This week, the market ended an important trading week: the poor performance of the US non-farm payrolls report was consistent with most of the US labor data released this week, which intensified speculation that the Federal Reserve may cut interest rates in September. At the beginning of this week, the market also believed that the probability of a rate cut by the Federal Reserve in September was about 60%, and after the release of the non-farm payrolls report, this probability rose to about 75%.

As in recent months, the overall increase in jobs was largely due to strong growth in the government and private healthcare sectors, but it is worth noting that the latest estimates showed that monthly job growth in the past 12 months to May had been revised down by an average of 24,000, suggesting that the June data may look much worse in a few months.

Increasing speculation about a rate cut by the Federal Reserve has weighed on the dollar for much of the week, while commodities and U.S. stocks continue to move higher. The S&P 500 and Nasdaq 100 hit new highs multiple times this week. Gold and silver prices rose sharply on Friday, and oil prices posted their fourth straight week of gains. With summer in full swing in Europe and the United States, falling inventories and supply concerns continue to support oil prices.

It is worth noting that next week will also be an "eventful week": on Tuesday and Wednesday next week, Federal Reserve Chairman Powell will "bravely go" to Capitol Hill to deliver his semi-annual monetary policy testimony; next Thursday, the United States will also release June CPI data, so investors must continue to be vigilant.

The following are the key points that the market will focus on in the new week (all in Beijing time):

Central Bank News: Powell "bravely goes" to Capitol Hill! Is gold determined to reach a new historical high?

Fed:

At 21:15 on Tuesday, Federal Reserve Board Governor Barr was invited to speak at an event hosted by the Federal Reserve;

At 22:00 on Tuesday, Federal Reserve Chairman Powell will deliver his semi-annual monetary policy testimony to the Senate Banking Committee;

At 01:30 on Wednesday, Federal Reserve Board Governor Bowman made an introductory speech at an event hosted by the Federal Reserve;

At 22:00 on Wednesday, Federal Reserve Chairman Powell will deliver his semi-annual monetary policy testimony to the House Financial Services Committee;

On Wednesday, 2025 FOMC voting member and Chicago Fed President Goolsbee will participate in an online event;

At 02:30 on Thursday, Goolsbee, 2025 FOMC voting member and president of the Chicago Fed, delivered an opening speech at an event;

At 20:30 on Thursday, 2024 FOMC voting member and Atlanta Fed President Bostic will participate in a Q&A session;

At 01:00 on Friday, 2025 FOMC voting member and St. Louis Fed President Moussalem will speak on the economy;

Fed officials were not confident enough to cut rates when they last met because inflation remained high, but some policymakers argued that they must keep an eye out for signs that the labor market may weaken faster than expected. Officials remain divided on how long high interest rates should last.

According to the latest minutes of the Federal Reserve meeting, some officials stressed the need to remain patient, waiting for more evidence of cooling inflation, and reiterated that it would not be appropriate to cut interest rates until more data strengthened their confidence that inflation was back on target. Several policymakers even maintained their willingness to raise interest rates despite recent signs that the Fed's anti-inflation mission has made some progress.

Nick Timiraos, a reporter for the Wall Street Journal who is known as the mouthpiece of the Federal Reserve, pointed out that judging from the latest meeting minutes, officials generally took a wait-and-see attitude towards adjusting interest rates, but emphasized various views that may prompt the Federal Reserve to raise or lower interest rates. If combined with the recent public speeches of Federal Reserve officials, this has shown that they are unlikely to cut interest rates at this month's meeting.

Since meeting last month, Fed officials including Powell have said they are broadly comfortable with inflation resuming its downward trend, suggesting a September rate cut remains a possibility.

This week, at the ECB Forum in Sintra, Powell said they were getting back on an “anti-inflation path” but added that they wanted to have more confidence that inflation was falling back to their 2% target before they started easing policy.

His comments were interpreted by the market as suggesting that two 25 basis point rate cuts might be needed this year, even though the Fed’s own dot plot showed only one. More importantly, following the poor performance of the PMI data in June, the market believes that the probability of the Fed’s first cut in September has risen to 80%.

Next week, Fed Chairman Powell will go to Capitol Hill for two consecutive days to deliver semi-annual monetary policy testimony. At that time, the Fed Chairman will deliver a prepared statement, and then the committee will conduct a question-and-answer session. Of course, when the Fed will cut interest rates and its views on recent data will almost certainly be asked, and investors need to pay close attention to Powell's answers.

As for gold, affected by a series of data supporting the Federal Reserve's interest rate cut, its price has returned to its highest point in two weeks and is only one step away from the $2,400 mark.

