Market Overview: Holding and Hoping

A Positive Day for Stocks and Oil

US stocks reached new record highs recently, with the NASDAQ increasing by 1.25% and the S&P500 closing up 0.77%. European stocks also managed to recover from the recent turmoil, closing higher. The EuroStoxx 100 increased by 0.85%, the DAX by 0.37% and the CAC40 rebounded from last week's steep losses to close up 0.91%. Oil prices also saw gains, with Brent crude up 2.2% trading above $84/bbl and WTI closing above $80/bbl. Spot gold, however, sold off 0.58% to $2,319/oz, possibly due to 10-year Treasury yields rising by more than 6bps to 4.27% while the 2-year yields posted similar gains.

Upcoming Market Events

The focus for the day ahead will be on the RBA’s June policy rate decision, the publication of the German ZEW survey and the release of May retail sales figures for the United States. The RBA is expected to leave the cash rate unchanged at 4.35%, so traders will be looking for signs of an increase in the Aussie central bank’s minor hawkish bias in the Decision Statement or Governor Bullock’s subsequent press conference.

Rabobank's Contrarian Forecast

Rabobank holds a contrarian forecast on the next move from the RBA, predicting a hike rather than a cut. This forecast was made following the upside inflation surprise in Q1, which aligned with signals from Australia’s positive output gap, a labour market operating beyond full employment, rising asset prices, accelerating credit growth, PMIs back in expansion, a gradual improvement in consumer confidence since early 2023, virtually non-existent productivity growth and subsequent monthly inflation readings that showed the RBA’s favoured core inflation measure drifting higher.

Australia's Fiscal Stance

The RBA also has to consider a fiscal stance that is shifting from mildly contractionary to unambiguously expansionary. The Australian Federal budget included $24bn/year worth of income tax cuts and $10bn worth of additional spending in 2024/25. Additional spending and lower receipts will transform the current fiscal year’s small surplus into an expected $28bn deficit next year. At the state government level, the purse strings have been loosened even further as a number of administrations throw the proverbial kitchen sink at campaigns for re-election. Australia’s three most populous states are all forecasting large operating deficits in the year ahead.

Market Disagreements and China's Influence

The futures market does not agree with Rabobank's view on Aussie rates. RBA-dated OIS suggests that the cash rate will remain unchanged for the duration of 2024, with a 95% chance of a rate cut at the February policy meeting. China’s economic performance, which has a significant impact on Australia’s fortunes, also plays a role. Recent data confirmed ongoing weakness in the Chinese real estate sector, which is bad news for Australia’s terms of trade.

German ZEW Survey and US Retail Sales

The June ZEW survey is expected to show further improvement for both the ‘expectations’ and ‘current situation’ readings, indicating a positive outlook for Europe. US retail sales are expected to rebound from a -0.3% month-on-month slump in April to post growth of 0.5% in May. Signs of resilience in retail spending would justify the caution of Philly Fed President Harker, who commented that the Fed needed to wait for several more months of data before cutting rates.

Final Thoughts

This report provides a comprehensive overview of the current state of global markets and the factors that could influence them in the near future. It's clear that there are many factors at play, from central bank decisions to geopolitical issues, all of which could have significant impacts on the global economy. What do you think about the current state of the markets? Do you agree with the predictions made in this report? We encourage you to share your thoughts and discuss this article with your friends. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.