Market sentiment roared higher this past week. On Wall Street[1], futures tracking the Nasdaq[2] 100 soared 7.28%, the best 5-day performance since March. This is as S&P 500[3] and Dow Jones futures gained 6.76% and 6.39% respectively, the most since November 2020. Things were also looking good in Europe where the DAX 40[4] climbed 3.44%. The Hang Seng Index pushed up 2.89%.
Virtually all G10 currencies outperformed against the US Dollar[5], including the New Zealand Dollar[6], Australian Dollar[7], Euro[8], British Pound[9], Canadian Dollar[10] and Japanese Yen[11]. The DXY Dollar Index is down 1.32% over the past two weeks, the most since April 2021. What could explain this dynamic? Look no further than the Federal Reserve.
In recent weeks, we have seen the markets materially pull back 2023 Fed rate hike expectations[12]. Cautious commentary from the central bank has been cooling chances of a 50-basis point rate hike in September. It seems traders have been shifting their focus from concerns about inflation to recession. Data since early May hints that markets are seeing the Fed increasingly fall behind on tackling CPI[13] one year out.
This has been resulting in a broad decline in Treasury yields. The combination of this and a weaker US Dollar has also been benefiting gold prices[14]. Now, in the week ahead, all eyes will be on non-farm payrolls on Friday. Could the markets be getting ahead of themselves? Jobs creation is expected to slow, but the unemployment rate and wages are seen to remain robust.
Outside of the world’s largest economy, the Bank of
