Some really surprising moves overnight. First off, I’m amazed at the sudden appreciation of JPY. It goes far beyond what “safe haven” buying might account for, seeing as Tokyo stocks are down only 0.70%, not a huge move.
A risk-on day as the S&P 500 rose to another record high just short of the psychologically important 3,000 level. Asian stock markets were mixed though as investors were asking questions about just how substantive the Trump/Xi talks really were and what progress was really made in settling the trade dispute.
A big “risk-on” day after Trump and China President Xi agreed to restart their negotiations, Trump visited his pal Kim Jong Un, and OPEC+ basically reached an agreement before their meeting even started. The commodity currencies were up and the safe-haven CHF and JPY were down, down, down. Gold fell the most it’s fallen in a year. Stocks were up across the board in Asia, with the exception of Hong Kong (down slightly).
To keep it brief, I’m mostly going to discuss the major indicator out today, namely the US personal consumption expenditure (PCE) deflators, which are released every month as part of the personal income and spending data. The FOMC stated back in January 2012 that the PCE deflator was “most consistent over the longer run with the Federal Reserve's statutory mandate.” In other words, this is the Fed’s preferred inflation gauged and therefore crucial for its rate decision. They didn’t spell out that they focus on the core PCE deflator, but it’s widely assumed. The core deflator is therefore more important, but as it doesn’t change very much, the market usually gets it right. In that case, attention will focus on the headline measure and any deviation from expectations there.
It’s “risk on” today as stock markets in Asia are almost all higher. Accordingly, we have the three commodity currencies up and JPY and CHF down. Other currencies are barely changed. The similarity in the range of the currencies suggests to me that there wasn’t much specific news for each of them moving the market, but just general sentiment.
Gold price has experienced a strong sell-off since last night as it dropped from the 6 year highs of $1.440/oz to the lows of $1.405/oz during the early US trading session amid the comments from the most dovish Fed member Bullard and Fed chairman Powell that they ruled out a 50 basic points interest rate cut in July and they both talked for an “insurance cut” of 25bps rather than introducing an easing monetary policy with more rate cuts in the future.
A surprising “risk on” day in the FX market, even though US stocks were down and Asian stocks are mixed as investors worry about whether the Fed really is about to cut and whether Saturday’s talks between Trump and Xi really will result in any breakthrough in the US-China trade impasse.
With stock markets lower in most Asian countries, it was a “risk off” start to the day, presumably due to Iran saying that the new US sanctions on Iran’s Supreme Leader Khamenei mean the diplomatic path is closed “forever.” The FX market reflected that – CHF and JPY were both higher while AUD and CAD were lower.
Fed funds rate expectations fell by around 10 bps across the curve over the week. The market is now expecting around three rate cuts by the Fed this year. Expectations for next year however were little changed. The “dot plot” shows that many of the FOMC members have switched to expecting one rate cut this year, while only one expects any tightening. However, the market (red dots) is still far ahead of the Fed.
Gold price spiked above $1.400/oz, hitting their highest level since 2013 while WTI Crude oil price moved above $57 driven by rising geopolitical tensions in Middle East after Trump called off an airstrike against Iran military facilities on retaliation of shooting down the US spy drone, the weaker US dollar amid the expected rate cuts from Federal Reserve.
WTI and Brent crude prices rallied by 2% at $55.50 and $63.50 per barrel respectively at early Thursday amid rising geopolitical risk after Iran said it shot down a US spy drone in its airspace, together with missile attack on Saudi power plant last night and the signals from Federal Reserve for rate cuts in July.
WTI and Brent crude prices are trading higher by 0.2% at $54.10 and $62.40 per barrel respectively after the agreed meeting between US President Trump and Chinese President Xi at the G20 summit at the end of this month, the ongoing tension in the Middle East after the two attacks in oil tankers at Strait of Hormuz and the OPEC+ meeting at June 1-2 to extend the cut deal until end of year.