Week Ahead in the Market How Will Inflation Influence from Now?

Political Influence on Inflation

Democratic systems often fall to inflation as politicians tend to spend more in their quest to win more votes, using their power to print extra money. Charlie Munger wisely noted that the natural wiring of politicians was to spend for votes. Ernest Hemingway warned that the first act of an errant country was to print more money and the second to go to war, both of which created long-term destruction, hence being a perfect safe haven for political and economic chicanery.

Market Reaction and Trends

As May rolls off, the seasonality of the market being weak and largely torpid appears to have been somewhat rewritten. Rather, there appears to be a pervasive fear of missing out overtaking any evident trends of buying or selling. This is the theme that has taken carry trades, especially towards CHF, JPY, and SEK, not to forget most emerging markets. The technology sector is experiencing the largest movement, most of which can be attributed to hype for AI. Subsequently, uncertainty over interest rates and monetary policy can still be read into the bond market and the very narrow FX market ranges.

Market Volatility and Economic IndicatorsVolatility Indices

The mood, devoid of concern, is probably the best characteristic of the market in its current state, considering inflation, growth, electoral results, or uncertainties of policy. This is best reflected by the fact that the S&P500 fear barometer, VIX, is trading below 12%, much like it was in 2019, while the US bond volatility index, MOVE, is falling back to its 2021 lows. The incoming data next week, particularly regarding inflation, growth, and electoral results, will be key to determining if this calm can remain.

Key Economic Events

This week is set to see a lot of action in the markets as there are only four working days after the extended week on account of US Memorial Day. The important events for the week are the implementation of the T+1 settlement cycle in US markets on Tuesday, the South African election, and the release of inflation reports in the US, Europe, and Japan on Friday. These are the important events in which one has to seek out easing or tightening risks in monetary policy.

Themes and FindingsNatural Rate and Fiscal Risks

Fed Governor Waller's speech on the natural rate of interest (R*) has raised questions about future growth and interest rate trajectories. Markets found some relief in the less hawkish tone, though concerns about US fiscal sustainability and the credibility that demands on national borrowers remain in question.

Political and Geopolitical End of the Road

Major geopolitical events, such as elections across Europe or conflicts in Israel, have been similarly mostly shrugged off by markets. Even the UK snap election announcement has made barely any dent on bonds, stocks, or GBP. This calm stands in sharp contrast to the excitement about AI technology that has caught a lot of attention in the market.

More Robust for Longer: Autos and Housing

Economic indicators tell a story of mixed signals. The May Flash PMI for the US touched a 25-month high but consumer sentiment sank to a six-month low, on the fear of increased job fears and the concerns of persistent inflation. This shows the tension between strong corporate profits and cautious consumer sentiment, a substantial challenge suggested to investors in finding the right balance in their risks and rewards.

Relatively Quiet Economic Calendar and Central Bank WatchEconomic Data

This could well prove to make the week ahead very heavy in economic data releases. Monday: China Industrial Profits, German Ifo. Tuesday: Australia retail sales, ECB inflation expectations, Canada PPI, US house prices. Wednesday: South African election, German flash CPI, EU M3. Thursday: Sweden GDP, Swiss GDP, Taiwan GDP, EU economic barometer, Mexico jobs, US GDP. Friday: Japan jobs number, Tokyo CPI, Germany retail sales, Eurozone flash CPI, and US core PCE prices.

Central Bank Activities

The core activities of the major central banks include Monday: BOJ Ueda, ECB Lane, Israeli BOI rate decision. Tuesday: Sanitized Cook, Kashk. Wednesday: Sweden Riksbank FSR, Fed Beige Book, Fed Williams, ECB Villeroy, RBA Hunter. Thursday: South Africa SARB, Fed Logan, Riksbank Breman. Friday: Fed Bostic, ECB Vujcic.

Issue and Market MovementsUS Issuance

The US Treasury's estimate of $183 billion in coupons issued this week, with a net negative cash flow of $191 billion. Keep in mind Tuesday: $69 billion two-year notes; $70 billion five-year notes. Wednesday: $44 billion in new 7-year notes and $28 billion in 2-year floating rate notes (FRNs).

EU/UK Issuance

The EU countries will issue debt totaling €26bn, with net cash generation of €66.4 billion. Key issuances include Monday: EU sells €2.5bn in 3-year bonds and €2.5bn in 19-year Green bonds, Belgium sells €3bn of 10-year and 30-year OLOs. Tuesday: Germany sells €3bn 5-year and €2.5bn 10-year Bunds, Italy sells €2bn 5-year and €2bn 10-year BTPs. Wednesday: UK sells £1bn 15yr index linked gilts and Germany sells €2bn 14yr and 17yr Bunds. Thursday: Italy sells €7.3bn in 5-year and in 7-year BTPs. Finland sells €1bn in ORI.

Market in a JiffyEquities

The US equity markets witnessed mixed performances. The S&P500 had a marginal gain. DJIA fell by 2%. NASDAQ was up by 1.41%, due to performance by NVIDIA. Sweden OMX rose by 0.86%. Canada TSE increased by 0.09%. Hong Kong Hang Seng decreased by 4.83%. Italy MIB fell by 2%. China CSI 300 fell by 2%. Mexico Bolsa decreased by 3%.

Foreign Exchange

Divergent monetary policies triggered a 0.25% increase in the US dollar index, to 104.73. Currencies of special note include drops in CLP (on copper), ZAR (election and Zuma ban), AUD (commodities, China). Gains were seen in ILS (despite war woes being on the rise) and TRY (TCMB on hold). Inflow divergences were noticed in ZAR, where investors have been buying even though the price has dropped, CHF, HUF, and PLN.

In these points, one can identify an extremely complex interface that underlies the political, economic, and market forces that are now shaping the current financial landscape. The coming week should be marked by key developments, with core economic data and central bank action likely to serve as an influence over market action.

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