U.S. equities finished the week in a volatile session with the monthly expiration of options likely contributing to the price swings, while a busy week of key economic data is likely to see similar moves this week.
The S&P500 initially gained on Friday, boosted by sentiment globally on signs of financial stimulus in China before the index fell as much as -2.27% only to rally in the final hour of trading to finish unchanged. Performance across sectors was mixed with health care +1.26% and real estate +1.19% leading gains while consumer discretionary -1.53% and industrials -1.07% led losses with 57.7% of stocks rising. The Dow Jones was also little changing, while the Nasdaq Composite was -0.30% lower along with the Russell 2000 -0.17% with the VIX just +0.27% higher at 29.43.
There was little in the way of economic data to guide markets although Treasury yields declined as investors look to havens in the face of a weaker growth outlook and volatility from equity markets. The 2-year yield was -2.7 basis points lower at 2.581%, as were both the 10 and 30-year rates by -5.6 and -6.3 basis points respectively. The spread between the 2 and 10-year rates narrowed -3.1 basis points to 0.204% continuing to signal the market remains worried about the prospects for growth, expecting that while short-term rates may remain elevated or even move higher, longer-dated yields are declining on expectations the Federal Reserve will need to cut rates in the coming years. That is also the view of James Bullard, the President of the Federal Reserve of St. Louis, who on Friday noted that the Federal Reserve should aggressively front-load rate hikes to as much at +3.5% by the year end, which could then lead to policy easing in 2023 or 2024. “The more we can front-load and the more we can get inflation and inflation expectations under control, the better off we will be. In out years, ’23 and ’24, we could be lowering the policy rate because we got inflation under control.”
The week ahead is filled with key economic data and several speeches by members of the Federal Reserve that all have the potential to see heightened volatility. Overnight Monday will see the release of PMI surveys expected to reinforce a slow down in growth and a speech by Jerome Powell overnight on Tuesday. Wednesday will see the release of durable goods orders for the month of April, forecast to moderate from +0.8% in March to +0.6% followed by the release of the FOMC’s latest policy minutes. Thursday will bring the second estimate of GDP for Q1, forecast to show the economy contracted -1.4% on an annualised basis as well as the release of PCE inflation data. Year-on-year to April core prices are forecast to moderate to +4.9% from +5.2% with headline prices rising +6.2% compared with +6.6% previously. The last data point for the week in the final reading of the University of Michigan consumer sentiment for May expect to show sentiment declined to 59.1 from 65.2 in April.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a modestly lower open this morning with ASX200 futures down just -15 points or -0.21% to 7,129. The index climbed +1.15% on Friday posting the first weekly gain (+1.0%) since April with sentiment boosted after China cut a key lending rate. The vie year loan prime rate was lowered by -0.15% to 4.45%, exceeding analyst forecasts for a 5 to 10 basis point cut. The reduction is the largest since 2019 and suggests policymakers intend to support the economy and rescue the stricken property sector. Ahead in economic data for the week, Tuesday will see the release of flash PMI data for May followed by a speech by the RBA’s Ellis on Wednesday and finally retail sales for the month of April, expected to rise +1% compared with +1.6% in March.
Oil prices edged higher on Friday with both WTI and Brent crude up +0.35% and +0.46% to US$110.28 and US$112.55 a barrel. Base metals were higher for the week with aluminium up +5.67%, as was copper +2.87%, lead +4.91%, nickel +2.61%, tin +3.88, zinc +6.23% and iron ore +3.23% to US$132 based on futures contracts in Singapore. Gold gained +0.25% on Friday to US$1,846.50 while silver retreated -0.70% to US$21.78 and Bitcoin finished -3.68% lower at US$29,117.
Economic data:
- German Ifo Business Climate (MoM May) 18:00
- U.S. Chicago Fed National Activity Index (MoM Apr) 22:30
- Fed Bostic Speech 02:00
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
