US Stocks Extend Gains as Debt Ceiling Deal Optimism Boosts Market, Walmart Raises Forecasts | Daily Market Analysis

Key events: 

• Canada - Core Retail Sales (MoM) (Mar)
• USA - Fed Chair Powell Speaks
• Eurozone - ECB President Lagarde Speaks

Continuing their upward momentum, US stocks closed higher for a second consecutive day on Thursday, fueled by growing optimism surrounding a potential US debt ceiling agreement anticipated to be reached in the coming days.

Walmart Inc, the leading US retailer in terms of sales, raised its annual sales and profit forecasts on Thursday. The company experienced robust demand for its affordable groceries and other essential items. As a result, Walmart's shares climbed 1%, and the company also reported better-than-expected first-quarter results. With a year-to-Wednesday increase of 5.5%, Walmart's stock has outperformed the broader Dow Jones Index, which recorded a 1% rise.

The benchmark S&P 500 index rebounded from initial declines following news that Kevin McCarthy, a prominent Republican in the US Congress, stated that a potential agreement to raise or suspend the debt ceiling could be achieved in time for a House vote next week. This development contributed to the positive market sentiment and supported the market's upward trajectory.

Over the past two weeks, the dollar has displayed strength against its major counterparts, marking a 2% increase against a basket of prominent currencies. The Dollar Index has even exceeded the 103 level, which has not been observed since the latter half of March.

Interestingly, this surge in the US currency has occurred concurrently with a rally in equity indices, an unconventional pairing. The dollar's ascent is aligning with growing expectations of another interest rate hike in the middle of the following month. The market's current assessment assigns a 30% probability to such a hike, a significant rise from the nearly 0% probability projected at the beginning of May.

The likelihood of the Federal Reserve implementing another interest rate hike, rather than maintaining the status quo before a reversal as previously anticipated by analysts, is growing. This shift in expectations is driven by relatively hawkish remarks from Federal Reserve members. The market had previously made the mistake of assuming that the Federal Reserve would adhere to its historical pattern of avoiding recessions through accommodative monetary policies.

Furthermore, in addition to the underlying market conditions, it is noteworthy that the Dollar Index has found support when experiencing downward fluctuations below the 101 level. This particular range holds psychological significance, aligning with approximately 1.10 in EUR/USD and close to 1.25 in GBP/USD.

It is important to anticipate the potential for a temporary rebound in the Dollar Index in the short term, followed by a subsequent long-term downward reversal. Examining the technical aspects, it is evident that the index has already reached local overbought levels, indicating the likelihood of a corrective pullback, particularly in the short term.

Meanwhile, Japanese consumer price index inflation in April met expectations, nearing 40-year highs after a first-quarter lull. The Bank of Japan faces increasing pressure to tighten policy.

National core consumer price index inflation, excluding volatile items, rose by 3.4% annually, in line with estimates. Including fresh food, national CPI inflation reached 3.5%, surpassing expectations of 2.5%. Rising food prices offset weaker fuel and electricity costs. Japan's reliance on imports and the weaker yen contributed to inflation. The yen stabilized after recent declines amid concerns over a hawkish Federal Reserve and a strong dollar.

Apart from that, gold prices remained subdued on Friday after experiencing a sharp decline below crucial levels earlier this week. The improving market sentiment regarding a potential US debt deal led traders to abandon safe-haven assets. Investors are now eagerly awaiting further signals on monetary policy from the Federal Reserve.

The price of gold dropped below the significant $2,000 level this week, surpassing key support levels. The Biden administration's optimistic remarks about reaching a deal to raise the US debt ceiling contributed to this decline.

As a result, risk-driven assets rallied, fueled by the expectation of no US defaults. Additionally, the dollar strengthened, reaching seven-week highs. This further weighed on the metal markets as it increased the cost of purchasing gold for international buyers.

Investors will closely monitor the speeches of Fed Chair Powell, as well as FOMC members Williams and Bowman during Friday's trading session. These key figures from the Federal Reserve are expected to provide insights and updates on monetary policy and the economic outlook. Their remarks have the potential to impact market sentiment and influence trading activities as investors analyze their statements for any indications of future policy decisions or shifts in the central bank's stance.