The key events this week include the US presidential race, US Treasury Secretary Yellen (Tue) and Fed Chair Powell’s (Tue and Wed) testimonies, China CPI and PPI (Wed), US CPI (Wed), China trade data (Friday), and Uni. of Michigan consumer sentiment and US PPI (Fri).
Markets will look for policy direction from central bank members this week, including: the BoE’s Haskel (Mon), Pill and Mann (Tue), and the Fed’s Goolsbee and Bowman (Tue), and Bostic and Musalem (Thu).
Last week, markets grappled with politics, central bank chatter and some key data points. The yield on the 10-year rallied 12bps, amid the broadly cooler labour market data. The S&P Index soared to new highs, gaining 1.95% over the week. The dollar (DXY Index) fell 0.94% last week, on softer US data and less hawkish Fed rhetoric. Meanwhile, Brent crude closed marginally higher over the week closing at 86.54pb, amid the easing geopolitical backdrop.
During his speech at the ECB Forum, Fed Chair Powell stated that the US is back on a “disinflationary path,” providing a boost to investor sentiment. Powell also warned that US debt growth is on an unsustainable path. Next, the FOMC minutes from the June meeting appeared more dovish, primarily focused on the labour market, and slowing economic growth. However, as expected, members reiterated a cautious approach to rate cuts.
US data through the week painted a mixed economic picture, the ISM manufacturing index declined in June, while the new orders and employment prints dropped below the crucial 50-point threshold. The ISM services were also hugely disappointing, falling into contraction with the employment figure dropping to 46.1. Next, we had the employment print, where, in June, 206k jobs were added (exp. 190k). Unemployment ticked up to 4.1% and average hourly earnings eased to 3.9%yoy; consistent with a cooling labour market. Market odds for a cut in September chopped and changed through the week, closing at ~77% on Friday, and currently stand at 71% this morning.
Elsewhere, the eurozone grappled with its own economic challenges. CPI was estimated to have decelerated to 2.5%yoy in June, but core inflation remained sticky at 2.9%. ECB President Christine Lagarde struck an optimistic tone in Sintra, predicting inflation would be “in the low twos” within a year. Elsewhere, France woke up to looming political gridlock this morning as the left coalition’s victory in Sunday’s legislative elections prevented a far-right surge, risking political deadlock in France, with neither party attaining a clear majority.
In China, the PBoC has initiated measures to curb the recent bond market rally, announcing plans to borrow and potentially sell government bonds to regulate long-term interest rates. This strategy aims to manage financial institution risks, prevent yield curve inversion, and control the interest rate gap with the US. The move has already led to a rebound in 10-year and 30-year government bond yields. While the PBoC’s current focus is on bond sales, future bond purchases could become a new liquidity management tool. Concurrently, China’s economy shows mixed signals, with early signs of recovery in property transactions and strong growth in port cargo handling, while facing challenges such as the European Commission’s decision to impose temporary anti-subsidy tariffs on Chinese electric vehicles.
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