The US equity markets have finally snapped a 7-week losing streak, gaining for three trading days in a row last week, with both Dow and S&P finishing the best week since November 2021. The market rally could extend into this week as all the indicators point to further upside momentum, though we cannot confirm a year-bottom just yet. While the recent economic data suggests a growth slowdown becomes reality, bets on the Fed’s less hawkish stance are growing, hoping that the US economy can achieve a “soft landing”, or a worse scenario of a “bumpy landing”. Companies start signing to slow hiring amid the surrounding headwinds, making the upcoming non-farm payroll data a spotlight for investors to gauge the labour market's trajectory.
Elsewhere, Europe is deepening its economic distress amid ongoing war-intensified geopolitical tensions. On the bright side, China is easing health restrictions in Beijing, citing that the Covid outbreak is under control over the weekend, while Shanghai’s daily cases have dramatically dropped. The PBOC is to allow foreign institutions to trade bonds on its exchange market to bring capital inflow, which could be a further catalyst to pump up the Chinese stocks. This will be also a positive sign for both Australia and New Zealand’s markets as being such important trade partners.
- S&P 500 had a major bullish break out at the descending trendline. Can the rebounding trend persist in US equities after the longest losing streak in decades?
- Cryptocurrencies are losing a positive correlation to risk assets, which are not following the recent relief rally in the stock markets. Does it indicate investors have lost faith in the Defi tokens after a systematic meltdown of the stablecoin, UST -Terra?
- Chinese stocks may be close to shrugging off the Covid doom, with further stimulus measures taken by the government. Will you consider this as an alternative for the portfolio?
- WTI futures hit a two-month high on Friday. Are crude markets taking off again amid a close deal of the EU members to fully ban Russia’s oil? Easing lockdowns in China and the US Memorial Day holiday may also add to the rally?
Key economic data and events
US non-farm payroll, ISM Manufacturing PMI
The US labour market is expected to keep strong momentum but slow in the pace of increase. This will be good news for the financial markets as it will strengthen the odds that the Fed may turn less hawkish. The consensus calls for 325,000 new jobs created in May, which is lower than the previous month of above 400,000, suggesting employment may start softening amid slowing hiring by companies. The unemployment rate is forecasted to further drop to 3.5%, and wage growth is expected to be 0.4%.
In addition to the payroll data, the US manufacturing PMI may suggest a slowdown in output due to elevating inflation, softening demands, and rising rates, which again, indicates that the Fed cannot avoid cooling down inflation at the cost of slowing economic growth.
China’s May manufacturing and non-manufacturing PMIs are due for release this Tuesday. Consensus calls for a further contraction bus less extend of the economic activities due to Covid lockdowns in the major cities. The manufacturing PMI is forecasted at 49.1 vs. 47.4 in April, and the non-manufacturing PMI is predicted at 45.2 vs. 41.9 in the previous month.
Australia’s Q1 GDP is expected to grow 0.7% from the prior quarter, and 3% year on year. The data could show a slowdown in growth compared to the final quarter in 2021 as stimulus measures had been removed and faced global headwinds. But the recent economic data shows that employment and consumer spending are still strong, suggesting the economy is in a good shape, despite a jump in inflation. And challenges remain, with rapid rate increase and China’s lockdowns.
BOC policy meeting
Markets participants have fully priced in a 50-basis-points rate hike to 1.5% by the Bank of Canada this Wednesday, which will be the second time in a row of such an aggressive rate increase. Canada’s inflation also hits a 30-year high at 6.8% in April. While the economy remains robust, a hot housing market adds to the worrisome that a fast tightening approach may lead to a bubble or an economic recession.
Europe Week Ahead
- Broadcom Q2 results
- Eurozone flash CPI (May)
- European services PMIs (May)