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Australian Inflation Spike Surprises Market While Chinese Manufacturing PMI Disappoints

Rising Inflation in Australia Meets Disheartening Chinese PMI Data

In a tepid day of trading, the Dow Jones Index (US30) reported a modest dip of 0.15% at yesterday’s closing bell. In contrast, the S&P 500 index (US500) held steady, ending the day at its opening price. Showing some resilience, the NASDAQ Technology Index (US100) managed to chart a 0.32% gain on Tuesday.



 

Kevin McCarthy, the leading Republican figure in Congress, issued a call to arms on Tuesday for his party to back a bipartisan proposal to lift the $31.4 trillion US debt ceiling, thereby averting a potential financial disaster ahead of a procedural vote. Both President Joe Biden, a Democrat, and House Speaker McCarthy appeared confident about securing the necessary votes to pass the legislation by June 5. However, a degree of resistance was observed within Republican ranks.

Despite the news of the debt ceiling agreement, analysts believe that Fitch Ratings may still consider a downgrade for the US credit rating. The lingering uncertainty surrounding the future of US creditworthiness is reminiscent of the debt ceiling crisis in 2011 when the Standard & Poor’s rating agency reduced the US’s top-tier “AAA” rating shortly after an agreement was reached.

US consumer confidence has hit a six-month low. The Conference Board reported that its Consumer Confidence Index dropped to 102.3 this month from a revised 103.7 in April, marking the lowest level since November. There was a discernible change in optimism towards the labour market, with fewer people viewing jobs as “plentiful” and more considering jobs to be “hard to get”.

European stock markets mostly tracked lower on Tuesday. Germany’s DAX (DE30) fell by 0.27%, France’s CAC 40 (FR 40) declined by 1.29%, Spain’s IBEX 35 (ES35) saw a 0.18% drop, and the UK’s FTSE 100 (UK100) closed the day 1.38% lower.

In Spain, the inflation rate cooled off from 4.1% to 3.2% year-on-year. Both France and Italy are due to release their inflation data today, and the overall Eurozone figures are expected tomorrow. Forecasts predict continued easing of inflationary pressures in the region.

The oil market retreated by 4% on Tuesday, unsettled by the Federal Reserve’s potential rate hike and OPEC’s decision on production levels. Speculation of the Fed’s rate increase in June was a major driver behind the fall in crude oil prices. Additionally, OPEC+ nations will convene on June 4, with the backdrop of mounting tensions between Saudi Arabia and Russia over the latter’s large-scale, low-cost oil production undermining Riyadh’s efforts to stabilise energy prices.

Asian markets showed mixed trading on Tuesday. Japan’s Nikkei 225 (JP225) was up 0.30% for the day, while China’s FTSE China A50 (CHA50) fell by 0.32%. Hong Kong’s Hang Seng (HK50) added 0.24%, India’s NIFTY 50 (IND50) edged up 0.19%, and Australia’s S&P/ASX 200 (AU200) declined slightly by 0.11%.

Activity in China’s manufacturing sector contracted for the second consecutive month in May, increasing concerns about the country’s economic recovery. Weak demand and a slowdown in capital investment weighed on China’s primary economic drivers. The manufacturing PMI declined to 48.8 from 51.4, with any reading below 50 indicating contraction. China’s service sector remained above 50 but slipped from 56.4 to 54.5 for the month. Following the release of this data, China’s Shanghai Shenzhen CSI 300 and Shanghai Composite indices dipped by 1% and 0.6%, respectively. The blue-chip index hit a six-month low. It’s worth noting that China is also grappling with a resurgence of COVID-19 cases, with some officials projecting that the number of cases could peak by the end of June.

In Australia, consumer prices exceeded expectations by a significant margin in April, prompting the markets to adjust their forecasts for potential rate hikes. On an annualised basis, the CPI climbed from 6.3% to 6.8%. Governor Lowe of the Reserve Bank of Australia warned households to brace for potential difficulties while risks of higher inflation persist. The central bank is determined to bring inflation under control and anticipates that overall inflation will return to the bank’s 2-3% target by mid-2025, a slower trajectory compared to many other nations.

Key Events to Watch

Today’s calendar is packed with significant events including:

  • Australia RBA Governor Lowe Speaks at 02:00 (GMT+3)
  • Japan Unemployment Rate (m/m) at 02:30 (GMT+3)
  • Japan Industrial Production (m/m) at 02:50 (GMT+3)
  • Japan Retail Sales (m/m) at 02:50 (GMT+3)
  • Australia Consumer Price Index (m/m) at 04:30 (GMT+3)
  • China Manufacturing PMI (m/m) at 04:30 (GMT+3)
  • China non-Manufacturing PMI (m/m) at 04:30 (GMT+3)
  • Switzerland Retail Sales (m/m) at 09:30 (GMT+3)
  • ECB Financial Stability Review at 11:00 (GMT+3)
  • German Consumer Price Index (m/m) at 15:00 (GMT+3)
  • Canada GDP (q/q) at 15:30 (GMT+3)
  • US FOMC Member Bowman Speaks at 15:50 (GMT+3)
  • US JOLTs Job Openings (m/m) at 17:00 (GMT+3)
  • Switzerland SNB Chairman Jordan Speaks 18:05 (GMT+3)
  • US FOMC Member Harker Speaks at 20:00 (GMT+3)

 

“Two rules for Investing/Trading: Rule number one: Most things will prove to be cyclical. Rule number two: Some of the greatest opportunities for gain and loss come when other people forget rule number one.” – Howard Marks

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