By Edward Moya
US stocks are rallying ahead of a massive macro week that contains a key inflation reading, some major central bank rate decisions, and many important economic readings.
The bull market rally looks like it doesn’t want to stop, which means Wall Street appears confident that the Fed will not be delivering its 11th straight rate hike this week. The Fed will try to keep optionality for further tightening available later this year and that should support their ‘higher for longer’ stance.
A hot May inflation report could disrupt the Fed’s plan to deliver a ‘hawkish skip’.
Inflation should be coming down given the trend with gasoline prices, a more seasonable rise in food prices, and the negative base effects. If the US economy is dealt a hot report, the Fed may have to debate delivering one more rate hike and possibly signal to do more.
Oil
Oil has become a favorite short on Wall Street.
The oil market doesn’t appear like it will get tight anytime soon on fears that China’s weak post-COVID recovery won’t be improving anytime soon and as Russia continues to sell more oil to China and India.
In addition to all the bearish drivers, some notable oil bulls are abandoning their aggressive calls.
Goldman Sachs lowered its Brent outlook for the end of the year from $95 to $86 a barrel. Just last week, Goldman’s Currie was talking about seeing substantial physical draws in Q3 or Q4, which could support oil back to the low $90s.
With every energy trader buckling up for a massive week of central bank rate decisions and important economic data, volatile price action should be expected.
Oil could get many conflicting signals this week as we expect a hawkish skip by the Fed, another ECB rate hike and a signal for more tightening, possibly a technical recession for New Zealand, and a growing case for easing by the PBOC.
The global economic outlook should be for more crude demand destruction to occur, which could support oil prices remaining under pressure unless OPEC+ signals and delivers on more production cuts.
Gold
Gold prices edged lower on expectations the Fed will deliver a hawkish skip.
First, we need to see inflation cooled in May, before we can talk about a hawkish Fed skip. Wall Street will likely anticipate that rates will remain elevated a while longer and that is keeping gold prices under pressure.
With stocks in bull market territory, demand for safe-havens has disappeared. Gold either needs investors to get nervous about earnings, disinflation trends to improve, or for the PBOC to send a strong message that they will energise growth.
Gold is getting dangerously close to the $1950 support level and if that doesn’t hold, it could pave the way for momentum selling towards $1900.
Crypto
Bitcoin remains heavy as investors pile back into MegaCap tech trades and 5% interest income from CDs.
The cryptoverse is stuck in limbo as regulatory fears run wild and as some investors abandon certain key exchanges.
Mainstream acceptance for crypto won’t occur with DeFi. While experienced crypto traders move more their trading volumes onto DeFi, this is not good news for long-term growth and for attracting new investors.
Ahead of a key CPI report and Fed decision, Bitcoin has key support at the $25,400 region.
Edward Moya is Senior Market Analyst, The Americas at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.
