Week of MAY 19

Last week saw a flurry of market activity, with key economic data such as the US CPI, as well as UK and Japanese GDP figures guiding markets.

In the upcoming week, major events expected include a rate cut from the RBA, UK inflation figures, and flash Manufacturing PMIs from major economies.

Week in Review

The market started the week on a positive footing after the US and China agreed over the weekend to reduce tariffs by a much larger stake than expected, triggering a surge in optimism that was largely sustained throughout the week. Attention then shifted to the US CPI print on Tuesday, with the headline falling to 2.3% instead of rising to the 2.4% expected and previously reached. Meanwhile, the core rate remained unchanged at 2.8%. Analysts suggested that the effects of tariffs were not yet visible and would likely show up in May. The majority of the inflation rise came from the shelter component. PPI figures also showed slower inflationary pressure than expected, with the monthly indicator coming in at -0.5% instead of 0.2% expected. On the other hand, major US retailer Walmart stated that it expected prices to rise due to tariffs when reporting its earnings.

The unemployment rate in the UK ticked up to 4.5% instead of the 4.4% expected, with the British economy adding more jobs than economists had forecast. The upbeat data continued with the release of Q1 GDP showing 0.7% growth instead of 0.6%, as March GDP doubled forecasts at 0.2%. Meanwhile, the GDP figures in Japan contracted at a faster rate than expected, falling by 0.2% from 0.6% prior.

In geopolitics, Donald Trump was on an extended trip to the Middle East, which included a series of investment deals and lifting sanctions against Syria. An expected three-way meeting between Trump, Vladimir Putin, and President Volodymyr Zelenskyy on a potential 30-day ceasefire did not materialise. There was attention on the slow progress of US budget negotiations in Congress, pushing up yields as the deadline to raise the debt ceiling approaches.

Biggest Market Movers

●     Crude prices reversed early gains in the week after reports that Iran was ready to sign a nuclear deal with the US, ending mixed

●     Surging optimism around trade deals and rising US treasury yields kept gold on a downward track throughout the week, losing over 4%

●     Risk appetite and a shift away from safe havens saw Nasdaq rise over 5%, placing the index back into a bull market

Top Events in the Week Ahead

The next few days are expected to be relatively busy, with second-tier data releases providing direction for markets, with further trade deal announcements expected.

RBA Largely Expected to Cut Rates

There is quite a bit of expectation around the rate decision of the RBA, with consensus pointing to a 25 basis point cut. However, some economists venture that the cut could be an even bigger reduction in the wake of inflation numbers coming down faster than expected. The Aussie trades within a range against the buck between 0.6350 and 0.65, with a break opening the door to 0.6580 and 0.63.

German Manufacturing PMI to Improve

Traders will scrutinise preliminary releases of PMI figures to see if the reduction in the tariff war has restored optimism among businesses and whether price pressures from tariffs are being felt. Germany's manufacturing PMI is expected to improve to a multi-year high of 49.1 from the previous 48.4. After four weeks of decline, support at 1.12 could offer EURUSD a bounce towards 1.13, with a breakdown exposing 1.1050.

Inflation Prints to Open Path for Easing

The headline CPI rate for the UK is expected to jump to 3.3% from 2.6% previously as higher food costs impact the economy. However, the core rate, which is more relevant to BOE policy, is expected to remain unchanged at 3.4%. If bulls can maintain support at 1.32, another attempt at 1.34 may be made, but a break lower may see 1.31 tested. Lower support lies at 1.30.

Canada's inflation rate is also expected to rise to 2.5% from 2.3% amid effects from tariffs, while the BOC's preferred measure, the trimmed-mean CPI, is expected to remain unchanged at 2.8%. USDCAD struggled to surpass the 1.40 handle, leaving the door to 1.3870 and 1.38 wide open.

The inflation rate in Japan is expected to keep accelerating to 3.7% from 3.6%, with the "core-core" rate seen unchanged at 2.9%. With 148.00 triggering a strong sell-off and prices under 146.00, USDJPY could revisit 142.00 via 143.42.

Other Events, Earnings

Monday sees Chinese retail sales and industrial production figures. Eurozone consumer confidence figures are due on Tuesday. For Wednesday, Japan and New Zealand's trade balances are expected. Thursday includes Japan machinery orders and US existing home sales. Friday has UK retail sales data.

The first quarter earnings season will be unofficially over this week, but there are still some major names scheduled to report, such as Home Depot, Palo Alto Networks, Vodafone, Currys, Marks & Spencer, Tate & Lyle, Lowe's, Medtronic, Intuit, Analog Devices and Booz Allen Hamilton.