Agreement on the US debt ceiling and questions about interest rates and the business cycle. The week in a nutshell

Goldwasser Exchange tells you everything you need to know at the start of the new week.

Interest Rate Markets: Will the Fed Raise Rates Again?

Now that the uncertainty surrounding the US debt ceiling is a thing of the past, investors will focus on the economic cycle and inflation trends in anticipation of the Fed’s monetary decisions.

The next announcement from the Federal Reserve is scheduled for June 14 and from the European Central Bank (ECB) the following day.

Until then, a series of economic indicators will be released. Just think of indices for economic activity in Europe and the US (Monday), figures on economic growth in the Eurozone for the first quarter (Thursday) and weekly figures on employment in the US (Wednesday). The importance of the latter may be slightly higher than usual now, as the most recent monthly figures still point to a very dynamic labor market (higher-than-expected job creation), which, however, also offers some certainty (unemployment rate rising, average hourly wages falling). Things that don’t make it easy for the central bank to decide which direction monetary policy should take.

Markets are anticipating another rate hike. If not in June, then in July. Currently, the market believes there is a 75% probability of June rates, but a 25 basis point hike is expected in July. And with a 53.5% probability, at least according to barometer FedWatch.

Markets are also anticipating a rate hike, as evidenced by the renewed rise in US Treasury yields. Coincidentally, it reversed part of the steep decline after the US debt ceiling deal.

The US two-year interest rate fell 5 basis points in a week to 4.51%. The ten-year equivalent was 3.7%, down ten basis points and below the peak of 4.06% in early March when the banking crisis was in full swing.

The ECB now appears to be under less pressure after data showed that inflation in the eurozone fell more than expected last month and Germany is in a technical recession. Both are just arguments for a more cautious rate hike by the European Central Bank (ECB). Christine Lagarde, president of the ECB, said during a bank conference that the ECB’s interest rates were “close to cruising altitude” but remained committed to bringing inflation down to the desired average of 2%.

Inflation data for Europe pushed bond yields lower. Germany’s ten-year yield fell 23 basis points in a week to 2.32%, the same level as in mid-May. A similar situation applies to the two-year interest rate: it lost 12 basis points to land at 2.81%.

Primary Bond Market: Focus on Continental

After a busy May, activity in the primary market appears to have stagnated somewhat, particularly in the US. Perhaps the US debt ceiling deal will encourage more issuers to return to investors. In the latest issue, we focus on tire manufacturer Continental. The German group has borrowed 750 million euros at 1,000. Another problem to add to the long list of recent small value problems.

Currency markets: Australian and Canadian dollars from a trader’s perspective

Forex traders will be watching the Reserve Bank of Australia’s monetary policy decisions next week on June 6 and June 7 respectively. Will the Reserve Bank of Australia raise rates again as it did in May after April’s standoff? We’ll find out more on Tuesday.

Equity Markets: Does C3.ai’s Shrinking Mean the End of Stock Market Excitement About All Things AI?

The US debt ceiling deal sent a sigh of relief through stock markets. However, there is uncertainty about the direction the economy and interest rates will take. The value of semiconductor manufacturers is moving in the right direction, led by Nvidia, which has crossed $1 trillion in market capitalization. A reflection of the ecstasy that reigns in all things artificial intelligence.

Investors have high expectations when it comes to AI. Disappointing companies have been warned. One of these was C3.ai, which collapsed after releasing forecasts that did not align with the outlook for AI. The punishment was extra sour as the company was believed to benefit greatly from the AI ​​boom. OpenAI’s conversational chatbot is a boom from the viral success of ChatGPT.

Lululemon Athletica, on the other hand, rose just 7% after quarterly results that beat Wall Street’s expectations. The Canadian sportswear manufacturer (running, yoga…) saw its net profit jump 53% year-on-year to US$290.4 million. Turnover increased to $2 billion (+24%). A strong increase in operations in China, air freight costs and strict cargo control contributed to these results.

The entire Goldwasser Exchange team wishes you a pleasant week.