The market spotlight has mostly focused on US inflation updates this week as interest rate expectations continue to weigh heavily on risk sentiment in general.
Confirmation that US inflation rates will continue to slow from higher levels of inflation, coupled with downbeat Chinese data spurring stimulus hopes, lifted risky assets towards the latter part of the week.
Not sure what I’m talking about? I could explain, but lemme show you the headlines first:
Notable economic news and updates:
🟢 Extensive arguments about market risk
China announced a loan forgiveness scheme for developers Aimed at ensuring the delivery of homes under construction
US Treasury Secretary Yellen met with Chinese officials In “direct and productive” discussions of economic and political issues
US CPI address It showed a rise of 0.2% on a monthly basis in June against an estimated rise of 0.3%, bringing the annual rate down from 4.0% to 3.0% against an expected reading of 3.1%. Core CPI rose 0.2% month over month against the 0.3% consensus
The primary and primary headline for producer prices in the United States It posted meager gains of 0.1% m/m in June versus an expected gain of 0.2%, and May’s readings were revised down to show a 0.4% drop in the headline figure and a 0.1% increase in the core reading.
China’s main consumer price index It slowed from 0.2% to 0.0% year-on-year in June versus the estimated figure of 0.2%, Chinese PPI Decreased 5.4% YoY versus 5.0% expected and a previous drop of 4.6%
Chinese trade surplus It expanded from $65.8 billion to $70.6 billion, compared to the expected $90.0 billion.exports decreased -12.4% yoy in June (forecast -6.1% yoy; -7.5% yoy prior); The biggest decline in more than three years
University of Michigan Consumer Confidence Index For July: 72.6 (64.5 expected; 64.4 previously)
Extensive arguments for deflecting market risk
The Reserve Bank of New Zealand kept interest rates unchanged at 5.50%. As expected, noting that “the level of interest rates limits spending and inflationary pressure as expected and required”
The Bank of Canada raised interest rates by 0.25%. From 4.75% to 5.00% as expectedwhich keeps the door open for higher interest rates in the future due to stubborn inflationary pressures and an upgraded economic outlook
Weekly global market summary
Dollar, Gold, S&P 500, Oil, US 10 Year Yield, Bitcoin Overlay Planned by TV
Consolidation was the name of the game for most asset classes quite early in the week, as traders assessed the potential impacts of the US CPI release on global borrowing costs and overall economic activity.
Risk sentiment soon began to pick up as more market analysts weighed in on the prospect of a negative inflation surprise that could dash hopes of a July hike or make it the Fed’s last tightening move of the year.
Crude oil bulls also seized on Tuesday’s headlines suggesting lower production from Russia, as shipments through the country’s western port were said to have fallen below February levels.
As expected, the US CPI for June reflected weak inflationary pressures on Wednesday, with the annual reading falling rock like from 4.0% to 3.0% and close to the Fed’s target range. On Thursday, US PPI numbers came in below estimates, adding to a slowdown in inflation and dampening the odds of interest rate hikes much further.
This piled on bearish dollar bets after the non-farm payroll report, and spurred another wave higher for riskier holdings. In particular, higher-yielding commodities and bonds extended gains in reaction to the downbeat Chinese data released earlier.
Market players likely believe that slowing inflation and business activity could encourage the People’s Bank of China to give additional stimulus, which would benefit export-driven economies. As a result, the commodity-linked New Zealand dollar was able to quickly recoup its losses, even after the RBNZ announced a somewhat dovish pause the same day.
Although their decision to keep interest rates unchanged signals a potential end to the tightening cycle, businesses and consumers may have been relieved to know that borrowing costs won’t rise significantly in the near term.
Meanwhile, the Bank of Canada raised rates by 0.25% as expected and indicated room for further tightening, but likely based on incoming data. It wasn’t the hardcore vibes the Loonie bulls were looking for and likely contributed to Loonie’s weakness for sessin.
From there, it was a steady climb for most risky assets and stock indices like the Nasdaq and S&P 500 for the rest of the week. It is worth noting the strong recovery that Amazon achieved thanks to record sales during the Prime Day sale period, in addition to the 4% rise in Alphabet shares and the slight rise among banking sector stocks before the earnings release.
Crude oil jumped again on Thursday, despite a surprise build in EIA inventories, as investors focused on unplanned unrest in Libya and Nigeria, along with ongoing OPEC production cuts.
On the other hand, Treasury yields continued to fall, as markets began pricing in the federal funds rate at 3.71% by December 2024, down from 4.10% earlier in the week.
On Friday, the news cycle was very light and the broad-based market price action was very stable throughout the session. After a relatively large risky move triggered by major catalysts this week, some profit-taking seems likely, most notably in oil and bitcoin prices. This behavior may have started with a surprisingly strong preliminary US consumer confidence reading.
The University of Michigan’s preliminary reading for July came in at 72.6 (well above expectations of 64.5), which may have supported the notion that the Fed has more wiggle room to keep interest rates high for now. Unfortunately, this wasn’t a big enough event to bring the US dollar back from the big hit this week, or cut risky assets from the strong rally that lasted into the weekend.