The number of Americans filing for unemployment benefits rose by 2,000 from the previous week to 232,000 in the week ending 27 May, the most in one month, but below market forecasts of 235,000. The figure also remained well below the elevated levels of March, consistent with recent data indicating a persistently tight labour market in the US economy. The ISM Manufacturing PMI (purchasing managers’ index) fell to 46.9 in May from 47.1 in April, compared to forecasts of 47. The reading pointed to a seventh consecutive month of contraction in the US manufacturing sector. Timothy Fiore, Chair of the ISM Manufacturing Business Survey Committee said, “Companies are managing outputs to better match demand for the first half of 2023 and prepare for growth in the late summer/early fall period. However, there is clearly more business uncertainty in May.”
The economic sentiment indicator in the euro area declined to 96.5 in May, from a revised 99.0 in the previous month, falling short of market expectations of 98.9. Morale hit its lowest level since November 2022, as the economy remained stagnant in the face of high inflation and the rapid increase in interest rates. Sentiment has deteriorated among manufacturers, service providers, retailers, and constructors. Confidence among consumers was largely unchanged. On the price front, the consumer inflation expectations index dropped to 12.2 in May, the lowest since October 2020, while the gauge for selling-price expectations among manufacturers decreased to 6.6, its lowest level since November 2020. The seasonally-adjusted unemployment rate in the euro area edged down to 6.5% in April, the lowest rate on record. The latest figure represented a drop from last year’s rate of 6.7% and pointed to a tight labour market. The number of unemployed people declined by 33,000 from a month earlier to 11.088 million, its lowest level since comparable records began in 1995.
In China, the official NBS Manufacturing PMI unexpectedly fell to a five-month low of 48.8 in May from 49.2 in April, missing market estimates of 49.4. The latest print also pointed to the second straight month of contraction in factory activity, amid weak domestic and global demand.
DEBT CEILING DEAL IMPROVES THE MOOD
The Dow Jones dipped nearly 200 points on Thursday, dragged down by a 7% drop in shares of Salesforce after the cloud-based software company reported higher capital expenses than expected. Both the S&P 500 and the Nasdaq traded largely sideways as the AI-tech rally took a breather. Shares of AI company, C3.ai Inc. plunged about 22% after a disappointing sales outlook. Recent remarks from some US Federal Reserve (Fed) officials suggested the Fed could pause rate hikes this month. Around 71% of investors continue to expect borrowing costs to be left steady. Meanwhile, traders welcomed the passage of the Fiscal Responsibility Act of 2023 by a vote of 314 to 117 in the House of Representatives. The bill is now headed to the Senate and is expected to be approved before the 5 June default deadline.
European stocks rebounded from Wednesday’s two-month lows, with Germany’s DAX 40 index experiencing a gain of approximately 1% and the region-wide STOXX 600 advancing by 0.9%. Investors responded positively to data indicating that inflationary pressures in the eurozone cooled more than expected in May, alongside a tight labour market within the region. Furthermore, optimism was fuelled by the news that the US House of Representatives had passed a bill to suspend the debt ceiling, garnering significant bipartisan support. Among single stocks, shares of German software maker SAP were slightly up despite slowing revenue growth at Salesforce, while fashion retailer Hugo Boss also got some support from a surprise quarterly profit from Nordstrom, the US department store chain.
Japan’s Nikkei 225 Index jumped 0.84% to close at 31,148 while the broader TOPIX Index gained 0.88% to 2,149 on Thursday, recouping losses from the previous session in a broad market rebound. Indications that the Fed could pause its interest rate hikes in June and the passing of the US debt ceiling bill in the House of Representatives also aided sentiment. Moreover, investors digested data showing Japanese manufacturing activity turned expansionary in May.
GOLD LOOKING FOR DIRECTION FROM THE FED
West Texas Intermediate Crude futures steadied above $68/barrel on Thursday after losing more than 6% in the past two sessions. “Black gold” remains under pressure as a surprise build in US crude inventories and signs of weaker Chinese demand weighed on the market. Data from the American Petroleum Institute showed that US crude stockpiles jumped by 5.202 million barrels last week, defying expectations for a 1.22-million-barrel decrease. Meanwhile, markets are bracing for the upcoming 4 June meeting of expanded Organisation of the Petroleum Exporting Countries, OPEC+. Investors remain split on whether the group would cut production further following mixed signals from key officials.
Gold steadied above $1,960/ounce on Thursday, holding onto recent advances as traders reassessed the US Federal Reserve’s interest rate outlook. Fed Governor and vice chair nominee Philip Jefferson said on Wednesday, “Skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.” He added that any decision to hold rates steady should, however, not be viewed as the end of the tightening cycle. Markets have now trimmed the chances that the Fed will raise rates by 25 basis points to only 26%, just a day after predicting a 67% chance of a hike.
Copper futures approached the $3.70/pound mark, rebounding from the six-month low of $3.50 touched on 24 May as mounting supply concerns and expectations of government stimulus outweighed evidence of low purchasing activity. Major market players continued to flag concerns that copper supply cannot keep up with expectations of long-term demand, as the metal is a key raw material for the transition to renewable resources. Copper inventories at the Shanghai Futures Exchange fell to under 135,000 tonnes in May, their lowest level this year, and those at the London Metal Exchange were under 60,000 tonnes, their lowest level since 2005. In addition, Chile said this year’s output is estimated to sink as much as 7% after the 10.6% decline in 2022. In the meantime, concerning manufacturing activity and industrial growth figures out of China ramped up bets of incoming stimulus measures from the Chinese government.
EURO AND STERLING RECOVER AGAINST THE GREENBACK
The US dollar index fell below 103.9 on Thursday, its lowest level in nearly a week, as fresh data and comments from some Fed officials raised bets the Central Bank will pause the tightening cycle when it meets in about two weeks, following comments from Fed Governor Philip Jefferson and Philadelphia Fed President Patrick Harker, who suggested the central bank would skip a rate hike in the next meeting.
The euro has rebounded above $1.07, attempting to recover from recent lows of $1.0633 reached on 31 May, as investors digested the hawkish comments made by the European Central Bank (ECB) President, Christine Lagarde, and their implications for the future path of monetary policy. Lagarde stated that eurozone inflation remains too high, emphasising the need for further monetary policy tightening by the ECB. In contrast, other policymakers, such as Vice-President Luis de Guindos and Bank of France governor Francois Villeroy de Galhau, mentioned that rate hikes were starting to impact inflation and upcoming interest rate increases would be minimal.
The pound sterling rose back above $1.24, recovering from the two-month low of $1.2306 reached on 25 May, bolstered by expectations of additional interest rate hikes by the Bank of England. While the UK’s annual inflation rate dropped to 8.7%, marking its lowest level in over a year, it still surpassed market expectations of 8.2%. Notably, the core inflation rate, which excludes food and energy prices, surged to 6.8%, reaching its highest level in 31 years.
The pound started the day trading at 1.2530/$ and 1.1630/€.
Sources: Trading Economics and investing.com
Written by Citadel Global Director, Bianca Botes
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