So, what do we know?
(A forex, index, and commodity market review)
Last week’s key central bank policy announcement offered no surprises to the markets as the Federal Reserve raised interest rates by 0.25%, which was a near certainty and expected by the markets. The Eurozone’s central bank, The European Central bank (ECB), also raised rates by 0.25% which was also widely expected by the markets. Whilst the Federal Reserve said that it “remained “highly attentive to inflation risks” and gave little away about any future rate rises before year end.
Markets on early Monday morning are bolstered by the weak PMI data out of China and the expectation that the Chinese authorities will provide further stimulus to the faltering economy.
Weekly change (amount change and percentage change on the week)
US and to a lesser extent, global markets were happy with the outcome of the FOMC and ECB rate decisions. US forward interest rate contracts imply a 30% probability of another rate hike before year end. By the end of the week, the language from the Fed was well received by the markets as the S&P500 and the NASDAQ gained1% to 1.6% on the week. What also encouraged the markets was comments from Jay Powell, the Fed Chairman, who said they are no longer forecasting a recession. Overall Powell’s comments were regarded as less hawkish than last month whilst markets are in no doubt that if the employment picture tightens further or inflation tilts higher then the FED will raise rates again.
Whilst inflation has continued to fall in the US with headline inflation hitting 3% last month, its lowest annual rate since March 2021, the Fed refused to rule out a further rate rise in case data warranted another hike. However, the PCE data released on Friday, the Fed’s preferred measure of inflation, showed inflation falling to its lowest level since the start of the pandemic in 2020.
Another factor influencing the Fed is employment. The employment picture is strong despite a recent modest cooling which has helped underpin consumer spending and sentiment. This week’s non-farm employment data will certainly move the dial on the probability of a further rate rise this year.
The European Central Bank’s hike of 0.25%, the ninth hike in a row, was also expected by the markets as the governing council raise rates to 4.25%, the highest level since 2001. The ECB modified its language accompanying the hike by saying that it would ensure interest rates “will be set at sufficiently restrictive levels for as long as necessary.” This contrasts with language from the previous meeting when the bank said it would ensure rates were “sufficiently restrictive” to bring inflation down to target. The markets interpretation from the change in language was to view last week’s hike as the last hike in the current tightening cycle. Eurozone inflation has continued to fall over the past three months with the headline rate hitting 5.5% and with a further update this Monday expected to show another decline in both headline and core rates. The ECB is also mindful of the effects the rate rises are having on the manufacturing sector which last week saw the Manufacturing PMI data fall to 42.7, its lowest level since May 2020 in the first few months of the pandemic.
UK markets had a quieter week, with the FTSE recording modest gains whilst investors wait for the MPC to decide this week about the next hike in interest rates here in the UK. Up until the better-than-expected inflation data release on 19th July, forward contracts implied another 0.5% hike in rates. Investors now expect the MPC to raise rates to 5.25% with expectations for the current tightening cycle to peak somewhere around 5.75% to 6% - lower than the 6.25% to 6.5% forecasted just three weeks ago. However, analysts also expect rates to remain elevated for longer to combat the stickier core UK inflation.
The US Dollar continued its recover last week, following the sharp sell-off in the second week in July. Whilst both the Federal Reserve and ECB raised rates by 0.25%, the ECB’s language encouraged the view that rates had hit their peak in the Eurozone. The interest argument supported further gains for the US Dollar versus the Euro although Sterling continues to be the stand-out currency, remaining unchanged versus the US Dollar and higher versus the Euro last week as traders expect interest rates to remain elevated in the UK for longer.
The Japanese Yen had a volatile day last Friday, following the meeting of the Bank of Japan’s monetary policy committee. The BoJ kept rates unchanged, maintaining its ultra-loose monetary policy as inflation hits a high of 3.3% in the last release. However, the BoJ made a change to its yield curve control measures by announcing that it would allow yields on its 10-Year JGB to widen to 1% yield. The BoJ had previously capped the yields on the 10-year JGB at 0.5%, which the bank said it was still maintaining that cap, but it was a reference rather than a rigid limit. Perhaps the BoJ just has difficulty saying its tightening monetary policy slightly. The Japanese Yen went on a roller coaster ride, eventually ending last Friday down two yen versus the US Dollar as the US dollar recovered ground it lost over the past three sessions.
Gold -4 -0.20%
UK OIL +3.73 +4.60%
US OIL +3.60 +4.68%
Gold has managed to hold on to most of its gains from the first two weeks in July, despite the recovery in the US Dollar, which makes any dollar denominated commodity more expensive in other currencies.
Oil continues to make gains with both Brent and WTI grades up $11 from levels at the end of June. More positive news from the US economy helped bolster prices further last week as the Federal Reserve no longer believed that the US Economy would slip into a recession.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Following hot on the heels of the Federal Reserve and ECB, we have the Bank of England’s MPC and Reserve Bank of Australia meeting this week. In addition, being the first Friday of the new month we have US Non-Farm employment data. The Markets would prefer a slightly softer reading to reinforce the view that US rates will remain on hold through to the year end.
China Manufacturing and service PMI readings. A slight decline forecast in both readings as the authorities in Beijing signal further measure to help improve activity. A drug that is having less and less effect each time it is administered. Data is already out and underlines the need for another injection of stimulus from the PBOC.
Eurozone Headline and Core Flash Inflation estimate.
China Hot on the heels of the state released data, the Caixin report provides a more independent deport on manufacturing activity. A similar decline expected.
Australia RBA policy meeting expected to result in a further rate hike of 0.25% to 4.35%. AUD sensitive.
US ISM Manufacturing PMI index. A recovery expected although still entrenched below the important 50-level which separates expansion from contraction in the sector. USD sensitive
US ADP payroll non-farm employment change. A correction to last month’s blow-out number. Can be erratic so not closely followed unless significantly different from consensus. USD, US assets sensitive
China Caixin Services index. Falling in line with other data suggesting Chinses economy is struggling.
UK Bank of England Monetary Policy Committee meets to set interest rates to a 15-year high. Expect 0.25% hike in rates although 0.5% is possible but not expected. Such a hike would cause sterling to spike higher and interest rate sensitive stocks to be buried. Governor Bailey speaking 30 minutes after the announcement. GBP and UK assets all very sensitive to this announcement.
US Non-farm employment change. 200K new jobs and average hourly earnings down slightly as the US employment market cools slightly. Watch out for revisions. A softer number would benefit stocks. US Dollar, US, and global assets sensitive to the release.
US Quarterly earnings
Apple and Amazon out on Thursday. The remaining big tech results following on from Meta and Microsoft last week. Focus on Apple’s revenue from iPhone and iPad sales although improved margins expected.
What should we be trading?
(Analysis of the popular markets and what we like)
What’s the problem?
(Examining a problem many traders face and what to do about it)