the AI-inspired rally in the Nasdaq. Higher US Treasury yields last week saw US equities stall and the outlook on interest rates will remain a headwind going forward. Plenty of US data releases this week -CPI, Retail Sales, Consumer and Business Sentiment
- Chinese growth: Last week’ s disappointing Chinese Trade Data (exports -7.5% yoy) added to concerns that growth may remain sluggish. Equities(ex-Japan) and currencies across the APAC region have underperformed as a result. Industrial production and Retail Sales will be closely watched.
- BoJ meeting: Nikkei 225 continues to make record highs, BOJ Policy Meeting and comments from Governor Ueda will be closely watched for signs of ending their Yield Curve Control.