Over the past two days, financial markets experienced significant fluctuations. Multiple statements from Federal Reserve officials and the release of key economic data influenced the outlook for interest rates and market movements. Notably, Minneapolis Fed President Neel Kashkari’s comments on the need to maintain current interest rates until inflation further decreases attracted considerable attention. Additionally, ongoing geopolitical tensions in the Middle East and anticipation for the key PCE inflation report affected market outlooks.
Economic Events:
Several important economic events took place yesterday:
- Fed Mester Speech
- House Price Index MoM
- Fed Kashkari Speech
- CB Consumer Confidence
- Fed Cook Speech
- Fed Daly Speech
Today, the following data is set to be released:
- Westpac Leading Index MoM
- ANZ Business Confidence
- MBA Mortgage Applications
- Fed Williams Speech
- Fed Beige Book
Bond Market:
The US 10-year Treasury note yield rose to 4.56% on Wednesday, following an 8 basis point increase the day before, reaching the highest level in four weeks. Disappointing results from recent 5-year and 2-year auctions, along with a surprising jump in US consumer confidence and growing inflation expectations, led to a bond selloff as investors reduced bets on interest rate cuts. Minneapolis Fed President Neel Kashkari suggested that more positive inflation data would be necessary before considering rate reductions this year. Currently, there is a 46% chance of a fed funds rate cut in September, 59% in November, and 79% in December. Market participants are awaiting the PCE inflation data on Friday to assess evolving price pressures in the economy.
Gold and Silver:
Gold prices fell near $2,350 per ounce on Wednesday as investors continued to reduce bets on US Fed rate cuts this year following recent remarks from officials. Minneapolis Fed President Neel Kashkari stated that the Fed should delay cutting rates until inflation significantly improves and might even hike rates if inflation does not decrease further. Traders are now focused on the PCE data due on Friday, which is expected to align with the CPI, indicating that prices did not accelerate. Meanwhile, increasing geopolitical risks in the Middle East continued to support gold’s safe-haven appeal. Recent reports indicated that Israel’s military denied striking a tent camp west of Rafah, despite Gaza health authorities reporting fatalities due to Israeli tank shelling.
Silver prices were at $31.5 per ounce, nearing the 11-year high of $32 reached on May 21st. Silver continued to outperform gold as the favorable macroeconomic backdrop for precious metals combined with physical silver purchasing for industrial uses. Despite robust economic growth and persistent inflation in the US delaying expectations of monetary easing by the Fed, markets still anticipate multiple rate cuts this year. The expected rate cuts from the ECB, BoE, and PBoC, coupled with lower opportunity costs for holding bullion and increased central bank interest in precious metals, have supported silver’s near 40% surge in the second quarter. Additionally, demand for solar panels amid volatile power prices has boosted industrial demand for silver, as reflected by solar equities trading at a year-to-date high.
S&P500:
US stock futures held steady on Wednesday after the Nasdaq Composite closed at a new record high in the previous session. In extended trading, American Airlines fell more than 6% after lowering its sales outlook for the second quarter, while Robinhood jumped 4% after announcing a $1 billion share repurchase program. In regular trading on Tuesday, the Nasdaq Composite rose 0.59%, driven by an almost 7% rally in Nvidia. The S&P 500 also inched up 0.02%, while the Dow fell 0.55% as Merck and Amgen slipped 2.2% and 1.8%, respectively. Technology, energy, and communication services stocks outperformed the market, while industrial, healthcare, and financials were the biggest laggards. Investors continued to assess the outlook for interest rates, with Minneapolis Fed President Kashkari stating he wouldn’t rule out additional rate hikes if inflationary pressures resurface.
Foreign Exchange Market (FOREX):
The euro eased to below the $1.085 mark, pulling back from the two-month high of $1.088 reached on May 15th as the anticipated rate cut from the European Central Bank contrasted with ongoing hawkish rhetoric from Federal Reserve members. An ECB survey suggested that consumer inflation expectations in the eurozone fell to their lowest level since 2021. This development aligns with statements from ECB Governing Council members favoring a rate cut in the upcoming June meeting. However, the survey also noted that wage growth remained strong, consistent with high PMIs for May, which supported concerns from hawkish policymakers about premature policy changes in the third quarter. Meanwhile, hawkish signals from Fed members further reduced expectations of a US rate cut by the third quarter, pressuring the currency pair.
The British pound traded around $1.275, its strongest level in two months, as investors scaled back expectations for Bank of England interest rate cuts and welcomed Prime Minister Rishi Sunak’s call for general elections on July 4th. Although the annual inflation rate in the UK eased to 2.3%, nearing the Bank of England’s target of 2%, the reading exceeded forecasts of 2.1%. Investors now anticipate the BoE’s first rate cut in September instead of June. Adding to the positive momentum, polls show the opposition Labour Party, considered more business-friendly, may win the elections in July. The pound is trading at a 16-year high against the Japanese yen and is approaching its strongest level against the euro since August 2022.
The Japanese yen depreciated past 157 per dollar, hitting its lowest levels in four weeks due to a strong dollar and high Treasury yields. This movement followed a lackluster auction for US government debt, raising concerns about demand for US bonds, while a Federal Reserve official added fuel to interest rate concerns. The large gap between US and Japanese yields encourages yen carry trades. Meanwhile, Bank of Japan board member Seiji Adachi mentioned the possibility of raising interest rates if a sharp yen depreciation leads to further inflation. Last week’s data showed Japan’s core inflation rate slowed to 2.2% in April from 2.6% in March due to milder food inflation, in line with expectations. The headline rate also fell to 2.5% in April from 2.7% in March, marking a second consecutive month of easing.
Bitcoin (BTC):
On Tuesday, BlackRock added the bitcoin ETF to its income and bond-focused funds in the first quarter. The firm’s Strategic Income Opportunities Fund (BSIIX) holds over $3.5 million worth of IBIT, while its Strategic Global Bond Fund (MAWIX) holds $485,000. Buying activity for IBIT increased recently amid bullish sentiment for bitcoin and the broader crypto market. The bulls gained momentum after the listing approval for ether (ETH) ETFs and renewed support for crypto among US political parties. Last week, US-listed spot bitcoin exchange-traded funds reached a new record with over 850,000 BTC in custody, surpassing the previous high of 845,000 BTC from early April.
US Crude Oil WTI :
WTI crude futures held above $80 per barrel on Wednesday, hovering near the highest levels in four weeks amid expectations that OPEC+ countries would extend voluntary output cuts of about 2.2 million barrels per day into the third quarter at an upcoming meeting. Geopolitical concerns in the Middle East also continued to support oil prices as fighting in the Gaza Strip intensified and another vessel in the Red Sea was attacked. On the demand side, the start of the peak summer demand season is expected to increase fuel consumption in the US. Elsewhere, markets are awaiting a key US inflation print this week to assess the Federal Reserve’s monetary policy path. A softer-than-expected reading on the US PCE price index could bolster expectations for interest rate cuts, supporting the outlook for economic growth and energy demand.
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