Dow Jones Surges 580 Points Amid Improved Investor Optimism and Declining Inflation | Daily Market Analysis

Key events:

• USA - S&P Global US Manufacturing PMI (May)
• USA - ISM Manufacturing PMI (May)
• USA - ISM Manufacturing Prices (May)

The Dow Jones Industrial Average surged nearly 580 points on Friday as investor optimism improved following a sharper-than-expected decline in the US Personal Consumption Expenditures (PCE) Price Index inflation. Markets are now pricing in increased odds of a Federal Reserve rate cut in September. The Dow also benefited from a significant rebound in Salesforce Inc. after the company missed revenue expectations for the first time since 2006, which had previously caused a steep 20%+ drop in its stock.

On Wall Street, the Dow Jones Industrial Average rose by 574.84 points, or 1.51%, to reach 38,686.32. The S&P 500 gained 42.03 points, or 0.80%, closing at 5,277.51, while the Nasdaq Composite slightly declined by 2.06 points, or 0.01%, to 16,735.02.

US PCE Price Index inflation decreased to 0.2% MoM in April, lower than the anticipated 0.3%. Additionally, US Personal Spending fell more than expected, dropping to 0.2% MoM compared to the forecast of 0.3%, and down from the previous month’s revised 0.7%.

The Japanese Yen weakened as Japanese Economy Minister Yoshitaka Shindo announced on Monday that the government aims to achieve a primary balance surplus by FY 2025. Shindo expressed optimism about achieving 1.3% real economic growth by FY 2025, according to Reuters.

Japan's Tokyo Consumer Price Index (CPI) increased to 2.2% year-over-year in May, up from April's 1.8% rise. Should nationwide inflation in Japan decline, the Bank of Japan may hold off on raising interest rates. The significant interest rate differential between Japan and other countries continues to pressure the Japanese Yen, supporting the USD/JPY pair.

The Australian Dollar continued its upward trend for the third consecutive day on Monday as Australia's minimum wage increased by 3.75%, aligning with market estimates of 3.5% to 4.0%. The AUD/USD pair strengthened due to the easing of US PCE inflation in April, the Fed's preferred inflation measure. Additionally, Australia's monthly inflation rate accelerated to 3.6%, raising the likelihood of another interest rate hike by the Reserve Bank of Australia.

The Australian Dollar also gained from the Caixin Manufacturing PMI in China, which exceeded expectations for May. However, lower-than-expected NBS PMI data from China on Friday negatively impacted import demand for Australia, a major commodity producer. Given the close trade ties between Australia and China, any shifts in the Chinese economy can significantly influence the Australian market.

The EUR/USD pair continued to climb around 1.0850 early Monday during the Asian session. This upward movement is supported by the cooler US PCE inflation data and better-than-expected Eurozone HICP inflation data. While higher-than-expected Eurozone inflation might not prevent the ECB from cutting interest rates this week, it could signal a pause in July and slower rate reductions in the coming months. Financial markets have priced in nearly 25 basis points (bps) ECB rate cuts for June and 57 bps cuts for 2024, according to Reuters. Traders will watch Lagarde's press conference for new indications on the pace of rate cuts after June. A dovish stance from the ECB could weigh on the Euro, creating a headwind for the EUR/USD pair.

The GBP/USD pair began the new week on a subdued note, fluctuating in a narrow range around the mid-1.2700s during the Asian session. The British Pound finds support from expectations that persistent price pressures in the UK might force the Bank of England to maintain current interest rates for a while longer. However, uncertainty surrounding the upcoming UK general election on July 4 is preventing GBP bulls from making aggressive bets, thereby limiting the upside for the GBP/USD pair. Traders are now focused on the release of the Manufacturing PMIs from both the UK and the US for momentum ahead of the US ISM Manufacturing PMI.

The Canadian Dollar saw broad gains on Friday, although softer-than-expected Canadian economic data limited them. Canada experienced a smaller rebound in quarterly Gross Domestic Product (GDP) growth than anticipated, which tempered gains for the CAD. With US inflation headlines driving broader markets, risk sentiment was high at the end of the week. Investors are now looking ahead to next week’s Bank of Canada rate decision, along with a series of US PMI prints and another nonfarm payrolls report expected next Friday.