The US Federal Reserve officials are hinting at a pause in the rate hike cycle. China has kept rates at historic lows

May 22, 2023

Problems with the US debt ceiling were back in the spotlight late last week. Investors are scared by the likelihood of default if politicians can’t reach an agreement. While the probability of such a scenario is low, the rise in the dollar last week showed how investors were buying dollars as a safe haven currency. At the close of the stock market on Friday, the Dow Jones Index (US30) decreased by 0.33% (+0.32% for the week), and the S&P 500 Index (US500) fell by 0.14% (+1.58% for the week). The Technology Index NASDAQ (US100) was down 0.24% on Friday (+2.90% for the week).

US President Joe Biden and House Speaker Kevin McCarthy will meet again today to continue negotiations on raising the debt ceiling. Speaking to reporters at the US Capitol, McCarthy said positive discussions had taken place to resolve the crisis. Before leaving Japan after the G7 summit earlier Sunday, Biden indicated that he was willing to cut spending along with tax adjustments to reach an agreement, but the Republicans’ latest ceiling proposal was unacceptable.

In his speech Friday, US Federal Reserve Chairman Jerome Powell hinted at a pause in the rate hike cycle, indicating that the Fed can afford to examine the situation, given how far it has come. Minneapolis Fed President Neel Kashkari also said he might support keeping interest rates on hold at the Central Bank’s next meeting in June to give officials more time to assess the impact of past rate hikes and inflation forecasts.

Stock markets in Europe were mostly up on Friday. German DAX (DE30) jumped by 0.69% (+1.93% for the week), French CAC 40 (FR40) gained 0.61% on Friday (+0.65% for the week), Spanish IBEX 35 Index (ES35) added 0.50% (-0.11% for the week), British FTSE 100 (UK100) was on the rise by 0.19% (+0.03% for the week).

G7 leaders on Saturday agreed to a new initiative to counter economic coercion and pledged to take measures to ensure that any actors attempting to use economic dependence as a weapon would fail and face the consequences. The world is facing an alarming increase in cases of economic coercion aimed at exploiting economic vulnerabilities. Analysts believe that China will be the first to be affected. In turn, the G7 countries call on China to put pressure on Russia to end the war in Ukraine and respect Taiwan’s status and fair trade rules. The statement also commits G7 leaders to deepen cooperation to strengthen supply chains and calls for a greater role for low-income countries in building economic resilience.

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Britain on Friday published plans to ban imports of Russian diamonds, copper, aluminum, and nickel and announced new sanctions against Russia targeting companies linked to suspected Ukrainian grain theft.

Oil prices fell Friday as investors fear that US policymakers will fail to agree on a new debt ceiling and trigger a default that would hurt the economy and reduce fuel demand. On the other hand, according to energy company Baker Hughes Co. the number of oil rigs in the US, an indicator of future production, fell by 11 last week to 575, the biggest weekly drop since September 2021. Analysts at the National Australia Bank said that while the possibility of additional rate hikes adds to concerns about weak demand in the United States, oil prices could rise because of stronger demand in China during 2023.

Asian markets traded without a single trend last week. Japan’s Nikkei 225 (JP225) jumped by 4.27% for the week, China’s FTSE China A50 (CHA50) fell by 1.60% for the week, Hong Kong’s Hang Seng (HK50) was down 0.38% for the week, India’s NIFTY 50 (IND50) lost 0.80%, and Australia’s S&P/ASX 200 (AU200) was up 0.31% for the week.

The People’s Bank of China on Monday (PBoC) kept its key lending rate near an all-time low of 3.65%, but the slowdown in the country’s growth has markets bracing for a possible rate cut this year.

In the commodities market, futures on natural gas (+14.43%), cotton (+7.6%), orange juice (+6.86%), gasoline (+6.16%), coffee (+4.29%), cocoa (+2.85%), and WTI oil (+2.66%) showed the biggest gains last week. Futures on soybeans (-6.1%), corn (-5.12%), and wheat (-4.76%) showed the biggest drop.

S&P 500 (F) (US500) 4,191.98 −6.07 (−0.14%)

Dow Jones (US30)33,426.63 −109.28 (−0.33%)

DAX (DE40) 16,275.38 +112.02 (+0.69%)

FTSE 100 (UK100) 7,756.87 +14.57 (+0.19%)

USD Index 103.19 -0.39 -0.38%

Important events for today:

– China PBoC Loan Prime Rate at 04:15 (GMT+3);
– Hong Kong Consumer Price Index (m/m) at 11:30 (GMT+3);
– US FOMC Member Bullard Speaks at 17:50 (GMT+3);
– US FOMC Member Bostic Speaks at 17:50 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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The US Federal Reserve officials are hinting at a pause in the rate hike cycle. China has kept rates at historic lows