Trading Week Ahead

Week of May 20

The theme for the final week was disinflation, as the US CPI came in lower than expected, and UK employment figures showed further loosening. Attention on inflation is expected to continue next week, with the UK, Japan and Canada all reporting their CPI data during the week of the last FOMC meeting minutes being published.

Week in Review

Last week's focus of the markets was US inflation data on Wednesday, which came in somewhat softer than anticipated. The decline to an annual rate of 3.4% from 3.5% brought an end to months of consecutive increases, easing worries sparked by marginally hotter PPI figures reported last Tuesday. Federal Reserve Chair Jerome Powell also spoke just before the inflation data were released, giving the impression that the central bank remained on course to cut later this year. Chances of easing starting in September rose substantially, with the market now viewing two rate reductions by the close of the year as likely. Despite recoiling around 50% of its losses after receiving rejection at the 21-week SMA of 103.70, the dollar index closed in the red.

UK unemployment unexpectedly ticked up to 4.3% from the previous and expected 4.2%, though average wages grew. BOE Chief Economist Huw Pill stated that "good progress" was being made in achieving the inflation target, but the risk was still loosening monetary policy too soon. Cable rose over 1% despite failing to cross past $1.27, leaving support back at $1.2539.

Chinese media speculated the PBOC could lower the required reserve ratio facility as early as mid-month.

The Australian government reduced its forecasts for inflation and GDP this year, suggesting CPI could return to the RBA's target by December.

The figurehead of the meme stock rally in 2021 posted on Twitter for the first time in three years, regaining attention for meme stocks as GameStop and AMC rallied without apparent reason.

Geopolitically, the White House confirmed plans to impose tariffs on Chinese electric vehicles and semiconductors; Russian President Vladimir Putin visited China on his first foreign trip since being reelected and announced a reshuffle of the war cabinet; and separatist parties lost their majority in Catalan regional elections, with the Socialist Party taking the lead.

Biggest Market Movers

• US indices reached new record highs following Powell's comments and softer-than-expected US inflation data. Nasdaq marked its 4th week of consecutive gains after posting a nearly 3% gain.
• The US dollar against the Japanese yen saw a strong retracement in the wake of US CPI figures, aided by yields on Japanese government bonds rising to their highest level since November. It still closed the week indecisive.
• Gold prices trended higher throughout the week, even before inflation data was released, approaching a new all-time peak but still facing resistance near the $2400 handle.
• The Australian dollar hit a two-month high above 67 cents after reports that Chinese authorities could purchase unsold homes but later relinquished gains following a sudden uptick in the unemployment rate.

Top Events in the Week Ahead

With a relatively calmer economic calendar, attention to inflation continues this week.

After the US, Other Major Countries Report Inflation

It starts with Canada publishing its April CPI, which is expected to maintain its slow decline. However, analysts don't believe this will convince the BOC to cut rates sooner without a substantial miss. USDCAD will be in focus, with 1.3538 and 1.3765 being major levels to watch.

The UK will report its own CPI on Wednesday, with consensus suggesting it continued dropping strongly and could renew speculation that the BOE could move in tandem with the ECB in June. It may push the UK's Footsie to a new record high towards 8500 unless bearish price action exposes 8250 in a pullback fashion.

Japan's inflation rate comes out on Friday and is projected to remain above target despite slowing economic growth.

Signs of Global Economic Growth

Markets will also monitor preliminary PMIs from major economies to see if recent improvements in business optimism have continued into the second quarter.

Germany's Manufacturing PMI will likely draw focus and is expected to remain in contraction but advance substantially from the prior reading.

Across the Atlantic, the US will update Durable Goods Orders, which will attract notice as the American economy is forecast to run hot this quarter and potentially maintain inflationary pressure.

Central Bank Minutes

The release of the latest FOMC minutes could also prove a highlight this week, as investors will likely interpret recent inflation figures in relation to officials' commentary to gauge how willing they are to implement a rate cut now viewed as most probable in September. However, before their publication, numerous FOMC members had scheduled speeches that may have moderated some impact from the minutes alone. After five weeks of successive gains, EURUSD will be in focus, with $1.10 back into the spotlight.

The RBA will also publish minutes, with investors seeking an explanation for the more balanced stance and verification central bank views align with market forecasts of a rate hike later this year.

Other Events and Earnings

Monday may see light trading volumes, with some European markets closed for the holiday. Tuesday features the release of Westpac Consumer Confidence for Australia. Wednesday has Japanese Trade Balance data. European Consumer Confidence comes out on Thursday. Friday brings UK Retail Sales and the University of Michigan Consumer Sentiment Index.

Following the unofficial conclusion of the Q1 earnings season, some notable names still expected to report include Nvidia, Palo Alto Networks, Lowe's, AutoZone, TJX, Intuit, Medtronic and Booz Allen Hamilton.