Image Source: Unsplash

MARKETS

All three major U.S. indexes experienced gains following the much higher weekly jobless claims data, which offered fresh hope for potential near-term interest-rate cuts.

With Federal Reserve policy acting as the primary driver of investor sentiment in 2024, renewed optimism surrounding the possibility of rate cuts has propelled the Dow to its most significant rally since December. Additionally, the S&P 500 (SPX), a key benchmark known for influencing global sentiment, surged past the critical 5,200-point mark for the first time since April 9, summiting a key technical milestone as the market begins to shake off the memory of the mid-April downturn.

A standout revelation from Thursday's otherwise sparse macroeconomic data releases was the surge in US jobless claims to their highest level since August. At 231,000, this figure significantly exceeded consensus expectations in country mile proportions.

This jobs series data is further evidence or poof in the pudding supporting the argument that the US labour market is showing signs of softening. While it's premature to discern a trend based on a single week's data, when viewed in conjunction with last week's disappointing nonfarm payrolls report and contractionary prints in both ISM headline indices, the significance of the claims update cannot be ignored.

For a Federal Reserve already short on justifications for implementing rate cuts, the emergence of "negative" news may paradoxically provide some relief. In such a context, a slight downturn in economic indicators could be seen as offering the Fed a more legitimate rationale for adjusting its monetary policy stance.

After enduring a tumultuous April marked by a roughly 5% decline in the S&P, markets have impressively rebounded, reclaiming levels reminiscent of nearly a month ago. This turnaround in fortunes can largely be attributed to the decisive actions taken by Jerome Powell, effectively tempering the mounting speculation surrounding a potential Federal Reserve rate hike by year-end.

Powell's proactive measures not only reaffirmed the Fed's stance heavily skewed towards an easing bias but also included a larger-than-anticipated reduction in quantitative tightening (QT) per month. This strategic manoeuvre underscores the intricate policy dynamics meticulously analyzed and navigated by contemporary stock market participants.

In the modern stock market playbook, where the Magnificent Seven dominates at the index level, cash flows are weighted more heavily in the future, rendering them more sensitive to changes in the discount rate. Consequently, the prospect of sooner and more frequent interest rate cuts is perceived as inherently bullish, further fueling market optimism.

Historically, the months of June to August have proven to be robust periods for the markets. However, what adds an intriguing twist to this trend is that it becomes even more pronounced during the fourth year of the presidential cycle and that is where we are right now.

ASIA MARKETS

Asian markets are set to conclude the week on a positive trajectory this Friday, buoyed by the upward movement on Wall Street, a softer dollar, and declining Treasury yields observed overnight

However, there's a palpable sense of groggy momentum as investors brace themselves for next week's pivotal US inflation data release. In light of this anticipation, investors in Asia might be more inclined to end the week with a subdued demeanour rather than an exuberant display of bullish optimism.

Arguably the most crucial economic event on the horizon arrives this Saturday with China's release of April inflation figures. Expectations hover around the economy remaining in deflationary territory, while annual consumer price inflation is forecasted to cling to a meagre 0.1%. Despite efforts, China has grappled with consumer deflation for about a year, presenting a formidable challenge that Beijing has yet to overcome.

Recent developments, particularly the "helicopter" events in the property sector, have injected a dose of optimism into local morale and stock market sentiment. However, other economic indicators paint a less rosy picture, with Citi's economic surprises index hitting a three-month low.

Speculation was rampant on X spurred by another Bloomberg article quoting some sell siders, which considered the prospect of Beijing deliberately depreciating the yuan to facilitate a sustainable economic recovery. I almost think folks on financial social media treat this stuff as gospel

While a potential devaluation presents risks and may ultimately not come to fruition due to the yuan's crucial role in stabilizing China's capital, it remains a subject of conjecture. At the end of the day for the Yuan trading band to widen, all roads lead through Tokyo, specifically the Bank of Japan

Concurrently, tensions between the U.S. and China escalated, as evidenced by the Biden administration's decision on Thursday to add 37 Chinese entities to a trade restriction list. Some of these entities are purportedly linked to supporting the recent spy balloon incident over the United States, further exacerbating Sino-U.S. trade relations.

FOREX MARKETS

The prospect of near-term rate cuts in the US remains alive amidst a weaker economic landscape. We anticipate that the mounting evidence of labour market rebalancing, along with softer consumer and business surveys, will signal a discernible slowdown in consumer and business spending growth in the coming months. Consequently, weaker US economic data is likely to prompt the market to factor in a more dovish Federal Reserve reaction function, potentially leading to a significant depreciation of the US dollar.

The US dollar is currently finding support from a blend of geopolitical tensions, alongside a narrow window of potential policy divergence among central banks such as the BoE, ECB versus  the Fed. Furthermore, the Yen's weakness is mitigating a broader US dollar sell-off in Asia, especially through the Yuan. However, with the Bank of Japan (BoJ) increasingly cornered into a scenario of potential rate hikes, there is a growing risk that the USDJPY could lose momentum. This is primarily due to the anticipation of further intervention and a potential shift towards a more hawkish policy stance from the BoJ.

While these developments may seem influential on the surface, it's essential to recognize that the primary drivers of the US dollar lie within US economic data and Federal Reserve actions. While international monetary policy decisions can impact currency markets over the very short term , the health of the US economy and the Fed's policy decisions hold the greatest sway over the dollar's trajectory.

I expect the dollar will trend downwards as the market reacts to softer US economic data. This adjustment in expectations is likely to result in a more dovish outlook for the Federal Reserve's reaction function.

Of course, there will be a reluctance to sell the dollar aggressively ahead of next week’s inflation data but let the chips fall where they may

OIL MARKETS

Oil futures surged on the back of mounting expectations for lower interest rates, propelled by a surge in initial filings for unemployment insurance. This bullish momentum was reinforced by an unexpected drawdown in US oil inventories this week and upbeat trade data from China. While the latter's positive implications were noted, the rise in job losses traditionally weighs on gasoline demand, pressuring consumer sentiment and discretionary spending.

However, today's report was interpreted by the market as a signal of an economy in need of a rate cut. Consequently, oil traders embraced a risk-on sentiment, typically boosting consumer sentiment. Additionally, the softer US dollar lent further support to both key benchmarks, amplifying the rally.

More By This Author:

Asia Open: US Inflation Data In The Market Purview
FX Traders Are Already Looking Ahead To Next Week's Inflation Data
Living Vicariously Through Rate Cut Expectations