Trouble in the East? China experienced a faster-than-expected contraction in factory activity, highlighting a decline in demand and placing pressure on policymakers to bolster the country's economic recovery. The official manufacturing purchasing managers' index (PMI) reached its lowest point in five months at 48.8, falling below the critical 50-point mark that distinguishes expansion from contraction. Additionally, non-manufacturing activity expanded at a slower pace in May, with the services PMI dropping to 54.5. These indicators, along with other economic data, indicate a waning rebound from the pandemic, prompting investors to revise their recovery expectations for China.
Wall Street closed mixed amid concerns over the US debt ceiling bill vote, although Nvidia's surge briefly pushed its valuation above $1 trillion. Meanwhile, the Philadelphia SE Semiconductor index closed higher, and consumer confidence data suggested another rate hike by the Federal Reserve with a 60% probability compared to around 30% last week.
Gold prices steadied above two-month lows as profit-taking and anticipation of the U.S. debt ceiling decision provided some support. However, the outlook for gold remains challenged by rising interest rates and a hawkish Federal Reserve stance. The potential for increased safe-haven demand in the event of a US default is key, and increased debt will crash the gold market.
The drama over the U.S. debt ceiling has faded for oil traders as a tentative deal was reached, shifting their focus to the Fed's potential rate hike and OPEC's output control. Crude prices fell 4% on rate hike expectations, but upcoming U.S. job data might shift that. OPEC+ faces challenges pushing crude prices higher despite previous production cuts as capital-desperate Russia floods the market.
The U.S. dollar strengthens as investor attention shifts to the upcoming jobs report, which could support the possibility of a rate hike next June. Economists expect the jobs report to show 180,000 new jobs created in May, with average hourly earnings predicted to decrease slightly. The anticipation of a rate hike is supported by strong economic data, and while there is confidence in the passage of the debt ceiling bill, there is a time constraint before the US faces a default.