FXStreet analysts believe that $2,400 is the immediate resistance level for gold, and a break above this level will bring the price of gold close to its all-time high of $2,441. Considering the current gold market sentiment and the fact that many indicators are showing bullish signals, there is a high probability that gold will break through these key levels.

Ole Hansen, head of commodity strategy at Saxo Bank, said it might be too early to say that gold's consolidation period is over, but he is still optimistic that gold prices will eventually rise. "I would be a little surprised if the market continues to rise. The recent correction is relatively small, indicating that either the potential demand in the market is strong when prices are low, or that long positions that have been established see no reason to reduce risk exposure."

Other central banks:

Next Wednesday, the Reserve Bank of New Zealand will announce its monetary policy decision, and the market expects it to remain on hold, with only a 5% chance of a 25 basis point rate cut.

The central bank said at its last meeting in May that they needed to keep policy at a restrictive level to ensure inflation falls back to target, and more importantly, they discussed the possibility of raising interest rates at that meeting.

Since then, New Zealand's first quarter retail sales came in better than expected, while GDP data showed better-than-expected growth in the quarter. Although no inflation data was released, the above data confirmed that the Reserve Bank of New Zealand can maintain a hawkish stance.

However, investors expect a rate cut of just over 40 basis points by the end of the year. As the RBNZ has no reason to turn more dovish, if it reiterates its May message, this could prompt investors to scale back their rate cut expectations, boosting the New Zealand dollar.

Important data: Will CPI continue to fuel risk sentiment? The US dollar may face a major risk!

Monday 23:00, US New York Fed 1-year inflation forecast for June

Tuesday 18:00, US June NFIB Small Business Confidence Index

At 0:00 on Wednesday, EIA released its monthly short-term energy outlook report

China's June CPI data at 09:30 on Wednesday

At 22:00 on Wednesday, the monthly rate of wholesale sales in the United States in May

At 23:00 on Wednesday, EIA crude oil inventories in the United States for the week ending July 5

Thursday 01:00, US 10-year Treasury auction until July 10

At 14:00 on Thursday, the UK's three-month GDP for May, the UK's manufacturing output monthly rate in May, the UK's seasonally adjusted goods trade account in May, and the UK's industrial output monthly rate in May

At 16:00 on Thursday, the IEA released its monthly crude oil market report.

At 20:30 on Thursday, the US June CPI, core CPI, and the number of initial jobless claims in the US for the week ending July 6

Friday 10:00, China's June trade balance

Friday 10:50, China's June trade balance in US dollars

Friday 14:45, French June CPI

Friday 20:30, US June PPI, core PPI

At 22:00 on Friday, the U.S. one-year inflation rate forecast for July and the preliminary value of the University of Michigan Consumer Confidence Index for July

Most of the labor market data released this week showed that the U.S. labor market is slowing down. And Friday's non-farm payrolls report seems to be sending a clear message to the Federal Reserve - the Fed is at risk of falling behind the curve.

The U.S. non-farm data for June released on Friday showed that U.S. job growth exceeded 200,000 last month, exceeding market expectations, but the unemployment rate rose to the highest level since November 2021, and the year-on-year wage growth rate was the slowest since May 2021.

Most of the details in the jobs report were "a bit soft," JPMorgan economist Michael Feroli said in a note to clients Friday.

Still, Feroli argued that the report outlined a "gradual easing of a very tight labor market, which is consistent with the Fed's perfect anti-inflation narrative and should give the FOMC the confidence to lower interest rates sometime in the second half of the year."

The upcoming CPI data will be the next catalyst for whether the Fed will really cut interest rates in September. The market expects that the annual rate of the overall CPI in the United States in June will fall from the previous value of 3.3% to 3.1%, and the monthly rate will rise to 0.1%; the annual rate and monthly rate of the core CPI will remain at 3.4% and 0.2% respectively.

The agency believes that given the decline in the price sub-indices of both the ISM manufacturing and non-manufacturing PMI surveys, the risk of CPI next week may be tilted to the downside. A further slowdown in inflation could convince more market participants to bet that the Federal Reserve will cut interest rates twice this year, putting pressure on the dollar.

In addition, there is little chance that Powell will change his dovish tone in his semi-annual monetary policy testimony next week, which will leave the dollar vulnerable and facing a potentially larger correction.

Analysts pointed out that at present, the US dollar index has fallen below the psychological level of 105. Before the release of US inflation data, any signs that inflation will continue to decline may put further downward pressure on the US dollar, which may have a wide range of market impacts. Currently, the market expects a 75% chance of a rate cut in September, and if inflation continues to fall, the probability of a rate cut may increase. On the contrary, rising inflation may help the US dollar index return to above 105, possibly reaching 106 or even 107.

