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Abstract: Did the inflation fear dissipate? U.S. stocks recorded highs! Demand outlook remained positive, and oil prices hovered at high levels. Did the sharply higher-than-expected CPI data indicate that gold still has momentum on the upside? Commodity demand was strong and the bullish tone for AUD continued. EUR reacted modestly after the monetary policy decision was announced.

U.S. stocks fell slightly early last week as investors weighed the risks of inflation and a landmark G7 agreement was reached on minimum corporate taxes. As per the agreement, foreign governments shall levy taxes on large American businesses, particularly tech giants such as Amazon and Facebook. What's more, U.S. Treasury Secretary Janet Yellen added to market fears of a Fed rate hike by saying in an earlier interview that a slightly higher interest rate environment could be a good thing for society's point view and the Fed's point view. Then U.S. CPI data for May were released and showed a 5% year-on-year rise, much higher than market expectations and the fastest pace since August 2008. After the data, the U.S. stock market climbed to new highs while Treasury yields fell back to 1.43%, the lowest level since March. As of last week's close, the S&P 500 and Nasdaq gained 1.10% and 2.98% to 4,239.18 and 14,020.33, respectively, while the Dow lost 0.32% to 34,466.24. See S&P500 chart below:

Source from: Mitrade

On the jobs front, the number of Americans Initial Jobless Claims fell to 376,000, the sixth straight week of declines, which reflected improvements in the U.S. employment picture that appear to be consistent with the strong economic data. This week, the Fed's interest rate decision and monetary statement will be released. Investors should pay close attention to the data, as market concerns about soaring long-term borrowing costs appear to have eased despite the better-than-expected CPI data.

Oil prices extended gains last week on optimism about the outlook for summer crude demand. But the demand was overshadowed by a rise in U.S. fuel inventories. While U.S. API and EIA crude oil stocks posted better-than-expected declines of 2.108 million barrels and 5.241 million barrels, gasoline inventories surged by 7 million barrels, the most since April last year. U.S. crude and Brent crude eased from nearly two-year highs after the data, but then climbed back, and finally ended the week at $70.79/BBL and $72.6/BBL, up 2.03% and 1.40%. See live WTI crude chart below:

Source from: Mitrade

 Accelerated vaccinations and the reopening of the U.S. economy, on the other hand, have market participants arguing that the short-term surge in inventories of refined products is unlikely to derail the broader market recovery. Also, a positive signal about the rebalancing of supply and demand created a solid bullish structure for the current oil market. In its latest monthly outlook released last week, the EIA forecast Brent crude prices averaging $68/BBL in the third quarter, up $5 from its previous estimate, but downward pressure on the oil market could emerge later in the year. Therefore, investors should pay attention to technical psychological resistance levels that may increase volatility in the oil market, while crude oil may still be supported by fundamentals in the short term.

The dollar's decline earlier in the week, following weaker-than-expected U.S. non-farm payrolls data, helped push gold higher. The non-interest-bearing asset - gold traded in a narrow range as the market awaited the U.S. inflation report, although it gained support after the yield on the 10-year U.S. Treasury note fell below 1.5%, its lowest level in a month. Then, gold prices surged and briefly topped $1,900 an ounce, following the release of record U.S. CPI data. At last week's close, gold fell by 0.7% to $1,876.6 an ounce. 

On the dollar index, the weakness in the dollar did not abate due to the U.S. employment data. But the dollar's losses eased a bit as investors focused on U.S. inflation data. After the CPI data, the yield on the 10-year Treasury note continued to fall and led to more volatility in the dollar index. At last week's close, the U.S. Dollar Index was at 90.51, up 0.42% for the week. While the dollar has been weakening for two months in a row, nearly half of the analysts polled between late May and early June said the weakening trend was largely over, according to Reuters. However, the Fed's dovish policy may keep the dollar low in the short term, as the fall in Treasury yields made the market seem to accept the Fed's previous comments that inflation was temporary.

The Australian dollar (AUD) continued to climb as China's exports rose nearly 28% in May from a year earlier, well above its historical growth rate, helped by a strong recovery in commodity demand as a result of the reopening of economies. Then the AUD struggled after dovish comments by RBA official Chris Kent, who played down domestic and global inflation risks and noted that inflation expectations had only returned to levels seen a few years ago. At the week’s close, the AUD was at 0.7706 USD, down 0.4% on the week. Separately, Canberra said it was seeking to take WTO action to resolve its wine-tariff trade dispute with China. The risk AUD does not seem to have benefited since the commodities boom, but seems to have been held back by the deteriorating relations between Australia and China. Minutes from RBA meeting was due to be released this week, after the previous data showed that wages would probably need to grow at a sustained rate of more than 3% to hit the inflation target, compared with current wage growth of 1.4%. Meanwhile, Australian employment data will also be released this week. As parts of Australia were hit by another wave of the pandemic, investors should focus on May employment after the previous figure fell to 5.5%, the lowest level since the COVID-19.

Last week, the ECB's interest rate decision upheld its previously loose monetary policy. The central bank said it would buy bonds in the summer at a "significantly higher" pace than at the start of the year because withdrawing stimulus flowing would accelerate a rise in borrowing costs and choke off the recovery. But it did not discuss any transition to scaling back or exiting the emergency buying program at the ECB meeting. The central bank expected Eurozone inflation to remain below target for the foreseeable future. Also, it saw GDP growth of 4.6% in 2021 and 4.7% in 2022, both of which have been revised upwards. The euro took muted reaction to the meeting and traded in a narrow range. At the week’s close, the euro was at 1.2108, down 0.46%. Eurozone CPI for May is due to be released this week, after the April data rose 1.6% from a year earlier and 1.3% from a month earlier on the back of the rise in energy prices and the reopening of the service sector. Some economists expected Eurozone CPI to rise further in May due to higher energy prices.