It looks like the market’s twin themes of a debt ceiling resolution and the chances of a Fed pause at its June meeting will again drive price action this week. This comes after bets on Fed Funds futures pushed up the odds of a 25bps rate hike next month above 40% last Friday afternoon before falling sharply after Chair Powell confirmed risks are more balanced and a pause in rate hikes possible. A vote on a deal to raise the debt ceiling could come as early as this week though doubts still remain.

The dollar has enjoyed two good weeks after it broke above long-term trendline resistance a couple of weeks ago. Solid data has been a boon to the greenback and we get a smorgasbord of fresh economic releases to confirm the idea that the US economy is still ticking over. Numerous analysts are waiting for the very aggressive tightening cycle and recent banking crisis to kick in and boot the economy down. It is very hard to manage tightening credit conditions during a hiking cycle as credit contrasts very slowly at first and then accelerates. The Fed’s favoured price pressure gauge, the core PCE deflator, and the FOMC minutes also next week will keep the market on edge about a June rate hike.

Risk sentiment has been boosted by the prospect of an end to the fiscal drama – is there one final surprise in the offing as we get close to approval? Any kind of breakdown in talks would see risky assets trashed. We could also get a “buy the rumour, sell the fact” type move in markets if a deal is signed. The benchmark S&P 500 closed below previous resistance around the early February high at 4195/4200. It needs to hold this critical psychological zone for more upside. 

The UK gets the latest inflation data on a busy Wednesday calendar, along with the RBNZ meeting and important German IFO business sentiment indicator. Markets expect another 25bps rate hike in the UK but there is another CPI report to come before that June MPC meeting. Much could depend on whether there is a surprise surge in services inflation. The RBNZ is widely tipped to hike rates by another 25bps taking the cash rate to 5.5%. This would be the highest among G10 nations and the twelfth straight increase. That was projected by the bank’s own forecasts and new ones are released this week to guide markets, with a hawkish bias expected.

Major risk events of the week

23 May 2023, Tuesday:

-Eurozone PMIs: These are important surveys to gauge the health of the underlying economy. The market median sees manufacturing ticking up two-tenths to 46.0 and the services sector falling seven-tenths to 55.5. That means manufacturing is still struggling in contractionary territory while tourism’s recovery is key to the outperformance of the service sector. The euro has taken the brunt of dollar strength recently though it fought back late Friday last week. The 100-day SMA at 1.0806 and the round number may offer support.

24 May 2023, Wednesday:

-RBNZ Meeting: Analysts expect the bank to lift the OCR by 25bps to 5.5%. One domestic bank predicts a peak rate of 6% so an openness by policymakers to get there along with a tightening bias. NZD/USD is messy and trading around the early January low at 0.6191. The 200-day SMA offers further support at 0.6155.

-UK CPI: Expectations are for the headline rate to fall to 8.2% from 10.1% in March. The core is forecast to tick one-tenth lower to 6.1%. Analysts say that electricity and natural gas contributions will decline sharply. There is one more CPI report before the BoE June meeting. GBP is holding onto the January peak at 1.2447 which we have consistently highlighted. The 50-day SMA may offer further support at 1.2410.

-German IFO Survey: Analysts expect the headline number to fall to 93.0 in May from 93.6. Optimism on the outlook is brightening despite tough conditions. Lower wholesale gas prices and the reopening of the Chinese economy have boosted confidence even if the latter has disappointed recently.

-FOMC Meeting Minutes: This meeting saw more hints of a pause by the Fed as it dropped the language about anticipating more policy firming while Chair Powell stressed a data dependent approach to further rate hikes. But recent Fedspeak has become more divergent with some officials pointing to the need for more hikes.

26 May 2023, Friday

-UK Retail Sales: Forecasts see a contraction in activity of -0.5% from the prior -0.9%. The BRC says retailers hope a warmer summer, steady consumer confidence and easing inflation will underpin spending. This data point is historically volatile.

-US Durable Goods: The market median is for a print of -1.0% after the April reading of 3.2%. The volatility in recent months has been due to the Boeing aircraft orders. Investment is under threat from a tightening in credit conditions which makes funding less accessible to small firms and households.

-US Core PCE: The Fed’s favoured inflation measure is expected to remain elevated with the annual figure likely to remain at 4.6%. The m/m print is forecast to rise 0.3%. Analysts say disinflation in shelter should offset rising core goods prices.