Last week was a turbulent week for global markets filled with risk, volatility and plenty of opportunity.
This week’s market moves initially confused many people. Earlier, the sudden surge in the yen caused traders to close their carry trades, shaking global assets, gold fell below the $2,400 mark, and Brent oil prices hit a new one-week low just above the psychological $80 per barrel.
Gold rebounded from its intra-week lows on Friday and returned above $2,380; the S&P 500 and Nasdaq 100 rebounded on the back of a rebound in technology stocks, led by Meta, Microsoft and Amazon. According to research from Bank of America, despite concerns about large technology stocks, U.S. stock funds still saw inflows of about $2.17 billion this week.
Overall, the impact of investors selling off technology stocks, positioning for the US election and unwinding of carry trades this week has created significant market volatility and cast a shadow over US economic data. Whether these factors will overshadow a series of economic data events next week remains to be seen.
Next week, the market will usher in a "super central bank week". The Bank of Japan, the Bank of England, and the Federal Reserve will announce interest rate decisions. These three central banks are likely to make or hint at major monetary policy decisions. On Friday, the United States will also release the latest non-farm payroll data. Due to the remarks of Federal Reserve Chairman Powell, this data may be the focus of whether the Federal Reserve can cut interest rates as expected in September.
The following are the key points that the market will focus on in the new week (all in Beijing time):
Central Bank News: Is the Fed going to "drastically change" its policy statement? The fundamentals for gold's rise may become more solid!
Fed:
At 02:00 on Thursday, the Federal Reserve will announce its interest rate decision
At 02:30 on Thursday, Federal Reserve Chairman Powell held a monetary policy press conference
The Federal Reserve will announce its interest rate decision next Thursday. Among the three major central banks that will hold interest rate decisions next week, the Federal Reserve is least likely to announce any policy changes. Although some people still believed that there was a possibility of a rate cut earlier, this possibility was basically shattered after the US second quarter GDP data was better than expected.
On Friday, the Fed got new evidence of progress on inflation, fueling expectations that they will use next week's meeting to signal that they could start cutting interest rates in September. In addition, their recent speeches have shown that the Fed is becoming more confident in achieving its inflation target.
The Bureau of Economic Analysis of the U.S. Department of Commerce reported that the U.S. PCE price index rose only slightly by 0.1% month-on-month in June and rose by 2.5% year-on-year. The core PCE price index, which excludes volatile food and energy prices, rose by 0.2% month-on-month, slightly higher than the market forecast of 0.1%.
However, Powell may not clearly state when the Fed will begin its easing cycle, so the negative risks of the meeting for the dollar are limited. Given that July non-farm payrolls will be released a few days later on Friday, Powell may not want to commit to a rate cut in advance if the data unexpectedly rises.
"From the Fed's perspective, we think the data shows enough progress in inflation and labor market conditions for policymakers to open the door to a September rate cut at next week's FOMC meeting," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Interestingly, from a market perspective, even though the market has fully priced in a rate cut by the Fed in September, the US stock market still sold off sharply. Therefore, if the Fed just "slightly forewarns" that a rate cut may be in September, it may not be enough. On the contrary, if the Fed sends the following signals, the market may usher in a wave of rebounds, namely:
1. Expressed deep concern about recent labor market trends;
2. The U.S. economy may require a significant reduction in R* or the terminal interest rate.
However, the Fed and Powell, who have already made a mistake, may prefer to keep their options open rather than choose to "commit in advance." Before the Fed's June interest rate meeting, Powell had been a reliable dovish and the dollar weakened. But in June, Powell unexpectedly took a more conservative stance, which may be consistent with the message conveyed by the Fed's dot plot, that is, one rate cut is expected this year, not three.
Regarding the so-called political risk, if the Fed wants to avoid being accused of political bias, then they may cut interest rates at this week's meeting. However, the market currently reflects only a 4.5% chance that the Fed will cut interest rates in July. Therefore, the Fed is unlikely to be as "unpredictable" as the Bank of Japan. Instead, they may continue to emphasize that the Fed is still data-dependent.
Despite the possibility of a so-called "worst case" scenario, in which the Fed reveals no rate cut plans at all or does not take a dovish stance, some economists also believe that information about the Fed's policy shift may be confirmed in the coming weeks, namely in Powell's annual speech at the Jackson Hole central bank symposium in Wyoming in late August, when the Fed will have more data on inflation and the labor market.
