Week of 8 JUNE

Last week, markets rose on tech enthusiasm, despite disappointment over the lack of progress in the Middle East, as Eurozone GDP and unemployment data came in worse than expected. Gold started the week at $4,550 per ounce and trended lower to under $4,500 towards the end of the week as the dollar firmed on increasing odds that the Fed will hike rates this year.

The week ahead has a busy economic calendar with highlights including US CPI, UK monthly GDP numbers and interest rate decisions from the ECB and BOC.

Week in Review

The week started on a positive note, as news from the tech sector outweighed geopolitical developments following the US and Iran's failure to reach an agreement. US stocks hit record highs across the board on Monday, with the Nasdaq closing just over 27K. Brent jumped to over $97 per barrel amid press reports that Iran had broken off negotiations on Monday. But those reports were later dismissed by both sides, and crude returned to under $94 while gold traded over $4,500 per ounce. As the US and Iran failed to make headway on a deal, reports that both sides had traded military strikes sent Brent almost to $100 on Wednesday, but it fell back towards $95 by Friday.

The relatively light economic calendar allowed traders to focus more on fundamentals, with AI-backed tech stocks leading the trend higher after major announcements at the Computex AI exhibition on Monday. The Nasdaq posted consecutive record highs, and all three major US indices did so in the early part of the week. The gains were marred by Broadcom's sales not growing as much as investors had hoped, followed by profit-taking in the latter half of the week. 

The final reading of Eurozone Q1 GDP was revised down to -0.2%, the first contraction since 2021 and opening the risk of a technical recession. April retail sales disappointed, and the unemployment rate unexpectedly rose to 6.3%, with the prior measure also revised to the same level.

The USDJPY levelled off just below the 160 level that had prompted intervention in the past, with BOJ governor Kazuo Ueda making hawkish remarks on Wednesday. Sources reported the BOJ was considering raising rates in June.

Markets showed signs of indigestion in the second half of the week, as US yields fell and bitcoin dropped to its lowest level since February. Markets moved to price in a 60% chance of a Fed rate hike by the end of the year, from a 60% chance of a hold at the start of the week.

Biggest Market Movers

• The pound was the only major currency to rise faster than the dollar, recovering as the political situation died down and the services PMI came in well above expectations.
• NZD among the worst performers amid tensions with China over the parliamentary visit to Taiwan and falling dairy prices.
• WTI rose through the week, mirroring the curve in Brent, as investors lost hope of a quick end to the conflict in the Middle East.
• Precious metals retreated amid a stronger dollar, with silver leading the way lower, attributed to profit-taking following gains in prior weeks.
• S&P 500 set to snap an eight-week win streak as investors approached the weekend with caution.

Week Ahead

The coming week will likely be influenced by a busy economic calendar as news exhaustion around the Strait of Hormuz keeps investors focused on fundamentals. Pending a surprise resolution to the conflict, markets are likely to focus on the upcoming rate decisions, with the ECB expected to hike while the BOC holds. US inflation is projected to remain elevated, with the final comments from Fed officials for markets to parse ahead of the pre-rate decision blackout period.

Rising US Inflation to Pressure Fed

The US May headline CPI is expected to rise to 3.9% from 3.8%, while the core rate is projected to stay unchanged at 2.8%. Markets will be looking for signs that energy costs are bleeding into the broader economy, as that will push the Fed towards hiking. This is the last major data point before the first FOMC meeting to be presided over by new Fed Chair Kevin Warsh on 17 June, which could leave the market more sensitive to the data. A larger CPI increase could weigh on gold, resulting in a break of $4360 support, while a miss could send gold towards $4600.

ECB Expected to Hike, Leave Options Open

Futures are pricing in a near 100% chance that the ECB will hike rates on Thursday as the shared central bank tries to get ahead of rising inflation despite the risk of a technical recession. The focus will likely be on President Christine Lagarde's comments as investors try to figure out how much more hiking to expect. The consensus is that she will try to leave all options on the table to allow for a hold or hike at the next meeting, depending on developments in energy prices. Given the strain on the Eurozone economy, however, a more hawkish ECB could weigh on the euro, re-exposing 1.1575. On the other hand, signs that the ECB will pause at the next meeting might provide some relief, sending the eurodollar towards 1.1700.

BOC to Hold With Inflation in Focus

The BOC is widely expected to keep rates unchanged and signal it will likely stay the course through the summer. However, markets could react to signs of concern around inflation, as consumer prices rise while demand falters amid soft economic growth. As the Fed is expected to turn more hawkish, signs that the BOC is more concerned about inflation could support the CAD, pushing it towards 1.3760. But if the BOC remains focused on the economy, the CAD could weaken, opening the door to 1.1400 for USDCAD.

UK April GDP to Stay Positive

Markets forecast the UK's monthly GDP to defy the trend in Europe and stay in the green at 0.1%, down from 0.3%, despite the geopolitical pressures. This could help shore up the pound towards 1.3600 ahead of the BOE's meeting, as it would give more room to deal with higher inflation. However, a miss could weigh on the pound, paving the way for the 1.3300 handle.

Other Events And Earnings

Monday has the final Japan Q1 GDP figures. China trade data comes out on Tuesday. Wednesday includes China inflation figures. For Thursday, the UK RICS house price balance is expected. Friday sees the US University of Michigan consumer sentiment index.

Corporate reports are light this week, with few notable names, including Oracle, Adobe, Lennar, and Casey's.