Stocks supported on personal spending and inflation data
Stocks continue to rise since the US economic growth exceptionalism story does not appear to be going away anytime soon and as inflation still looks like it will be transitory. It might be hard for stocks to hold onto gains heading into the long weekend and ahead of President Biden’s unveiling of his $6 trillion spending plan.
Today’s data showed that the spending spree continues in America and inflation continues to come in hotter-than-expected. A wrath of data suggests the economy will run hot this summer on reopening momentum and despite the waning impact from stimulus checks and as some households await the child tax credits in July.
The April Core PCE Price index came in hotter-than-expected at 3.1% from an upwardly revised 1.9% prior reading, and well above the Fed objective of 2.0%. The transitory thesis remains intact and that is why Treasury yields refuse to takeoff. The 10-year yield pared earlier gains and is only 1.2 basis points higher at 1.587%. The dollar can’t muster up a significant rally unless Treasury yields rally back to the highs set in March.
Personal spending rose 0.5%, as expected and will likely rip higher as Americans continue to embrace pre-pandemic life and supporting service industries.
Advanced Goods Trade Balanced eased a little which provides some upside for future growth prospects.
The final May Michigan consumer sentiment report mostly matched the preliminary readings. Inflation expectations for 1-year stayed steady at 4.6%, while the 5-10 year outlook.
After a wide array of data, the inflation debate remains unchanged and transitory arguments are still in the lead.
Crude prices are broadly following the risk-on theme on Wall Street. A quiet day on the energy front saw little impact over a very quick grounding of a ship in the Suez Canal and after Moody’s noted oil majors could have increased credit risk as ESG investments will lift capital costs.
Energy markets remain fixated on both the upcoming OPEC+ ministerial meeting and likely revival of the Iran nuclear deal. OPEC+ will likely move forward with the June increase of 700k bpd but may decide to hold off a July supply increase. The crude demand recovery warrants an increase in July, but the alliance might choose to have a more cautious approach.
Uncertainty over Iranian output is complicating the upcoming OPEC+ meeting. Expectations are high that the nuclear deal will get wrapped up before the Iranian presidential elections on June 18th. Both sides are motivated, but will drag this out a little so they can make it look like they got the better end of the deal. Depending on how much Iranian crude returns and how quickly, crude demand recovery could be in jeopardy. Brent could swing by $10 in either direction, but energy traders are still optimistic the market will stay balanced.
Gold prices whipped around after another round inflation readings came in slightly hotter-than-expected. The PCE core deflator monthly and annual readings both came in above consensus estimates, which spiked Treasury yields and sent gold initially lower.
Bullion had a good week and while the rally appears to be taking a break, it seems it might only be a temporary one. Gold’s fundamentals are still improving as central bank buying continues to improve, unprecedented monetary and fiscal stimulus efforts are still elevated, and as some traders lose confidence with cryptocurrencies.
The true test for gold will be after the next couple of months of hot inflation reports and if we have some surprising better-than-expected nonfarm payroll reports. If gold can hold its own against rising Treasury yields, the path to record highs could be inthe cards for later this year. For now, Treasury yields have been depressed,but the outlook by the end of the year is still for much higher yields.
The month of May has been disastrous for Bitcoin. After rallying to almost $65,000, it all came crashing after Elon Musk announced Tesla would no longer accept bitcoin as payment and revived ESG concerns, China seemed more serious with their latest banning of Bitcoin, and as panic-selling hit many of the new retail traders. The institutional picture is mixed, with some remaining confident over the long-term.
Right now, cryptocurrency traders are still unsure on where the bottom could be for Bitcoin and are sensitive to sell on any headline. Weakness overnight came from BOJ Governor Kuroda’s downbeat comments on Bitcoin, but they should not have surprised anyone. Bitcoin is legal tender in Japan and has seen increases in Bitcoin transactions. Japan has been cracking down on crypto scandals and making sure all exchanges obtain the appropriate licenses.
This commentary is kindly contributed by Edward Moya, Senior Market Analyst, New York, OANDA