Daily Market Commentary 26th May 2023

Reports of progress on the US Debt Ceiling Negotiations (DCN), boosted market sentiment and equities reversed into positive territory. The news that both sides were close to a deal on the DCN, triggered a relief rally on equity markets and saw bond yields spike upwards, as markets turn their attention to inflation. The Fed’s preferred measure of inflation, is the PCE indicator due for release tonight, and this could be a spoiler event. If inflation spikes higher, then earlier ‘dovish’ sentiment from the Federal Reserve will reverse sharply. German Q1 GDP contracted 0.3%, while the Q4 2022 number was minus 0.5, putting Germany into a technical recession. Germany’s manufacturing sector has been under unprecedented pressure from the energy crises for more than a year and demand slumps recently, are only aggravating the situation. The US Dollar was boosted by rising bond yields, with the EUR slipping to 1.0710, while the GBP fell back to 1.2310.

The rising reserve adding to the downward pressures on commodity currencies, with the NZD crashing to 0.6050, while the AUD slumped to test 0.6500, to the downside. The RBNZ’s last ‘dovish’ commentary, accompanying the latest 25 basis point rise, triggered the sell off which was only accelerated by negative market sentiment. All eyes remain focused on the DCN and the latest US PCE inflation number.