LONDON (Reuters) – There is no shortage of events, data and major drama for the markets in the coming days.
Washington’s debt ceiling squabbles continue, Greek voters go to the polls, and data from the United States to China and Europe could show just how fast inflation and economic growth are declining.
Here’s a look at the upcoming week at the markets of Kevin Buckland in Tokyo, Lewis Krauskopf in New York, Naomi Rovnick in London and Yoruk Bahceli in Amsterdam.
1/ USA WATCH
Critical US inflation data will allow investors to gauge whether the Federal Reserve will be able to break its cycle of rate hikes, as many on Wall Street expect.
The Personal Consumption Expenditure (PCE) price index, tracked by the Fed, is expected for April Friday.
The index gained 0.1% in March. That was the smallest increase since July and with the consumer price index slowing to below 5% year on year in April, hopes for peak numbers have grown.
Minutes from the Fed’s last meeting on Wednesday could provide more clues as to whether a rate pause is approaching.
Also looming for markets is the June 1 deadline by which the federal government will default on some debts unless the country’s debt ceiling is lifted. There are some positive signs for a deal, but any headlines suggesting a deal is out of reach is likely to weigh on the markets.
Sentiment toward China is turning as a lackluster consumer cuts short of the post-pandemic recovery that was meant to offset the US and European downturn.
The yuan is at a 5-1/2 month low and Citi’s surprise economic index for China is at its lowest since January. Expectations for stimulus – monetary, fiscal or both – are increasing. That idea will be put to the test on Monday, when China’s central bank sets the prime rate for loans.
Friday’s consumer price data in Tokyo, which is several weeks ahead of the national data, is the focus of Bank of Japan watchers’ attention. Traders have all but given up on the aggressive BOJ shift in June, potentially taking markets by surprise on a very strong print.
The Reserve Bank of New Zealand meets on Wednesday, and expectations for a half-point rate hike have crept up after a more expansive-than-expected budget.
3/ TEFLON PMI
For stocks, good data can be bad news.
S&P Global’s US Composite Purchasing Managers Index, seen as a real-time gauge of business conditions, has been rising for five months. If the improvement continues in the next survey, to be released along with global PMIs on May 23, it could disappoint investors chasing higher stock valuations because they expect a recession.
Big technology stocks that dominate US indices can do well when the economy is weak, as this encourages bets that the Fed will cut rates, boosting risk appetite for companies with early-stage innovation baked into their business plans.
For Europe, the picture is mixed. Better-than-expected PMIs could benefit regional equities. But the Stoxx Europe 600 index, which is up 10% this year, was also supported by US recession fears, which prompted investors to diversify into Europe.
4/ EXPIRED STAR
Sterling has been the best-performing major currency against the dollar so far this year, helped by expectations that the Bank of England will raise interest rates beyond the current 4.5%.
Still, this narrative could lose momentum if Wednesday’s April inflation data shows that price increases are moderating.
UK inflation was 10.1% in March, the highest in Western Europe. But since then there have been some signs of a cooling in labor market inflation, with the UK unemployment rate rising to 3.9%. And while annual wage growth remained at 5.8% in March, the number of people changing jobs declined further.
Some economists believe that wage growth will weaken for the foreseeable future, suggesting that UK interest rates have peaked – and with them the strength of the pound.
5/ TO THE POSITIONS
Hot on the heels of neighboring Turkey, Greece will vote on Sunday. Prime Minister Kyriakos Mitsotakis’ New Democracy party is leading in the polls, but the election may not produce an outright winner given a new voting system.
While a coalition government or a second vote in July is likely, Mitsotakis hopes to win a second term to continue reforms and further boost growth. Markets are bullish; Greek equities and bonds remain major outperformers.
Many are hailing the election as the latest step for Greece to regain an investment-grade credit rating, more than a decade after it was downgraded to junk.
Former Prime Minister Alexis Tsipras’ Syriza, which once clashed with Greek creditors and was then moderated, ranks second. Syriza promises big spending, including raising wages, rolling back labor reforms and nationalizing utilities and one big bank — policies that would tickle the nerves of the market.
(Composed by Dhara Ranasinghe; Edited by Toby Chopra)