As for gold, Kelvin Wong, senior market analyst at Oanda, said he believes that the pullback in gold is just a price fluctuation in a broader upward trend. He said, "Given that the Fed still prefers to cut interest rates rather than raise them in the medium term, and the 10-year U.S. Treasury real yield is still hovering below the key medium-term resistance level of 2.05%, the medium-term upward trend of gold remains, so it is bullish."
George Milling-Stanley, chief gold strategist at State Street Global Advisors, said he also expects gold prices to maintain their bullish momentum as it is clear that the federal funds rate is only moving in one direction.
Other central banks:
At 11:00 on Wednesday, the Bank of Japan will announce its interest rate decision and outlook report.
At 14:30 on Wednesday, Bank of Japan Governor Kazuo Ueda held a monetary policy press conference
At 19:00 on Thursday, the Bank of England will announce its interest rate decision, meeting minutes and monetary policy report.
At 19:30 on Thursday, Bank of England Governor Bailey held a monetary policy press conference
The Bank of Japan has been dominating the headlines lately. Whether it’s speculation about rate hikes, hints of continued bond reduction, or skepticism about intervening in the foreign exchange market, Governor Kazuo Ueda has certainly made a strong impression on traders since taking office.
Bank of Japan policymakers have signaled they will decide to scale back bond purchases at this meeting, and according to sources, the current 6 trillion yen monthly bond purchases by the Bank of Japan could be halved in the next few years.
However, policymakers have not yet reached a consensus on the possibility of a rate hike, so it is unclear whether the Bank of Japan will actually raise interest rates, although most policymakers agree that further rate hikes are needed this year. Investors have increased their bets on the Bank of Japan raising interest rates in July, with the probability of a 10 basis point increase being around two-thirds. Therefore, if the Bank of Japan keeps interest rates unchanged, it may disappoint investors.
Japan's sluggish economy and concerns about weak consumer demand could provide reason for the Bank of Japan to remain cautious, especially with inflation above target but far from out of control. In addition, the yen's strong rebound in July could provide policymakers with some breathing room to raise interest rates.
However, even if there are no major surprises and the only announcement is the expected decision on tapering, BoJ policymakers are unlikely to risk sounding dovish, as this could derail the yen's rally. In this case, the central bank's latest outlook report could provide some additional clues about the future policy direction. Still, given the magnitude of the yen's gains, a "hawkish pause" from the BoJ could trigger some profit-taking in the yen crosses. But if the BoJ is "ultra-hawkish", meaning it raises rates while signaling another hike in October, then USD/JPY could fall back to the 150 level, which could be more "comfortable" for Japanese authorities.
In addition, the Bank of England will also announce its interest rate decision and the latest monetary policy report on Thursday, which will include GDP and inflation expectations. The market currently believes that the probability of the Bank of England cutting interest rates at this meeting is only 44%, and the expected rate cut for the rest of the year is only 38 basis points.
Markets have been reluctant to price in a rate cut for several reasons: stubborn inflation risks, especially service price inflation, some hawkish members of the Bank of England have come out and said they will not vote to cut rates at this meeting, and the possibility of an upward revision of the Bank of England's growth forecasts for this year and next. The latter point is worth noting, as it would be strange for the Bank of England to cut rates while raising its economic growth forecasts, so the Bank of England is unlikely to cut rates at next week's meeting.
However, the sharp fall in the UK's overall inflation rate means that the UK's real interest rate is higher than that in the eurozone and the US. Therefore, the Bank of England has room to cut interest rates. Even if they don't cut rates next week, they may signal a rate cut as the UK unemployment rate faces upward pressure.
GBP has been the best performing currency in the G10 FX market this year, partly due to the reduction in political risk premium and yield differentials with other currencies. However, GBP/USD has been struggling to break through the 1.30 level, but the pair fell last week. One of the reasons for this is that the market started to buy the yen across the board due to the "death" of the yen carry trade, which currently limits the upside of GBP.
If they decide to start easing, it will be a difficult decision and will be communicated as a "hawkish rate cut" as there are ongoing upside risks to inflation. Therefore, although the rate cut is not yet fully priced into market expectations, the pound may not fall much on the news.
Important data: Many labor market data are "explosive"! Will the strong dollar return?
