8 min readWeekly Recap
US stocks fell last week, with the Dow Jones falling by 1.4%, while the S&P 500 and the NASDAQ also fell but extended to remain positive year to date.
The week was divided into two halves, with major indices broadly positive until Thursday, boosted by better-than-expected economic data releases and reports that trade talks between the US and China had led to a preliminary agreement, helping ease recent tensions.
However, sentiment quickly turned negative on Friday on news that Israel had launched a series of airstrikes targeting Iran’s nuclear and ballistic missile facilities with a pledge for more attacks to come. Iran responded with retaliatory attacks later on Friday. The escalated tension sent oil prices surging and lifted safe havens such as gold.
On the data front, CPI was 2.4% YoY in May, up from a 4-year low of 2.3% in April but below the 2.5% increase. Meanwhile, wholesale inflation was also weaker than expected, rising just 0.1% MoM below the 0.2% forecast.
Middle East tensions
The market will be watching any developments in the Middle East after Israel and Iran continued to exchange missiles over the weekend. Oil prices opened 4% higher on Monday before easing back to current levels of 1% higher. Investors are assuming that Iran won’t close the Strait of Hormuz since that would drag the US into the conflict. There is also plenty of scope for Saudi Arabia and other OPEC countries to expand supply if needed to keep prices restrained. However, the market will be watching developments closely, with oil likely the barometer to watch.
China retail sales & industrial production (Monday)
China’s industrial output growth slowed in May, rising 5.8% annually, marking its lowest pace this year, down from 6.1% in April. Meanwhile, retail sales grew 6.4%, beating analysts’ forecast and marking the fastest expansion pace since December 2023, up from 5.1% in April.
These data points provide the first real insight into the health of the Chinese economy as the US-China trade tariffs start to bite. Whilst retail sales are being boosted by subsidies which help lift consumption, industrial output, an important source for growth in recent years, is under pressure. Exports to the US dropped 34% last month, the steepest fall since the beginning of the COVID-19 pandemic. The US and China met in London last week and agreed to preserve a truce to avoid 145% tariffs. However, a loss of economic momentum appears inevitable.
AUD/USD, which is considered a proxy for China, is rising after the data, in part supported by a weaker USD.
BoJ rate decision (Tuesday)
The Bank of Japan is expected to leave interest rates unchanged at 0.5% as policymakers monitor global tariff negotiations and economic implications. In the last meeting, the Bank of Japan reiterated that it would continue to raise the policy rate if the economy and prices moved in line with the forecast.
In the last meeting, the BoJ acknowledged uncertainties surrounding Japan’s economy and prices, with risks to the economic outlook and inflation skewed to the downside. Furthermore, projections were lowered with GDP cut to 0.5% for fiscal 2025 from 1.1%, and full CPI was cut to 2.2% from 2.4%. Recent commentary from BoJ governor Ueda suggests that the BoJ will raise interest rates if it has enough confidence that underlying inflation is nearing 2%.
In addition to the rate decision, the market will look for clarity on the BoJ’s tapering plans after recent reports that it would consider smaller reductions to its bond buying.
A slightly more hawkish BoJ could see USD/JPY break out of range below 142.00.
US retail sales (Tuesday)
US retail sales will be focused on ahead of the Federal Reserve interest rate decision later in the week. Consensus estimates are for retail sales to rise just 0.1%, which is in line with the previous week. However, it’s worth noting that Bank of America has seen total card spending per household down 0.7%. Should retail sales come in weaker than expected, as consumer sentiment deteriorated across the month, the US dollar and US stocks could weaken.
The S&P 500 fell last week and is hovering around 6000. Weak retail sales could cause it to fall further from this key level.
Federal Reserve (Wednesday)
The Federal Reserve will announce its interest rate decision on Wednesday, June 18. The central bank is widely expected to leave interest rates on hold at 4.25 to 4.5%, where they have been since the central bank last eased in December.
This central bank will continue to weigh up concerns over a weakening labour market and inflation still above the target 2% rate. Since the last meeting in May, non-farm payrolls have fallen, and US CPI inflation ticked up to 2.4%, although this was weaker than expected. The market will be looking for any signs that the Fed is more concerned about one of its dual mandate goals than the other, and what that might mean for the path of interest rates.
Along with the rate decision, the Federal Reserve’s economic projections will be updated after last being published in March. The dot plot will provide clues as to where the Fed sees the path for rate cuts. Currently, the market is pricing in two rate cuts by the end of this year, with the next one likely in September. Rusks from tariffs remain a concern and will keep the Fed in wait-and-see mode. A sense that the Fed is more dovish could pull USD lower and boost Gold.
BoE rate decision (Thursday)
The Bank of England is expected to leave interest rates unchanged at 4.25% when the Monetary Policy Committee votes on Thursday. The meeting comes after the UK consumer price index jumped to 3.5% in April, up from 2.6% in March, driven by higher energy prices and rising food and transport prices. UK CPI data will be updated on Wednesday before the BoE meeting.
While inflation remained sticky and well above the 2% target, there have been signs of the labour market cooling. Unemployment rose to 4.6%, and wage growth dropped by more than expected to 5.2%, down from 5.6%. While this is still elevated and is not consistent with inflation falling to the 2% target level, it is a move in the right direction.
Meanwhile, the growth outlook is deteriorating after the UK GDP slowed to contract 0.3% MoM in April after growing 0.7% in the first quarter.
Ongoing concerns over inflation will likely overshadow the weakening of the labour market for now. The BoE will want to see a cooling in inflation before cutting rates again. The market is pricing in two cuts before the end of the year.
A BoE prepared to maintain a gradual cautious rate cut could keep GBP/USD supported at current multi-year highs.
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