US equities extended gains on Friday, driven by technology shares amid a frenzy surrounding AI, offsetting stronger-than-expected PCE inflation data released on Friday. Equities are expected to benefit further today following an announcement debt ceiling agreement that will be voted on in Congress on Wednesday.
United States
Equity markets rallied after signs revealed that President Joe Biden and Republicans had inched closed to an agreement on the debt-ceiling negotiations, ending weeks of turmoil for traders. Late on Saturday, that optimism was rewarded as President Biden and House Speaker Kevin McCarthy reached an agreement that they believe has enough votes to pass in Congress and avoid a default. In economic data, the Michigan Consumer sentiment survey revealed consumers were less optimistic about their economic future, with the index declining from 63.5 in April to 59.2 in May. Meanwhile, the PCE price index for April was up from 4.2% to 4.4% on a year-on-year basis, while Core PCE rose from 4.6% to 4.7% missing estimates to remain unchanged. Personal incomes rose in April by 0.4% year-on-year in line with forecasts, whereas personal spending in April rose by 0.8%, double economists’ forecasts of 0.4%.
PCE Inflation (YoY %) source: Bloomberg
The data adds to hawkish comments by Fed officials in recent weeks which has seen a repricing on rate expectations with traders now betting on one further rate rise in either June or July. With rates in restrictive territory being higher than year-on-year inflation as well as mixed economic data, there is a strong case for a pause in June despite market pricing of rate expectations. An additional six weeks to the July meeting would give officials more information about how the economy and inflation are progressing given the lag in the effects of monetary tightening. While we believe this is the more likely outcome, the importance of maintaining the central bank’s credibility in bringing inflation back to target cannot be overstated, even at the cost of hurting economic growth.
Fed Rate Pricing source: Bloomberg
The S&P 500 closed 1.30% higher on Friday. Information technology, consumer discretionary, and communications were the best-performing sectors rising by 2.68%, 2.38% and 1.71% respectively. The Nasdaq jumped 2.19% and the Russell 2000 Index rose by 1.05%, while futures contracts on the S&P500 are 0.48% higher this morning following the debt ceiling agreement over the weekend. US cash markets will be closed on Monday for the Memorial Day Holiday, although equity and Treasury futures will still trade. In focus for data this week is the Conference Board’s measure of consumer confidence for May on Tuesday followed by the ISM manufacturing report for May on Friday along with employment data for May.
Europe
The European markets closed higher at the end of trading on Friday. The Euro STOXX 600 Index was up by 1.09%. Information technology was up 3.18%, consumer discretionary rose by 1.61% while materials firmed 1.42%. Real estate and communications were the only two sectors to close in red, declining by -0.47% and -0.07% respectively. The CAC added 1.24%, the DAX gained 1.20% while the FTSE was up by 1.16%. The UK pound gained momentum after economic data revealed retail sales in April rose 0.5% compared to -1.2% in May, also beating forecasts of 0.3%. UK Markets will also be closed on Monday due to a public holiday. Key data out this week includes French inflation and German employment data on Wednesday as well as Eurozone inflation data and the latest ECB policy minutes on Thursday.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open higher this morning, with ASX futures up by 0.98% to 7,245. The ASX 200 closed slightly higher on Friday, rising by 0.23% with six out of the eleven sectors closing in the green. The index was boosted by information technology which jumped 1.56%, followed by materials adding 0.93% and consumer discretionary firming 0.46%. The biggest underperformer was the healthcare sector closing -0.76% lower, real estate was down -0.69% while consumer staples ended the session -0.50% lower. Economic data revealed weaker than expected retail sales data for April, which was unchanged against estimates of a 0.2% gain over the month. Wednesday is the focus for economic data this week, with the release of ANZ’s business confidence for May along with the monthly CPI release for April which is expected to show prices rose 6.3% over the 12 months, unchanged from March. Chinese PMI reports for May will also be released on Wednesday.
Australian Retail Sales (MoM %) source: Bloomberg
Commodities
In commodities, the price of oil soared with WTI and Brent Crude rising by 1.17% and 0.90% to $72.67 and $76.95 respectively, and are extending gains this morning following the debt ceiling agreement. The value of precious metals rose, spot gold was up by 0.26% to $1,946.46 while the price of spot silver jumped 2.46% to $23.31. Industrial metal prices were mixed with copper gaining 2.60% to $367, SGX Iron Ore soared 5.13% to $100.58 and is a further 0.72% higher this morning while nickel fell by -0.16% to $21,080. The price of bitcoin climbed 1% on Friday and is a further 4.79% higher over the weekend at US$28,058 benefiting from a risk-on rally.
Economic Calendar
29th May 2023
No major data releases
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.