At 18:00 on Monday, the UK CBI retail sales balance for July;
At 22:30 on Monday, the U.S. Dallas Fed Business Activity Index for July will be released;
Tuesday 07:00, Japan's June unemployment rate;
At 13:30 on Tuesday, France’s second quarter GDP annual rate preliminary value;
At 16:00 on Tuesday, Germany's second quarter unadjusted GDP annual rate preliminary value
At 17:00 on Tuesday, the euro zone's second quarter GDP annual rate preliminary value, July industrial sentiment index, July consumer confidence index final value, July economic sentiment index
Tuesday 20:00, German July CPI data
At 21:00 on Tuesday, the monthly rate of the FHFA House Price Index in May and the annual rate of the S&P/CS 20-city House Price Index in May
Tuesday 22:00, US JOLTs job vacancies in June, US Conference Board Consumer Confidence Index in July
China's official manufacturing PMI for July at 09:30 on Wednesday
At 09:30 on Wednesday, Australia's second quarter CPI annual rate and Australia's June weighted CPI annual rate
French July CPI data at 14:45 on Wednesday
At 15:55 on Wednesday, Germany's seasonally adjusted unemployment rate in July and seasonally adjusted unemployment rate in July
Eurozone July CPI data at 17:00 on Wednesday
Wednesday 20:15, US ADP employment data for July
Canada’s May GDP data will be released at 20:30 on Wednesday
At 20:30 on Wednesday, the U.S. second quarter labor cost index quarterly rate
Wednesday 21:45, US Chicago PMI for July
At 22:00 on Wednesday, the monthly rate of the U.S. existing home sales index in June
At 22:30 on Wednesday, EIA crude oil inventories in the United States for the week ending July 26
Thursday 09:45, China's July Caixin Manufacturing PMI data
Thursday 15:15-16:00, final values of July manufacturing PMI for France/Germany/UK/Eurozone
Thursday 17:00, Eurozone June unemployment rate
Thursday 19:30, US Challenger Enterprise Layoffs in July
At 20:30 on Thursday, the number of initial jobless claims in the United States for the week ending July 27
Thursday 21:45, US July S&P Global Manufacturing PMI final value
At 22:00 on Thursday, the US July ISM manufacturing PMI and the US June construction spending monthly rate
At 20:30 on Friday, the U.S. unemployment rate in July and the seasonally adjusted non-farm payrolls in July
At 22:00 on Friday, the monthly rate of US factory orders in June
Investors will have the opportunity to carefully study a lot of other data in the coming week, including the consumer confidence index and JOLTS job openings data on Tuesday, the ADP employment report, Chicago PMI and pending home sales data on Wednesday, and of course the ISM manufacturing PMI data on Thursday, but the one they are most concerned about may be the US non-farm payrolls data and unemployment rate in July.
After adding 206,000 jobs in May, the market expects the U.S. labor market to add 185,000 jobs in June, the unemployment rate to remain at 4.1%, and average hourly earnings to grow at a similar pace compared to May.
A weaker-than-expected jobs report could boost sentiment on Wall Street somewhat but hurt the dollar as it would reinforce bets for aggressive rate cuts, while another strong reading could exacerbate the current sell-off in U.S. stocks.
At present, the focus of Fed officials is shifting from inflation to the labor market. Powell said earlier that "we need to pay attention to the state of the labor market."
Among the data to be released by the United States next week, most will be related to the labor market. If the U.S. labor market continues to weaken, the market may strengthen expectations that the Federal Reserve will cut interest rates more than twice this year.
San Francisco Fed President Mary Daly previously said that the cracks in the labor market are not yet serious enough to require immediate action, but she also acknowledged that the situation could change quickly. Daly said, "We don't want to see the labor market start to weaken significantly and waver, because by then, it is often too late to restore employment."
The U.S. unemployment rate has climbed month by month over the past three months, reaching 4.1% in June. Although still at a historical low, it is the highest level since 2021. Wage growth has also slowed. Fed Governor Cook said in a speech on July 10 that the Fed is "very concerned" about the unemployment rate and will "respond" if the unemployment rate deteriorates further.
For the dollar index, despite the possibility that the Federal Reserve may soon cut interest rates, Maybank Research analysts said that the strong dollar may soon resume in late July, but volatility may also increase given that "uncertainty about the US election has a greater impact on the market." The dollar index has weakened seasonally in July, and Maybank said that concerns about the election may further boost the dollar index in the third quarter, even if US economic data is more favorable and supports hopes that the Federal Reserve will start cutting interest rates in September. Maybank analysts added that the possibility of Trump's victory and a stronger inflationary environment may better support higher yields and the dollar index.
important events:
1. OPEC+ meeting
Next Thursday, OPEC+ will hold a joint ministerial monitoring committee meeting to review oil production policies.
