Market Outlook for the Week of 27 – 31 May

The week kicks off on Monday with a U.S. bank holiday in observance of Memorial Day, resulting in a quiet start to the financial markets.

On Tuesday, attention shifts to Japan for the release of the BoJ core CPI y/y. Meanwhile, in the United States, the CB consumer confidence data will be watched.

Wednesday brings important inflation data from Australia, providing insights into the RBA’s next monetary policy decisions.

Thursday sees a series of key releases in the United States, including the preliminary GDP q/q figures, unemployment claims and pending home sales. These data points are important for understanding the trajectory of the U.S. economy.

Friday is packed with significant releases. Japan will report its Tokyo core CPI y/y and industrial production data. The eurozone will release its CPI figures, which will be the last print before the next ECB meeting. In the United States, the core PCE price index m/m, personal income m/m and personal spending m/m data will be released, providing a view of recent consumer activity.

Throughout the week, several FOMC members are scheduled to deliver remarks, which could provide clues about the monetary policy’s future. Additionally, Barclays suggests that month-end rebalancing might give a strong signal to dollar selling, a factor worth considering in trading decisions.

In the U.S., the CB consumer confidence is expected to decline from 97.0 to 96.1. Analysts from Wells Fargo have pointed out the discrepancy between consumer spending, which has increased recently, and consumer confidence, which has declined since the beginning of the year and reached its lowest level since 2022. This discrepancy may be caused by a persistent sentiment of ever growing prices, despite a drop in inflation compared to its peak. Additionally, unemployment has risen slightly, giving the overall economic outlook a less optimistic feel.

All eyes will be on the Australian inflation data as it can provide clues about the timing of the first rate cut from the RBA. For now, analysts expect the Bank to wait until the fourth quarter before lowering rates, with y/y inflation expected to see a modest decline from 3.5% to 3.3% for April. However, if there are upside surprises in the coming months, there’s a possibility the RBA might even consider another hike before easing its monetary policy.

Japan’s Tokyo core CPI y/y is expected to increase from 1.6% to 1.9%. As a reminder, the Tokyo headline CPI came in at 1.8% last month. The BoJ will closely monitor this inflation print to decide its next monetary policy steps, with some economists anticipating the Bank will deliver another rate hike before the end of the year. The rise in core inflation (excluding fresh food) is likely to be driven by an increase of electricity prices caused by an end to government subsidies and surcharges for renewable energy.

Regarding FX movements, many analysts believe that the BoJ will intervene to prevent further yen depreciation if the USD/JPY rate surpasses 160.00.

Industrial production m/m for Japan is expected to increase by 1.5%, marking the second consecutive month of improvement following a weak start to the year. Analysts at ING attribute this recovery to substantial gains in the production of chips, machinery and vehicles.

The upcoming Eurozone CPI data will be closely watched, as it is the final release before the next ECB meeting. Analysts anticipate that headline inflation might exceed expectations, while core inflation is likely to align with consensus. If headline inflation does indeed surprise to the upside, the ECB may hold off on implementing a rate cut. This decision would be made in the context of recent wage growth figures, which have come in above expectations.

U.S. PCE data, the Fed preferred gauge of inflation expected to print at 0.2%, prior 0.3%. Personal income m/m likely to print at 0.3% vs prior 0.5% and personal spending m/m set to rise by 0.3% vs prior 0.8%.

The U.S. PCE data, the Fed’s preferred measure of inflation, is expected to come in at 0.2%, down from the previous 0.3%. Personal income m/m is likely to increase by 0.3%, compared to the prior 0.5%. Meanwhile, personal spending m/m is projected to rise by 0.3%, following a previous increase of 0.8%.

So far, household spending has continued to remain resilient despite slowing wage growth and a loosening labour market. The personal savings rate is at a historically low of 3.2% and credit card debt is increasing despite elevated borrowing costs. In light of these trends, analysts from Wells Fargo anticipate that consumer spending will slow down in the second half of the year, which will help keep inflation in check. They expect the core PCE deflator to stay at 2.8% y/y for April and settle around this level at the end of the year.