US Stocks Fall, Dollar Weakens as Debt Ceiling Talks Pause; European Shares Rise; RBNZ Rate Hike Ahead | Daily Market Analysis

Key events:

• China - PBoC Loan Prime Rate
• USA - FOMC Member Bullard Speaks
• USA - FOMC Member Bostic Speaks

On Friday, US stocks closed lower, and the dollar weakened as discussions to raise the US debt ceiling were suspended. This development unsettled market participants as the deadline to avoid default approached over the weekend.

Although all three major US stock indices ended the session with modest declines, they still recorded gains for the week. The week was characterized by positive economic data and the conclusion of an earnings season that surpassed expectations.

The initial reports of an impasse in the debt ceiling negotiations caused market volatility, even as investors closely analyzed remarks made by Federal Reserve Chairman Jerome Powell during a panel discussion for insights into the upcoming interest rate decision in the following month.

European shares finished the day on a positive note, with the German DAX reaching a new all-time high. Investor sentiment was buoyed by optimism surrounding the progress in US debt ceiling talks. However, it's worth noting that the European trading day concluded before reports emerged that the talks had encountered obstacles.

We can say that the combination of positive data, hawkish rhetoric, and ongoing debt-ceiling discussions has strengthened the bullish case for the US dollar. Traders may find it favorable to continue holding long positions on the dollar, although further input from voting members will be needed to solidify expectations for June.

The pan-European STOXX 600 index registered a 0.66% increase, while MSCI's global stock index, which tracks stocks worldwide, recorded a more modest gain of 0.13%. The positive performance of European shares reflects the overall improved sentiment among investors.

At the same time, the Reserve Bank of New Zealand is anticipated to announce a 25-basis point interest rate hike on Wednesday, with a focus on whether the policy rate will ultimately reach a higher level than previously anticipated. The recent stimulatory budget has prompted speculation about the potential for a higher peak in the policy rate.

Following the surprising 50-basis point hike to 5.25% in April, the Reserve Bank of New Zealand faces pressure to adjust its tightening pace amid concerns of a looming recession in the economy.

While the RBNZ initially forecasted the cash rate to peak at 5.5% back in February, an increasing number of economists now believe that further tightening may be possible in July.

This viewpoint has gained traction due to the government's increased spending revealed in last week's budget, coupled with signs of a turnaround in the housing market, a surge in migration, and declining mortgage rates. These factors have raised the likelihood of another rate hike beyond the upcoming policy review on Wednesday.

Investors and markets maintain a cautious stance regarding the possibility of another substantial 50-basis point interest rate hike during the upcoming week. Currently, the money market reflects an expectation of 39 basis points worth of rate hikes, an increase from the 20 basis points estimated the previous week. This heightened pricing indicates growing anticipation of a more significant tightening move by the central bank.

This week, market participants will closely monitor a range of economic indicators and events. These include data on building permits, preliminary manufacturing and services PMIs, new home sales, FOMC meeting minutes, GDP figures, pending home sales, the PCE price index, and Michigan consumer expectations and sentiment. Additionally, speeches from notable figures such as James Bullard, Lorie Logan, Thomas Barkin, Raphael Bostic, Janet Yellen, and Mary Daly will be of interest to market observers. These events and announcements will provide valuable insights into the state of the economy and may influence market trends and investor sentiment.