Week of 25 MAY

Markets responded to a mix of geopolitics and data this week, amid mixed UK data and more hawkish FOMC minutes. Fresh tensions in the Middle East at the start of the week pushed Brent over $110 per barrel, but crude prices fell to around $105 after press reports later in the week that a tentative deal had been reached.

The coming week gets a little busier on the economic front, with a rate decision by the RBNZ, the US PCE price index and European flash CPI readings.

Week in Review

Market focus at the start of the week was on the Middle East amid rising tensions, with US President Donald Trump saying on Tuesday he delayed a resumption of military strikes on Iran by a few days. The sides traded proposals, with reports on Thursday suggesting a tentative agreement had been reached through Pakistani mediation, which helped support risk appetite. WTI retreated below $100 per barrel, but there were signs of investor caution, as gold prices were largely unchanged over the week and are set to end slightly above $4,520 on Friday. That caution was warranted after FOMC minutes gave a more hawkish impression. A majority of members wanted to axe the part of the statement suggesting the next move will be a hike, including the three who voted against it. Earnings were also a focus throughout the week, with tech leader Nvidia at the forefront. Although the company beat expectations, investors were slightly disappointed with the outlook, leading to a midweek retracement in the tech sector.

UK political drama was put on the back burner as the status quo remained, with analysts awaiting a crucial by-election in June. In the meantime, there were reports that a potential Burnham Premiership could replace Chancellor Rachel Reeves with former Energy Secretary Ed Miliband. Economic data came to the fore, offering mixed results.  Unemployment was steady, but inflation was cooler than expected. On the other hand, retail sales also declined faster than anticipated. Markets are now pricing in one BOE rate hike in July. Overall, markets took a positive view, with cable rising by more than 0.8% during the week.

Flash PMIs showed the deepening impact of the war in the Middle East, with the Eurozone's composite Flash May PMI falling to its lowest level since the end of 2023. The services sector reading was more impacted by the industrials amid rising prices. Japanese prices have risen at the fastest rate since records began 19 years ago.

A surge in global yields pushed long-term rates to levels not seen since the late 90s in many major countries, raising concerns about government spending and debt levels.

Biggest Market Movers

• The DJIA reached a record high amid optimism that the Strait of Hormuz could reopen soon, as both Iranian and US officials expressed hope.
• The GBP was the best performer among major currencies, supported by a raft of economic data and a settling down of the political situation.
• Crude prices were lower amid hopes of a deal with Iran, with WTI falling faster than Brent.
• European stocks were top performers amid rising yields that might keep the ECB from hiking, with the DAX leading major indices higher, followed by the Stoxx 50.

Top Events in the Week Ahead

The week will start slowly, with the US and UK on holiday on Monday. The start of Eid on the Islamic calendar could be a symbolically important event in reaching a peace deal with Iran over the weekend, as markets were optimistic on Friday. No deal could lead to a larger correction amid lighter liquidity. On the data front, the theme is inflation, with flash CPI from France and Germany, along with the US PCE Price index, likely to get the most attention as traders try to figure out when the ECB will hike and whether the Fed will raise rates.

US Inflation Pressuring the Fed

Thursday is likely to be the most important day for the dollar next week, with the release of the Fed's preferred inflation measure, the PCE price index, as well as durable goods orders. Also, the second reading of US Q1 GDP growth is expected to confirm an acceleration to 2.0% from 0.5% in the final three months of last year. Core April PCE is expected to also accelerate to 3.3% from 3.2% in March, as the fading impact of tariffs is outweighed by rising energy prices. Markets now see a 60% chance the Fed will hike by the end of the year, and rising inflation is likely to confirm that. Durable goods are expected to ease to 0.4% from 0.8% but remain positive as the economy continues its rebound. A more hawkish outlook could see gold heading toward support at $4,400 per ounce, the lowest level since the start of the war, while a rebound could commence a rally towards the month's high at $4,700.

European CPIs and ECB Timing

German and French inflation numbers are released on Friday and are expected to show another jump due to higher energy prices. Markets are already pricing in a June ECB rate hike, and the question is whether the shared central bank will go for back-to-back tightening if inflation is even hotter. French flash May CPI is forecast at 2.6%, up from 2.2%; German May CPI is anticipated to accelerate to 3.1% from 2.9% prior. The prospect of higher rates could weigh on the shared economy's growth and pull down the Euro. In that case, it could head towards support at the 61.8% Fib retracement from the April highs, around 1.1560. A move higher could encounter resistance at the 50-day MA at the 1.1700 handle.

RBNZ To Hold For Last Time

Ahead of the RBNZ's rate decision on Wednesday, the question isn't whether there will be a hike, but when. 97% of economists expect a hold this time around, but Governor Anna Breman is expected to leave the door wide open for a rate hike at the subsequent meeting. Markets have become increasingly bullish about rate hikes in New Zealand, with as much as 50 bps priced in by the end of the year, which has lifted the Kiwi dollar. The NZDUSD could head towards monthly lows around 0.5820 on a more hawkish RNBZ. But if the message is more dovish, the pair could return toward the 50-day MA that is converging on the 0.5900 handle.

Other Events And Earnings

Tuesday has the US Conference Board consumer confidence data. BOJ Governor Kazuo Ueda will deliver a much-anticipated speech on Wednesday. Thursday includes ECB consumer inflation expectations. Friday sees Tokyo CPI and Japanese consumer confidence data.

With earnings season unofficially over, corporate earnings flow is relatively light, with names such as AutoZone, SSE, Salesforce, Marvell, Costco, Dell, and Buckle updating investors.