Markets to Watch This Week: Commodities Fall on Weak China

We standardise WoW price changes across different markets to allow for cross-market comparisons.

Market Moves Over the Past Week

Last week, Chinese trade data disappointed to the downside. Imports fell 7.9% YoY through April, with lower imports of crude oil, coal, iron ore, and copper than in March. The weaker import data followed disappointing China Aggregate Financing (TSF) and March PMI readings from the week before. As a result, commodity prices continued to slip. Copper prices fell 4% WoW while one-month Dutch TTF futures led the decline (Charts 1 and 2).

The greenback led the pack in FX as concerns over China growth and the US debt ceiling impasse led to haven flows – the dollar index (DXY) rose 1.4% (Chart 3). Rate differentials also moved favourably as US 2Y sector rose 7.3bps compared to a smaller 2.1 bps increase in the German 2Y Schatz.

Moving to the US, April CPI showed no incremental progress on disinflation, as a large increase in used car prices offset slower inflation in other categories. The ongoing recovery in rental indices suggests the progress on shelter cost inflation could turn out to be transitory. Dominique continues to believe that the market is under-pricing the risk of a 25bp hike at the Federal Reserve’s (Fed) June FOMC meeting.

Across the pond, the Bank of England (BoE) hiked 25bp to 4.5% and hawkishly revised their forecasts, in line with broad expectations. The presser’s tone aimed at tacking a dovish tone to caveat the apparent hawkishness of the forecast revisions – as Henry had expected. Despite the hawkish revisions, Henry’s expectations remain unchanged: the BoE will hike once more in June and pause in August.

The AI wars continue. Alphabet rose +11.3% WoW following the announcement at its annual I/O conference to roll out more artificial intelligence for its core search product. ‘We are reimagining all of our core products, including search,’ said Alphabet CEO Sundar Pichai. Despite this, the broader S&P 500 was broadly flat falling 0.3% over the week.

What to Watch

We have 14 public appearances this week from FOMC members Bostic, Kashkari, Cook, Mester, Barr, Williams, Logan, Jefferson, Bowman and Powell. By Friday, we should know what the Fed is looking at to determine its next move.

Watch out for the second meeting on the debt ceiling between President Biden and senior Congressional leaders. Originally planned for last week, the meeting was postponed, giving more time for working-level negotiations. However, Dominique believes that negotiations are unlikely to succeed as the parties remain too far apart from an agreement.

Elsewhere in the US, we get data around housing this week with releases for NAHB index (Tuesday), housing starts and building permits (Wednesday), and existing home sales (Thursday). Currently, consensus sees the data moving sideways, which she believes is overly pessimistic given recent signs of market stabilization.

In the UK, Henry is watching the UK labour market data (Tuesday). Following the hawkish revisions from the BoE, he expects signs of softening over the next few months, which should let the BoE pause hiking come August.

Turning to Eurozone inflation data, Henry sees a confirmation of last week’s inflation readings for Spain, Germany and France leading to readings in line with market expectations of +7.0% YoY in headline and +5.6% in core.

Watch Dominique and Henry discuss how inflation continues to be a problem with more data pointing to more hikes. However, can the Fed even consider hiking as the debt ceiling crisis looms closer with the X-date now 1 June!

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

Photo Credit: depositphotos.com

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