Risk assets had a solid week as financial conditions continued to ease following the recent soft jobs data. Stocks shrugged off weaker U-M consumer confidence and inflation expectations data, with consumer confidence falling to 67.4 from 77.2 last month, while 1-year inflation expectations jumped to 3.5% from 3.2%.
Overall, the Macroeconomic Surprise Index has fallen to its lowest level in 1.5 years, and Citi's hard data indicator had its largest one-day drop in a year last week. Although it is too early to assert a "hard landing", the US consumer is indeed entering a weak phase as consumer savings decline, PMI continues to be sluggish, high interest rates drag on credit demand, and the job market is finally slowing down.
Market focus will be on Wednesday's CPI data, which could be a key driver of medium-term price movements. While markets do want lower inflation data to steer the narrative of slowing inflation back in, market-led CPI fixing has been fairly stable recently, with traders expecting CPI growth of around 3.4% year-on-year in May and possibly slowing further to around 3.1% in December. The easing of financial conditions in the short term will offset the weakness in consumer credit demand, while oil price movements could drive inflation trends and expectations towards the end of the year.
Cryptocurrency price action was disappointing, with BTC pulling back sharply from 63.5k to 60.5k during New York trading on Friday, ETFs seeing a small outflow of 85m, while major global CEXs reported a drop in spot volumes in April, the first decline in about 5 months. With spot prices consolidating for much of the past 1-2 months, price action appears heavy, and existing investors naturally remain long-term. In addition, implied volatility has fallen significantly as trend traders sell call options for additional income and long-term players have returned to using volatility to generate returns during the current period of low sentiment.
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