Market Review

The US dollar index fell sharply after consolidating this week. On Tuesday, the US dollar index rose after Powell's speech, but fell again in late trading. The US CPI inflation data released on Thursday fell across the board, which strengthened the Fed's hope of starting to cut interest rates in September. The US dollar index plunged sharply, once approaching the 104 mark. US bond yields also fell collectively.

Spot gold rose sharply this week. On Monday, affected by the rebound in stock market risk sentiment, investors' profit-taking, and the Chinese central bank's suspension of gold purchases for two consecutive months, spot gold fell from its high to around 2,350, a sharp drop of more than $30 a day. But then the decline reversed, and after the release of CPI data, it rose by more than $40 a day, reaching a high of 2,424.5, a new high since May 22. On Friday, the rise in gold prices stalled. After the release of the unexpected PPI data, gold once fell below the 2,400 integer mark.

International oil prices fell at the beginning of the week and then entered a consolidation market. Due to the impact of Hurricane Beryl on US crude oil production being less than expected, international oil prices fell for three consecutive days to the lowest point in nearly two weeks. As data showed that US crude oil and gasoline inventories fell sharply last week, easing traders' concerns about demand, oil prices rebounded slightly.

Boosted by the weakening of the US dollar, non-US currencies rose overall this week. The Japanese yen was the most obvious, soaring nearly 3% after the CPI data, and the US dollar fell to below 157.40 against the Japanese yen. The Australian dollar rose to its highest level since January against the US dollar during the session, the euro hit a new high against the US dollar since June 7, and the British pound hit a new high against the US dollar since March 8.

In the U.S. stock market, large technology stocks pushed the S&P 500 index to break through 5,600 points for the first time in history this week, rising for seven consecutive days, setting a record for the longest time this year, and hitting a record closing high for six consecutive trading days; the Nasdaq hit a record closing high for seven consecutive trading days. However, after the CPI data, the S&P 500 index fell back, and the seven major U.S. stock companies suffered the biggest selling pressure in nearly a year, with market value evaporating by nearly $600 billion (about 4.35 trillion yuan) overnight. The Russell 2000 index rose sharply and hit its best single-day performance in seven months.

Events of the week

1. CPI is unexpectedly unexpected, and the market starts pricing in three interest rate cuts

The much-anticipated June CPI data in the United States cooled down across the board, with the core CPI annual rate recording 3.3%, lower than the market expectation of 3.4%, and falling back to the lowest level since April 2021; the core CPI monthly rate unexpectedly fell to 0.1%. The overall CPI rose 3% year-on-year, lower than the expected 3.1% and the previous value of 3.3%; the month-on-month growth rate was -0.1%, the first negative growth in four years.

After the CPI data was released, the market began to price in three rate cuts by the Federal Reserve this year. Money market pricing showed that investors were almost certain that the Federal Reserve would cut interest rates in September and December, and believed that the probability of a rate cut in November was greater than 50%.

Nick Timiraos, a financial journalist known as the "New Fed News Agency," commented that U.S. inflation slowed sharply in June, continuing the recent trend of slowing price increases, clearing the way for the Fed to cut interest rates in late summer. Citi analysts warned of the risk of a sharp weakening of economic activity and an accelerated pace of interest rate cuts, and expected the Fed to cut interest rates eight times in a row starting in September. JPMorgan Chase changed its expected time for the first rate cut from November to September.

However, Friday's PPI data unexpectedly came in above expectations as higher profit margins for service providers offset a second straight month of declines in goods costs, which could signal that the PCE data may not be as friendly as yesterday's CPI data suggested.

2. Powell began to be dovish, and many officials paved the way for a rate cut in September

This week, the Fed Chairman attended the semi-annual monetary policy report hearings of the Senate and the House. While he generally maintained his previous position, he added a new point of view, saying that inflation is no longer the only risk facing the Fed. Market analysts believe that this is a hint that interest rate cuts will begin soon. The following is a list of the highlights of his two hearings.

Inflation: Considerable progress has been made, waiting for more good data to boost confidence; inflation is not the only risk; there is no need to wait until inflation is below 2% before cutting interest rates.

Employment: The labor market has cooled significantly but remains strong, with the unemployment rate still at historically low levels; it will respond to any unexpected weakness.

Interest rates: Current policies are restrictive and are unlikely to fall to the extremely low levels before the crisis, and the next step is unlikely to be a rate hike; easing policies too much too early could harm inflation progress, while easing policies too late and too little would drag down the economy and employment.

Economy: Economic growth is around 2%. While reducing inflation, avoiding large-scale layoffs or a serious economic downturn is what keeps Powell "awake at night."

Balance sheet: There is still some way to go in reducing the balance sheet. There is no specific target for the size of the balance sheet, and the appropriate level will be found based on experience.

Others: Political factors are not taken into account when making decisions, and central bank independence is crucial; no cognitive decline has been found in Biden; new proposals for Basel III may begin soliciting opinions in the fall.

As for other officials, the president of the Federal Reserve Bank of St. Louis said that further progress has been made in fighting inflation, but more evidence is needed in this regard. Many officials "liked" the CPI data. Chicago Federal Reserve President Goolsbee said that the June inflation report was very good, and depending on the data, one or a series of rate cuts could be considered. San Francisco Federal Reserve President Daly also believed that based on the data, it might be necessary to adjust monetary policy, and a 1/2 rate cut this year would be appropriate. St. Louis Federal Reserve President Moussallem said that recent data showed progress in inflation, and he hoped that there would be data that would allow him to confidently predict that inflation would reach 2% by the middle or end of next year.

