Pending the US debt ceiling deal, concerns about the pace of the Chinese economic rebound coupled with uncertainty regarding the Federal Reserve's rate outlook, limited the global risk appetite this week.
The dollar Index jumped above the 104 level in line with rising US treasury yields as the debt ceiling impasse continued even as the economic and monetary policy outlook remained uncertain. US 2- and 10-year treasury yields breached the 4.5 percent and 3.8 percent marks, respectively, for the first time since March.
US Fed to hit pause?
The greenback benefited from safe-haven buying after Fitch Ratings warned it may downgrade the US’ AAA credit rating as a resolution to raise or suspend the debt limit is still pending.
FOMC May meeting minutes hinted policymakers leaning towards a pause in June but they are not keen on halting rate hikes, considering the still stubborn inflation and a resilient labor market.
Besides, Euro slipped to $1.0707 as Europe’s largest economy Germany entered a technical recession by contracting 0.3 percent in the first quarter of 2023 following a decline of 0.5 percent in the last quarter of 2022, as energy price shock led to a 1.2 percent decline in final consumption expenditure.
Red-hot inflation and higher interest rates across the region have weighed on consumption, while prospects of more rate hikes have sparked fear of prolonged economic weakness in Europe.
Bullion on a slippery slope
COMEX gold slipped to a two-month low of $1,936 per troy ounce and is headed for a third weekly loss, as higher treasury yields outweigh haven bids owing to the US debt crisis.
A stronger dollar, despite a serious threat of a catastrophic default as soon as June 1, added to the weakness. Silver, too, extended losses this week in line with the sharp decline in both gold and industrial metals. However, investment demand saw only modest outflows in both SPDR and iShares holdings.
Losses in base metals deepened this week on uncertainty over a decisive recovery in China, the US debt ceiling impasse and hawkish comments from Fed officials. LME copper slipped to a six-month low, while zinc plunged to its lowest in three years, hit by a sharp increase in stocks at the LME warehouses in Singapore.
On the other hand, a warning by the Saudi energy minister to short sellers and a bullish inventory report boosted oil prices to a three-week high, though gains were capped as Russian deputy prime minister Alexander Novak dismissed bets of further OPEC+ production cuts at its meeting next week.
Now, markets look forward to the release of the US Core Personal Consumption Expenditure (PCE), which is expected to remain unchanged at 0.3 percent month on month and 4.3 percent year on year in April 2023. If the figures come in unexpectedly high, it may prompt the Fed to keep interest rates higher for longer and lead to more upside in the dollar, keeping commodities lower. Strong US economic data has boosted bets of another 25 basis points (bps) rate hike in June.
One basis point is one-hundredth of a percentage point.
The main focus though will continue to be on the debt deal talks. House Speaker Kevin McCarthy told reporters that the two sides made some progress on May 25 and would continue to negotiate through the long weekend to reach an agreement to raise the government's $31.4 trillion debt ceiling.
Next week, commodities are in for a sluggish start as the US, the UK and EU markets are closed on May 29. US labour report, which is expected to show some weakness, may lead to repricing of interest rate expectations and weigh on dollar.
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