28 Jun

Economic optimism is boosting stocks. Australia and Canada are seeing a slowdown in inflation

June 28, 2023

By JustMarkets

The US stock indices rose yesterday, helped by positive economic data. Durable goods orders rose by 1.7% in May, well above the expected 1% drop. The US new home sales rose in May to their highest level in more than a year, helped by limited inventory in the secondary market. Purchases of new single-family homes increased by 12.2% to 763,000 year-over-year. Consumer confidence also rose from 102.5 to 109.7 (forecast: 104), a 17-month-high. The US consumer confidence rose on the back of renewed optimism in the labor market. As the stock market closed yesterday, the Dow Jones Index (US30) was up by 0.63%, and the S&P 500 Index (US500) added 1.15%. The Technology Index NASDAQ (US100) closed yesterday positive by 1.65%.

On the other hand, upbeat economic data suggests that the Federal Reserve may have to keep raising interest rates in order to slow demand in the overall economy. Morgan Stanley (MS) said Tuesday that it now expects the Fed to raise its key interest rate by 25 basis points in July, up from an earlier estimate of a pause.

Investors will also be watching closely as ECB head Christine Lagarde speaks alongside Fed Chair Jerome Powell and other global central bank governors at a panel discussion on Wednesday at the ECB’s annual forum in Sintra, Portugal. The topic of inflation and monetary policy will be the center of attention.

Inflationary pressures in Canada continue to decline. Inflation in Canada has slowed to its lowest level in two years. The consumer price index for May declined from 4.4% to 3.4% year-over-year. Core inflation (which excludes food and energy prices) declined from 4.1% to 3.7%. But despite the slowdown in inflation, the Bank of Canada may still consider another rate hike in July if gross domestic product (GDP) and labor market numbers remain excessively positive.

Equity markets in Europe mostly rise on Tuesday. Germany’s DAX (DE30) increased by 0.21%, France’s CAC 40 (FR40) gained 0.43% yesterday, Spain’s IBEX 35 (ES35) added 1.28%, Britain’s FTSE 100 (UK100) closed positive by 0.11%.

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Speaking at a Central Bank forum in Sintra, Portugal, ECB President Christine Lagarde pointed out that inflation in the Eurozone is too high and will remain so for a long time to come. The Eurozone faced higher inflation rates after Russia’s invasion of Ukraine, leading to higher energy prices across the bloc. At the same time, the biggest jump in prices was in food. Speeches of the heads of the Central Banks of the US, Britain, Japan, and the Eurozone are expected today.

Sweden’s Central Bank (Riksbank) will meet on June 29. The market expects a 25bp rate hike to 3.75%. The swap market expects a final rate between 4.00% and 4.25% by the end of the year. The Swedish Krona has lost about 3% against the dollar this year and almost 5% against the euro.

Oil prices fell more than -2% on Tuesday on signals that central banks may continue to raise interest rates. But much will also depend on whether China’s oil demand rises in the second half of the year. Chinese Premier Li Qiang said yesterday that China will take steps to revive markets.

Asian markets were mostly on the rise yesterday. Japan’s Nikkei 225 (JP225) decreased by 0.49% yesterday, China’s FTSE China A50 (CHA50) added 0.51%, Hong Kong’s Hang Seng (HK50) jumped by 1.88%, and Australia’s S&P/ASX 200 (AU200) closed positive by 0.56% on Tuesday.

Despite numerous initiatives to support the real estate market in China, stress remains. Two more real estate developers failed to meet their dollar commitments over the weekend. Central China Real Estate, the 33rd largest real estate developer by contract sales, failed to pay its interest rate in dollars before the weekend. It announced it would suspend payments on all offshore debt. The second developer, Leading Holdings Group, is not one of the top 100 Chinese builders. Late last week, it failed to pay its $119.4 million debt in full.

In Australia, the consumer price level fell from 6.8% to 5.6% (forecast 6.1%) in annual terms. The decline in inflation was largely due to falling fuel prices amid weakness in global crude oil markets. Core inflation (which excludes food and energy prices) declined from 6.5% to 6.4%, indicating that the key components of inflation (housing and goods) remain resilient. But lower inflation eases pressure on the Reserve Bank of Australia to keep rates rising.

S&P 500 (F) (US500) 4,378.41 +49.59 (+1.15%)

Dow Jones (US30)33,926.74 +212.03 (+0.63%)

DAX (DE40) 15,846.86 +33.80 (+0.21%)

FTSE 100 (UK100) 7,461.46 +7.88 (+0.11%)

USD Index 102.50 −0.19 (-0.18%)

Important events for today:
  • – Australia Consumer Price Index (m/m) at 04:30 (GMT+3);
  • – UK BoE Gov Bailey Speaks at 16:30 (GMT+3);
  • – Japan BOJ Gov Ueda Speaks at 16:30 (GMT+3);
  • – Eurozone ECB President Lagarde Speaks at 16:30 (GMT+3);
  • – US Fed Chair Powell Speaks at 16:30 (GMT+3);
  • – US Crude Oil Reserves (w/w) at 17:30 (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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