- Market focus on core PCE inflation data as Fed rate cut bets are being priced out
- The US dollar is weaker today but on track for a third consecutive weekly gain
- Equities markets boosted by news of debt deal progress and AI buzz
Fed rate cut bets pushed back as summer rate hike is anticipated
The US dollar has eased off its two-month highs on Friday as the three-week rally pauses for breath amid the sharp repricing of the Fed’s rate path. Treasury yields have also cooled off as investors await the next set of clues on Fed policy from the latest PCE inflation data due later today.
Recent fluctuations in Fed fund futures have been uncommon in the sense that there is still insufficient clarity about the possibility as well as the timing of another rate increase, yet the Fed’s message that it is improbable to consider rate cuts seems to be hitting home with investors.
Expectations of looser policy in 2023 have been dramatically scaled back and the current pricing now indicates just one 25-basis-point cut with around 70% probability by year end. However, whilst there is a high probability of a summer rate hike, investors are less certain about the exact timing following the May meeting minutes on Wednesday, which seemed to be making the case for a pause in June even as several policymakers called for the need for further tightening.
Dollar bullishness being watched ahead of core PCE
Two of the three significant concerns for Fed officials are a high inflation rate and a hot labour market. The other is the tightening of credit conditions, which was mentioned several times in the minutes. With two more inflation reports and one jobs report to come before the June meeting, the incoming data will be critical and will put the spotlight on today’s releases.
The core PCE price index, which holds much significance, is anticipated to have stayed put at 4.6% y/y in April, while personal consumption probably rebounded by 0.4% m/m. Yesterday, US GDP growth in Q1 was slightly revised up in the second estimate and weekly jobless claims beat expectations. Therefore, strong numbers today could reverse the earlier session pullback of the US dollar.
Pound leading the recovery against the dollar
For the time being, battered currencies are benefiting from the softness of the greenback to recover some of the heavy losses from this week. The and slumped to more than six-month lows yesterday and overnight, while the euro and pound are at two-month lows. The yen also hit a six-month trough as US-Japanese yield differentials are back in focus after the latest hawkish Fed bets and the absence of any explicit tightening signal from the Bank of Japan.
Leading today’s rebounds is sterling following better-than-expected retail sales figures from the UK that have strengthened the belief that the Bank of England is planning more rate hikes than other central banks. Meanwhile, CPI readings for the Tokyo region were slightly weaker than anticipated. Nevertheless, the yen is also joining today’s bounce-back against the strong dollar.
In emerging market currencies, the Turkish lira hit a new record low against the greenback, breaching the 20 marks for the first time amid the second round of presidential elections in Turkey on Sunday, where incumbent President Tayyip Erdogan is widely expected to win another term.
Rising yields offset by AI and debt deal boost in equity markets
There were few signs of stress from surging treasury yields on Wall Street as an AI-driven rally and relief that a deal on increasing the US debt ceiling is near bolstered equities.
Nvidia (NASDAQ:) led the charge in AI stocks as its share price rocketed by 24%, lifting the by 1.7%. The S&P 500 index rose by 0.9%, but the Dow Jones decreased by 0.1%. These movements show that the latest upswing on Wall Street has been uneven.
Although the AI revolution has brought a fresh lease of life to stocks, there is still a range of uncertainties hanging over the markets. However, there could be some resolution to one of those uncertainties soon, as the White House and Republicans seem to be getting closer to reaching a deal on raising the debt ceiling.
President Biden and Republican House Speaker Kevin McCarthy are close to capping federal spending for two years while raising the debt limit, with time running out before the June 1 deadline.
The optimism extended to Asian markets today, however European stocks were mixed, and US futures were mostly stagnant or slightly in the red.
