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Market update

Cautious start to the week as US debt ceiling talks continue

Wall Street

Last week saw modest losses for European markets in a week where there was little in the way of conviction in any of the moves.

It was a similar story for US markets, which also saw modest losses, over concerns about slowing global demand, which also weighed on commodity prices, notably copper which hit their lowest levels this year, while oil prices finished lower for the 4th week in a row.

This weakness appears to be being driven by concerns over a lack of demand in the Chinese economy where we saw factory gate prices decline for the 6th month in a row, and where there appears to be increasing evidence of a deflationary impulse.  

Sentiment hasn’t been helped by the political theatre around the US debt ceiling which has dominated the discourse in the media, and where discussions have been pushed into this week.

While the risks around this are well-rehearsed it could be argued that the risks appear somewhat overstated given how regularly we’ve seen this scenario play out over the last few years on a regular “rinse and repeat” basis before a late compromise is sealed.

Nonetheless the uncertainty being generated by events in Washington is prompting a more defensive bias, amongst investors, while the US dollar got a boost from the latest University of Michigan survey which saw consumer 5–10-year inflation expectations jump to a 12-year high at 3.2%.

This comes across as contrary to what has been happening to wider US inflation over the last few months, which has been slowing rapidly, especially on the PPI measure, where we sank to 2.3% last week and the lowest level since January 2021, while both US 2 year and 10-year yields both finished higher on the week.

The recent slide in US yields since the last Fed meeting was mostly predicated on the belief that rate cuts wouldn’t be too far behind. There now appears to be a growing realisation that this may not be the case with a number of Fed policymakers pushing back on that narrative.

Last week we had Federal Reserve Governor Philip Jefferson express concern over the stickiness over core inflation saying that progress here had been “discouraging”, while another Fed governor Michelle Bowman argued that there wasn’t enough evidence that inflation was coming down sustainably and she wanted to see more data before deciding whether a rate pause was justified.

Given that both are voting members on the FOMC rate setting committee their views undermine the current market expectation that rate cuts are only a matter of a couple of meetings away.

Later today we’re due to hear from Minneapolis Fed President Neel Kashkari who is expected to reiterate the comments he made a few days ago, when he said that an extended period of high interest rates is likely to be needed if inflation stays high.

As we look ahead to today’s European open, the late slide in US markets is likely to see a mixed open, with the main focus this week on the US debt ceiling negotiations,  EU Q1 GDP, UK wages and April retail sales numbers from the US and China.   

EUR/USD – appears to be breaking lower, heading towards the 1.0830 area, with a break below 1.0820 opening up the potential for further losses and support at 1.0770. Rebounds likely to find resistance at the 1.0940 area.

GBP/USD – last week’s losses could well signal further weakness towards the 1.2280 area in the short term, where we also have trend line support from the October lows. Initial support currently at the 1.2430 area. Resistance currently at 1.2530.  

EUR/GBP – the rebound from the 0.8660 area has run into resistance at the 200-day SMA. A move back through 0.8760 could see a return to the 0.8820 area.

USD/JPY – last week’s rebound off the 50-day SMA has seen the US dollar rebound with the potential we could see a move back to the 200-day SMA at 137.00.

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