After another bruising session in Europe yesterday, stocks are set to fall further on the open in a negative end to a challenging month. Investors continue digesting central bankers’ remarks and look ahead to a busy economic calendar.
· FTSE points to a 1.7% drop after BoE Bailey warns on the outlook
· Gold falls for a 4th day on aggressive central bank hiking expectations
· Oil awaits OPEC+ announcement, no changes expected
Wall Street finished the session approximately unchanged as investors took hawkish comments from Federal Reserve Chair Jerome Powell in their stride. Powell still considers the US economy strong enough to absorb the necessary monetary policy tightening. He noted that aggressive tightening could cause the economy to slow too much. However, he added that high inflation was the more significant risk.
Following his comments, USD/JPY soared to its highest level since September 1998, over 137.00, on central bank divergence before easing slightly. The Nasdaq close flat while the Dow Jones managed to close 0.28% higher.
Europe
Today European bourses are heading to a weaker open. Central bankers Bailey and Lagarde painted a bleak picture, with the BoE Governor warning that soaring inflation would hit Britain harder than any other major economy.
Andrew Bailey said that a lack of workers after COVID and the energy price shock means that the UK economy would weaken earlier, and the slowdown be more intense. Following his comments, GBP/USD fell to 1.1, a two-week low. Meanwhile, the FTSE closed 0.15% lower with the hit to sentiment, pulling the FTSE 1.7% lower on the open today.
UK Q1 GDP confirming the previous reading of 0.8% has been brushed off by the markets, given the bleak outlook for the coming quarters.
German retail sales data was more encouraging, rising 0.6% in May after tumbling -5.4% in April. However, the data hasn’t shaken off the gloomy mood and the DAX is still set to open 1.5% lower.
US PCE inflation
Looking ahead, attention is firmly on US personal consumption expenditure data (PCE), the Federal Reserve’s preferred measure of inflation. Core PCE is expected to rise 0.4% MoM in May, up from 0.3% in April. On an annual basis, core CPI is expected to ease slightly to 4.7%, down from 4.9%. A cooler inflation print is unlikely to knock the Fed off its rate hike path. However, it could give the sentiment a boost. The market is still focused on passing peak inflation, which is needed for any meaningful recovery in the stock market to take hold.
Gold
Gold is falling for a fourth straight session and is set to fall for a third consecutive month as investors position for central banks to adopt a more aggressive approach to tightening monetary policy. The bias is expected to remain bearish as more rate hikes come through, hurting demand for non-yielding gold and bringing inflation expectations lower towards 1800. Today, all eyes are on the inflation print; cooling inflation could allow gold a bounce before it continues its downward trajectory.
Oil
Oil prices fell yesterday, snapping a three-day winning run as the markets reacted to a surprise build in US gasoline and distillate inventories. However, the dip has proven to be short-lived, and oil is again on the rise on tight supply concerns ahead of the OPEC+ announcement. The group of oil producers is not expected to change the current output plan after raising production levels for July and August in the previous meeting.
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