FOMC took centre stage last week; it was the 7th FOMC meeting in a row in that no change in US interest rates occurred. The Federal Reserve’s (FED) mantra remains the same: core inflation must be sustainable below 2% before rates go down.  Of concern was the revision in PCE Inflation, which was revised marginally higher from 2.4% to 2.6%. Also, according to the FED, we can expect only one rate reduction this year, which is within our forecast.  Michigan consumer sentiment index unexpectedly sank to a 7-month low, racking up its 4 consecutive fall in a row. The index now stands at 65.6, having come down from a peak in March 24 of 79.4. In June 2021, the index stood at 85.5. The US Energy Information Administration (EIA) revised its global outlook for oil up from 900,000 bpd to 1 100,000 bpd,  on expectations that more demand will come out of Asian economies. We are coming into the summer drive time in the US, when gasoline demand is expected to pick up. Our weaker consumer sentiment could spill out into demand if Americans stay at home. Russia committed to meeting its output obligations under the OPEC+ agreement, where last month, the country exceeded its quota, which could mean it needs the currency. Mixed messages from data for the RBA. Australian employment data increased by 39,000, way better than expected, and the unemployment rate dropped from 4.2% to 4%, indicating the existing tightness in the job market. On the other hand, the NAB Business Confidence Index fell to -3 in May 2024 from an upwardly revised 2 in April, pointing to the lowest level in six months and turning negative for the first time since last November. Adding weight to negative sentiment over the state of the economy and softer GDP the week before.                                                                             

But first, the FOMC meeting took center stage last week, marking the seventh consecutive meeting without a change in US interest rates. The Federal Reserve (FED) reiterated its commitment to maintaining the current rate until core inflation sustainably falls below 2%. This steadfast approach underscores the FED’s priority of achieving long-term price stability. Actual Inflation data was in line with expectations, with both MoM and YoY data showing that inflation is falling (0% and 3.3%, respectively), albeit not quickly enough for the FED to focus on a rate reduction. A notable point of concern was the slight upward revision in Personal Consumption Expenditures (PCE) inflation, adjusted from 2.4% to 2.6%. This adjustment signals persistent inflationary pressures, reinforcing the FED’s cautious stance. However, the Michigan Consumer Sentiment Index has shown unexpected weakness. The index sank to a seven-month low, marking its fourth consecutive decline, and now stands at 65.6, down from a peak of 79.4 in March 2024. For comparison, in June 2021, the index was at a much healthier 85.5. This decline reflects growing consumer pessimism, which could negatively impact spending and economic growth in the coming months. THE FED did not revise GDP forecasts.

Accordingly, the FED will only see room for one rate reduction this year and potentially three next year, aligning with its previously communicated forecasts. This limited scope for rate cuts suggests that the FED is prepared to maintain a restrictive monetary policy for extended periods to ensure inflation is firmly under control whilst allowing the economy to weaken. The tipping point will be how the economy weathers restrictive monetary policy and if this affects company returns, which seem to be doing okay so far.  Equity markets remain at historical levels, but for how long? We have been on the wrong side of the ledger with positions and reduced exposure but maintain our negative look. 

The US Energy Information Administration (EIA) has revised its global oil outlook upward, increasing the expected demand from 900,000 barrels per day (bpd) to 1,100,000 bpd. This revision is based on anticipated higher demand from Asian economies. Chinese data will be a key input here. We have seen green shoots of recovery coming from the mainland, although last week's data was not all that encouraging. Inflation data was steady at 0.3%, and PPI was better than expected at -1.4, still deflationary. Today, we have Industrial Production and Retail sales, which should help to provide a lead for the economy and, hence, demand for oil. China imports about 11.3 million bpd, representing about 67% of its energy needs. Additionally, the summer driving season in the US typically sees a surge in gasoline demand, further supporting higher oil consumption. However, the weakening consumer sentiment might dampen this expected increase in demand. Further, Russia has reaffirmed its commitment to meeting its output obligations under the OPEC+ agreement. Last month, Russia exceeded its production quota, highlighting its proactive role in balancing the global oil market. This compliance is crucial for maintaining market stability and supporting oil prices amid fluctuating global demand.

Recent economic data in Australia presented a mixed picture. On the positive side, employment data showed an increase of 39,000 jobs, significantly better than expected. The unemployment rate also dropped from 4.2% to 4%, indicating a tight labor market. These figures suggest robust job market conditions, which could support consumer spending and economic activity. However, the National Australia Bank (NAB) Business Confidence Index fell sharply to -3 in May 2024 from an upwardly revised 2 in April. This decline points to the lowest level of business confidence in six months and marks the first negative reading since last November. This downturn in business sentiment could signal caution among businesses regarding future economic conditions and potential investments. Especially since we had weaker-than-expected or mute GDP numbers the week before. The SPI is 300 points from record highs, which is pretty good considering the economic outlook and projections for interest. We continue to maintain a soft outlook for the index. 

What can we expect this week? Key economic indicators in the United States will be closely watched in terms of retail sales, manufacturing and services PMI, industrial production, housing starts, building permits, and existing home sales. Additionally, speeches by several Federal Reserve officials will garner significant attention. Globally, central bank decisions in Australia, Brazil, China, Norway, Switzerland, and the United Kingdom will be of paramount interest. Manufacturing and Services PMI data will be published for Australia, Japan, India, France, Germany, the Euro Area, and the United Kingdom.

On the position front, we reduced our … position in the S+P (…); however, we are looking to reestablish it once we have a high in place and a clearer trend. We are … at … in the ASX SPI and have added at … ; at a daily close above … , we will review the position. We are still … USD/JPY at … and ... We are currently … the AUD/USD (US…) and AUS/CHF (…). 

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