Helima Croft, commodity strategist at Royal Bank of Canada, said OPEC+ "will most likely take a wait-and-see approach" next week rather than making any definitive statements about planned supply increases.
Oil prices plunged last month when OPEC+ unveiled plans to gradually restore oil supplies, but recovered when the group confirmed that "it would be prudent to increase production." The slump in Asian demand continued into the third quarter, strengthening the case for OPEC+ to remain cautious.
OPEC+ officials continue to insist that oil market stability, rather than market share, is the primary policy goal. OPEC+ will have a clearer understanding of its policy direction for some members at the end of the year meeting after the US presidential election.
It is worth noting that Russian Deputy Prime Minister Novak said that Russia will compensate for crude oil production that exceeds the quota set by OPEC+ partners, and there is no friction with other countries on this issue.
Russia's crude oil production in June exceeded the quota set by the OPEC+ group, but the Russian Energy Ministry pledged on Wednesday to stick to the required production level in July. Novak said overproduction was a minor problem and that Russia was in constant contact with its OPEC+ partners. He said he expected the OPEC+ Joint Ministerial Monitoring Committee meeting on August 1 to be constructive. "There is no friction between us, we are in constant contact with our colleagues."
2. Harris's approval rating begins to be on par with Trump's
There are about 100 days left until the US presidential election in November. The latest data shows that the polls between US Vice President Harris, who has basically secured the Democratic presidential nomination, and Republican presidential candidate and former President Trump are close, and the election situation is currently in a stalemate.
According to poll data compiled by the US election information website "Real Transparency Politics", as of the 25th, Trump was ahead of Harris by an average of 1.7 percentage points in national polls. The latest poll released by the Wall Street Journal on the 25th showed that Trump was ahead of Harris by 2 percentage points.
The newspaper reported that Harris's support rate is "nearly the same as Trump's," indicating that non-white voters have increased their support for Harris and Democrats' enthusiasm for this election has increased significantly. In several key swing states that may determine the final outcome of the election, the two's support rates are also very close.
However, Harris's support mainly comes from parts of the Democratic coalition that are dissatisfied with Biden. In a New York Times poll a month ago, the 81-year-old president won only 59% of black registered voters, while Harris' support was 69%. She also increased the party's share among Hispanic voters from 45% to 57%, and the share of voters under 30 from 46% to 56%.
The Trump campaign sought to downplay the shift, saying in a memo that Democrats would get a brief "Harris honeymoon" in the polls.
Still, the turmoil of the past few weeks has made analysts and forecasters cautious about drawing any hasty conclusions about what Harris’ candidacy might mean for the outcome of the November election.
Company earnings report: US tech stocks usher in a "critical moment"
Big tech companies will be in the spotlight next week as Amazon (AMZN), Apple (AAPL), and Microsoft (MSFT) report second-quarter earnings.
A months-long rally in big tech stocks hit a wall in the second half of July, culminating in a sell-off that saw the S&P 500 (SPX) and Nasdaq Composite (IXIC) post their biggest one-day declines since 2022 on Wednesday following disappointing earnings reports from Tesla (TSLA) and Google parent Alphabet (GOOGL).
Microsoft's earnings report will be closely scrutinized by investors after Google's earnings report failed to ignite investor enthusiasm for tech stocks. The market expects revenue of $64.5 billion, earnings per share of $2.94, and net income of $22.04 billion.
Analysts have been bullish on Microsoft's results over the past four weeks and have raised their forecasts. However, it is worth noting that Google's profit levels and costs have failed to impress the market, and its stock price fell by more than 7% last week, despite its revenue exceeding expectations last quarter.
In the past eight quarters, Microsoft's stock price rose an average of 4.2% within 1 day after the earnings were released. The market will focus on how artificial intelligence will generate revenue and cost for Microsoft, because the market is beginning to dislike the unbridled spending of large companies on artificial intelligence, so if Microsoft does not control its spending plans, then it may be "punished." Bryant VanCronkhite, senior portfolio manager at Allspring, said, "This is a critical moment in the market. People are starting to question why they are paying so much for these artificial intelligence businesses, and the market is worried that the Fed will miss the opportunity to achieve a soft landing, which has caused a fierce reaction."
However, even strong earnings may not be enough to pull the broader market out of its recent slump, at least in the short term, said Keith Lerner, chief market strategist at Truist.
"The market will judge direction based on the fact that these stocks have pulled back. My thought is that tech stocks have fallen so far that even if there are rebound gains from these stocks, people may be eager to lock in those gains."
Article forwarded from: Jinshi Data
