More drama on the horizon: World market themes for the week ahead

There’s no shortage of events, data and high drama for markets in the days ahead.

Wrangling over the debt ceiling in Washington continues, Greek voters head to the polls and data from the United States to China and Europe could show just how quickly inflation and economic growth are easing.

Here’s a look at the week ahead in markets:

USA WATCH

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Critical U.S. inflation data will allow investors to gauge whether the Federal Reserve will be able to pause its interest rate hiking cycle, as many on Wall Street expect.

The personal consumption expenditures (PCE) price index, tracked by the Fed, is due on Friday for April.

The index gained 0.1 per cent in March. That was the smallest rise since July and, with the consumer price index slowing in April to below 5 per cent on annual basis, hope for peak rates has grown.

Minutes from the Fed’s latest meeting on Wednesday, could provide more clues on whether a rate pause is nearing.

Also looming for markets is the June 1 deadline for when the federal government may default on some debts unless the nation’s debt ceiling is lifted. There are some positive signs for a deal, but any headlines suggesting an agreement remains out of reach will likely weigh on markets.

STUTTERING

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Sentiment towards China is turning, as a lackluster consumer cuts short the postpandemic recovery that was supposed to offset U.S. and European downturns.

The yuan is at 5-1/2-month lows and Citi’s economic surprise index for China is at its lowest since January. Expectations for stimulus – monetary, fiscal or both – are rising. That notion will be put to the test on Monday, when China’s central bank sets the loan prime rate.

Friday’s Tokyo consumer price figures, which front-run the national data by several weeks, are in focus for Bank of Japan watchers. Traders have all but given up on a June hawkish BOJ shift in June, potentially setting markets up for a nasty surprise on a very strong print.

The Reserve Bank of New Zealand meets Wednesday, and expectations for a half point rate hike have crept up after a more expansionary than expected budget.

TEFLON PMI

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For stocks, good data can be bad news.

S&P Global’s U.S. composite purchasing managers’ index, viewed as a real-time gauge of business conditions, has risen for five months. If the improvement continues in the next survey, out May 23 alongside PMIs globally, that may disappoint investors who have chased equity valuations higher because they expect a recession.

Big tech stocks that dominate U.S. indices can do well when the economy is weak, as this encourages bets the Fed will cut rates, boosting risk appetite for companies with early-stage innovation baked into their business plans.

For Europe, the picture is mixed. Better-than-expected PMIs could benefit regional stocks. But the Stoxx Europe 600 index, up 10 per cent this year, has also been supported by U.S. recession fears driving investors to diversify into Europe.

FADING STAR

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Sterling is the best performing major currency against the dollar so far this year, thanks partly to expectations the Bank of England will raise rates further from the current 4.5 per cent.

Yet this narrative could lose steam if Wednesday’s April inflation data shows price rises are moderating.

The U.K. inflation was 10.1 per cent in March, the highest in Western Europe. But since then, some signs of cooling job market inflation have emerged, with Britain’s unemployment rate edging up to 3.9 per cent. And while annual wage growth held at 5.8 per cent in March, there was a further decline in the number of people moving jobs.

Some economists reckon wage growth will weaken ahead, suggesting U.K. rates may have peaked – and sterling’s strength with it.

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