3. Biden is determined not to withdraw from the election, but he made a second slip of the tongue at a critical juncture

U.S. President Joe Biden reiterated his determination to run and urged Democratic lawmakers and donors to end discussions about replacing him, but serious divisions remain and some of his longtime allies and advisers are still discussing how to withdraw him from the race.

Among them, former U.S. House Speaker Pelosi said Biden should make a decision on whether to continue to run as soon as possible, and Senate Majority Leader Schumer privately expressed an open attitude towards nominating other candidates. Even deep blue New York State is wavering, with the deputy governor calling on Biden to step down.

Visitor records show that a well-known Parkinson's disease expert has visited the White House eight times since August last year, but the White House responded that Biden is in good health. However, his slips of the tongue at the NATO summit and press conference once again raised concerns about his age and mental acuity. He mistakenly introduced Zelensky as Putin and mistakenly referred to Vice President Harris as Trump.

4. Japanese authorities are suspected of intervening in the yen again

The yen appreciated sharply from about 161.58 to 157.44 in less than half an hour after the release of the US CPI inflation data, with a fluctuation of more than 4 yen, which is consistent with the magnitude of most previous interventions. A comparison of the Bank of Japan's accounts with forecasts by money brokers suggests that the scale of this intervention may be about 3.5 trillion yen (22 billion US dollars).

However, Japan's Vice Finance Minister Masato Kanda remained silent on whether there would be intervention on Thursday, but he said the recent sharp fluctuations in exchange rates were strange and that foreign exchange intervention was certainly rare in a floating exchange rate market, but an appropriate response was needed to excessive or disorderly fluctuations.

The Bank of Japan conducted a review of the yen's exchange rate against the euro early Friday. The last time the Bank of Japan was reported to have conducted such a review was in September 2022, just days before its first intervention since 1998.

5. CSRC: Suspend securities lending business from July 11

In order to maintain the stable operation of the market, after fully evaluating the current market situation, the CSRC approved the application of China Securities Finance Corporation to suspend the securities lending business in accordance with the law, which will be implemented from July 11, 2024. The existing securities lending contracts can be extended, but must be settled no later than September 30. On the first day of the new regulations, the securities lending balance in the entire market decreased by 15.48 million shares, and there were no new securities lending transactions.

At the same time, the CSRC approved the stock exchanges to increase the margin ratio for short selling from no less than 80% to 100%, and to increase the margin ratio for private securities investment funds participating in short selling from no less than 100% to 120%, to be implemented from July 22, 2024.

6. Central Bank: Conduct temporary repo or reverse repo operations depending on the situation

The People's Bank of China issued an announcement to primary dealers of open market operations on the morning of July 8, saying that it would carry out temporary positive repurchase or temporary reverse repurchase operations depending on the situation. The new tool will be operated in the afternoon, from 16:00 to 16:20 on working days, with a term of overnight. The new tool is interpreted by the market as narrowing or even forming a new interest rate corridor.

7. Bank of England rate cut bets fall

The Bank of England's chief economist, Peter Peel, said on Wednesday that the Bank of England may cut interest rates at some point in the future, but recent data showed that inflation may remain high for longer than expected. Subsequently, traders reduced their bets on the Bank of England to cut interest rates, giving less than a 50% chance of a rate cut in August.

Data on Thursday showed Britain’s GDP grew at its fastest pace in the three months to May since the Russia-Ukraine conflict and should continue to grow well in the coming months as real incomes continue to improve, further boosting the morale of hawkish officials who opposed an August rate cut.

8. OPEC Monthly Report: Member countries' production still exceeds quota

OPEC's monthly report released on Wednesday predicts that global crude oil demand will grow by 2.25 million barrels per day in 2024 and 1.85 million barrels per day in 2025, both of which are consistent with previous expectations. The organization expects oil supply shortages in the coming months and in 2025, and demand for OPEC+ crude oil in the third quarter will reach 43.6 million barrels per day, far higher than the organization's current production.

The monthly report also showed that Iraq, Kazakhstan and Russia continued to exceed production limits. Despite Russia's sharp production cuts in June, the three countries' combined supply was still more than 100,000 barrels per day above the quotas set at the beginning of the year.

9. Tesla delays release of Robotaxi, shares plummet

Tesla Inc (TSLA.O) has delayed the launch of its self-driving Robotaxi taxi from August to October to allow time to build more prototypes of the vehicle, with sources saying Tesla designers were asked to redesign elements of the Robotaxi.

A few months ago, Musk set the date for the launch event on August 8. The optimism about the upcoming launch event drove Tesla's stock price to rise for 11 consecutive days. Shortly after the news of the postponement of the listing was announced, Tesla's stock price fell sharply by more than 8% during the trading session, the biggest drop since March 4.

10. The protagonist of the “big margin call of the century” was found guilty

After a two-month trial, a U.S. jury sentenced Archegos Asset Management founder Bill Hwang and co-defendant, Chief Financial Officer Patrick Halligan, on Wednesday. Bill Hwang, 60, pleaded not guilty to one count of conspiracy to defraud, three counts of fraud, and seven counts of market manipulation, but was convicted of 10 of the 11 charges. Each charge carries a maximum sentence of 20 years in prison, but the final sentence may be lower than the maximum sentence.

Archegos collapsed in March 2021, causing counterparties such as Credit Suisse, Morgan Stanley and Nomura to lose more than $10 billion.

Article forwarded from: Jinshi Data