Jonathan Peterson, senior market economist at Capital Economics, said in a note on Friday that he expects the dollar to weaken further as inflationary pressures begin to ease. This environment is likely to continue to support gold prices.

“Next week’s U.S. inflation data is likely to reinforce that the Fed’s rate hike cycle is over, and this potential upside risk to the dollar is no longer there,” Peterson wrote. “Rather, the main risk to the dollar now appears to be economic weakness, and it may benefit from short-term safe-haven buying if risk assets become volatile.”

Notably, Friday's nonfarm payrolls report also opens up the possibility that the labor market is beginning to outweigh inflation data as the primary driver of the Fed's rate cuts.

As Powell described last week, U.S. inflation has returned to a "disinflationary path." The Fed's own forecasts suggest that inflation won't actually reach its 2% target until the end of 2026, and perhaps even more unbearable is the current slack in the labor market. Last month, the Fed projected an unemployment rate of 4% by the end of this year and just 4.2% by the end of 2025. Therefore, a continued rise in unemployment could give the Fed a "sense of urgency" to cut interest rates. Economists at TD Securities said in a report on Friday:

“While we continue to believe that the timing of the Fed’s first rate cut will depend primarily on inflation data, signals of continued weakness in labor market conditions and consumer spending suggest that the Fed may take its employment goals more seriously in the coming months. We remain optimistic that the Fed will make its first rate cut in September as we expect the month-over-month growth rate of the core PCE price index to gradually decline to a level consistent with the 2% inflation target by then.”

Important event: Beware of another plunge in the euro!

This week, the British general election ended, with the Labor Party led by Starmer achieving a decisive victory. While markets expected a significant Labor victory, the result exceeded expectations and surprised even the most loyal Labor supporters. Starmer pledged to rebuild Britain after years of turmoil but cautioned that progress takes time.

Next week, the market will be watching the actions of the new British Prime Minister. The speech of the new Chancellor of the Exchequer, Rachel Reeves, will also be closely watched, as maintaining a tight fiscal policy is essential to controlling the UK's debt level. In the short term, funding for the National Health Service (NHI) seems to be a priority for the Labour Party.

GBP traders are likely to turn their attention back to economic data. On Thursday, the UK will release monthly GDP data for May, as well as industrial and manufacturing production data for the month. With the Labour Party gaining a majority in Parliament, the Bank of England is likely to accelerate its easing process, which could be a negative for GBP in the medium term. Therefore, the improvement in the UK's GDP in May is unlikely to seriously change the market's expectations for a rate cut from the Bank of England.

ING said the pound's calm reaction to Britain's Labour Party's landslide victory in the general election was a clear sign that the result was fully priced in by the market. ING analyst Francesco Pesole said in a note that what matters for the pound is mainly the impact of a Labour government on Bank of England policy, which is not there yet. He said Bank of England officials should start speaking again next week after a period of calm ahead of the election. The first BoE rate cut is likely to come in August, with two more cuts to come in 2024, he said. "In line with this, we expect sterling to underperform over the summer months."

Looking ahead to Europe, all eyes will now be on the second round of the French election, with markets breathing a sigh of relief after Marine Le Pen’s far-right National Rally failed to secure a majority despite a win in the first round.

The various opinion polls this week agree that the chances of the National Rally winning a majority are extremely low. However, if the party unexpectedly wins a majority, the market may continue to panic, possibly causing French bond yields to rise, similar to what happened before the election, which is definitely something that euro and European stock investors need to pay close attention to.

Citigroup predicts that any breather rally in the eurozone credit market will be "short-lived" if the second round of voting in the French parliamentary election this weekend ends in a hung parliament. After the results of the first round of elections last weekend were announced, Srikanth Sankaran, an economist and interest rate strategist at Citigroup, believed that the final result would be either a hung parliament or a majority for Marine Le Pen's National Rally.

French stock and bond markets are likely to face a more volatile period regardless of the outcome of Sunday’s second round of voting in France’s parliamentary elections. French stocks rebounded this week, easing overall market pressures. Options markets also suggest less volatility when stocks reopen on Monday.

But if Le Pen's National Rally fails to win an outright majority, it would mean a political deadlock in France, hampering its efforts to address its ballooning budget deficit and ending Macron's pro-business reforms.

The CAC 40 index has been the worst performer among major European stock indexes since the announcement of an early election last month, and the correction has also eliminated the valuation premium that investors have given French stocks over the past year. The broad sell-off has increased the appeal of some companies because they have strong earnings prospects to support them. In the foreign exchange market, options data showed that traders have no confidence that the euro's recent gains can be sustained, and are still buying options products at a premium to protect against the risk of a decline in the next month.

The article is forwarded from: Jinshi Data