As the U.S. markets gear up for the new trading week, the AUD is the strongest of the major currencies while the CHF is the weakest. The USD is trading mixed/to lower to start the trading week. The week will be dominated by CPI data on Tuesday and the US Fed decision on Wednesday.

The general consensus is that the Federal Reserve is likely to “skip” a meeting in June but is more likely to hike by 25 basis points in July. The market is pricing in a 71% for a NO CHANGE on Wednesday, and a 68% chance FOR a hike in July. This speculation comes in light of the May labor market report indicating a gradual rise in unemployment, potentially easing pressures on businesses to raise wages. However, the outcome might be swayed by the consumer price index data due Tuesday, with economists projecting a 4.1% annual rise, down from 4.9% in April (lower on the month, but still well above the 2% target which would be hard to achieve in 2023 – see Adam’s article from last week here).

Fed watcher (“insider”?) Nick Timiraos from the WSJ wrote that the Federal Reserve, led by Chair Jerome Powell, is grappling with dual economic challenges: preventing a credit crunch and combating high inflation. These concerns arose following the collapse of three midsize lenders, which has caused certain Fed officials to contemplate keeping the current interest rates unchanged. The situation has led to debates about whether to focus on the precarious state of the banking industry or the persistently high inflation. Here are the key takeaways from the WSJ article:

• The strain in the banking industry is currently viewed as isolated incidents specific to the three banks that collapsed, rather than signs of an impending sector-wide crisis.
• Persistent inflation is a major concern. If it becomes embedded in the public consciousness, the Fed may need to keep short-term interest rates high for a longer duration.
• The Fed’s performance on bank regulation is under increased scrutiny due to the current banking instability.
• Rapid interest rate increases have created losses for some banks, leading to a run on Silicon Valley Bank in March.
• Emergency lending has prevented further bank runs, but there are concerns about depositors seeking higher yields elsewhere, which could exacerbate the situation for banks.
• The Fed is closely watching 20 to 30 institutions that are seen as more vulnerable in light of the recent banking turmoil.
• A potential downturn in lending could disproportionately impact small businesses, which are typically less reliant on bank loans than large corporations.
• Fed officials are divided on whether to raise rates. Some are more concerned that the economy isn’t slowing enough, while others worry about worsening the banking crisis through further rate hikes.

Former Fed Governor Ferguson on CNBC said that he agrees with a pause followed by 2 more hikes in 2023 before an extended pause period.

CNBCs Leesman pointed out that BofA on the consumer from high frequency credit card spending noted steady consumer:

“We see few signs of consumer strain and lower income households continue to outperform higher income households in spending growth… Importantly, lower and middle income consumers aren’t relying more on credit cards either”

Goldman Sachs has reduced its Brent crude price estimate to under $90 per barrel by the end of 2023, citing disappointing economic indicators from China, the world’s largest oil importer. This has raised concerns about the resilience of China’s recovery from pandemic-related restrictions. Additional pressures on oil prices arise from Iran’s potential return to the oil export market following its openness to a nuclear deal with the West.

In China’s real estate sector, Goldman Sachs predicts a slow, “L-shaped” recovery due to persistent defaults and weakening homebuyer demand. This prognosis could hinder overall economic activity in China, where the property sector contributed a quarter of the GDP as of 2021. The USDCNH inched to a new 2023 high (lower CNH) in trading today (lowest CNH since November 30, 2022

UBS has completed its purchase of Credit Suisse.

BOEs Haskel commented that further rate hikes cannot be ruled out. Nevertheless, the GBPUSD is now little changed after a run higher.

In the pre-market hours, U.S. futures indicate a positive opening with investors hopeful of a pause in Fed rate hikes. The Nasdaq is up 7 consecutive weeks and the S&P is up 4 consecutive weeks. Can the streaks be extended this week. Off to a positive start.

US rates are little changed in premarket trading.

A snapshot of the markets currently shows:

• Crude oil is down $1.58 or -2.27% at $68.58
• Spot gold is trading up $3.75 or 0.19% $1964.62
• Silver is up unchanged at $24.27
• Bitcoin is trading lower at $25959. It closed at $26,684 on Friday

In the premarket for US stocks, the major indices are trading higher. Nasdaq shares are leading the way to the upside. Tesla shares are up for the 12th consecutive day in premarket trading. Shares are trading at $247.47 after closing at $244.40 on Friday

• Dow Industrial Average is trading up 38.22 points after Friday’s 43.17 point rise
• S&P index is trading up 12 points after Friday’s 4.95 point rise
• NASDAQ index is trading up 72 points after Friday’s 20.62 point rise

In the European equity markets, the major indices are trading higher.

• German DAX up 0.35%
• France’s CAC up 0.69%
• UK’s FTSE 100 up 0.15%
• Spain’s Ibex of 0.38%
• Italy’s FTSE MIB up 0.65% (delayed)

In the Asian Pacific market today stock indices were mostly higher/mixed:

• Japan’s Nikkei rose 0.52%
• Hang Seng index rose 0.07%
• Shanghai composite index fell -0.08%
• Australia’s S&P/ASX 200 index rose 0.32 percent

In the US debt market yields are modestly lower

• 2-year yield 4.585% -1.9 basis points
• 5-year yield 3.905% -1.2 basis points
• 10-year yield 3.737% -0.7 basis points
• 30-year yield 3.872% -1.5 basis points

In the European debt market, benchmark 10 year yields are mostly higher (the exception is UK 10 year yield):

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