Mike Dolan’s Outlook for the U.S. and Global Markets
After a tense month focused on election risks around the world, markets quickly returned to the more mundane issue of the cost of money and whether de-inflation would be resumed to the extent that borrowing costs would eventually fall.
The release of the U.S. Consumer Price Index for June on Thursday will be a key moment of the week for many investors. The headline CPI is expected to fall 0.2 percentage points to 3.1%, while the “core” CPI remains at 3.4%.
With Federal Reserve Chairman Jerome Powell set to begin his two-part semi-annual congressional testimony later Tuesday, the consensus CPI forecast will likely reflect how the central bank thinks about the current situation: positive, but not quite there yet.
But with the U.S. unemployment rate above 4.0% for the first time since late 2021 and real-time estimates of quarterly GDP falling again to around 1.5%, markets may expect a more nuanced approach from the Fed chairman, who is growing increasingly wary of a sudden weakening in the labor market.
Leading up to the testimony, the Fed had several other reasons for optimism.
U.S. inflation outlook for the next few years broadly softened in June, as expectations of price increases for a wide range of consumer goods and services eased, according to a survey by the New York Federal Reserve.
The inflation rate one year from now is now seen at 3% as of June, down from a 3.2% increase expected in May, and the five-year outlook has also fallen from 3% to 2.8%.
Prices remained steady this week, down more than 3% from a 10-week high hit late last week, halving the annual increase in crude oil prices to 10%.
Tuesday’s drop in stocks came after a hurricane that hit a major U.S. oil production hub in Texas caused less damage than many market participants had expected, easing concerns about supply disruptions.
An update on U.S. small business confidence over the past month is also due to be released before Powell’s speech.
Ahead of the close, U.S. stock indexes, which had hit record highs, were expected to extend their gains, and futures remained in positive territory again.
Federal funds futures are pricing in two quarter-point cuts for the rest of the year, and the 10-year Treasury yield is hovering below 4.3% ahead of another round of bond selling this week, starting with 3-year notes on Tuesday, followed by 10-year and 30-year notes later in the week, with roughly $119 billion in coupons on offer.
The dollar rose slightly against the euro, yen, yuan and pound.
In the chaotic world of politics, the situation has been even less clear, but most recent statements from the White House suggest that President Joe Biden will remain the Democratic nominee in the November election.
In Europe, the new British government laid out a policy for how to revive economic growth amid a tight fiscal situation, initially focusing on supply-side reforms to improve infrastructure and boost housing construction. British stocks were strong.
As France begins to calm down a bit from a weekend general election that left parliament deadlocked, the reappointment of centrist Prime Minister Gabriel Atal as interim prime minister could be a move that will help the country weather a compromise on next month’s Olympics and perhaps the 2025 budget in the autumn.
Stocks and the euro fell slightly on Monday in relief after France’s far-right and far-left coalition failed to win an overall parliamentary majority. French government bond yields and spreads were steady.
In Asia, stocks broadly rose and outperformed with a gain of nearly 2%, while Hong Kong ended lower.
Key trends likely to give further direction to U.S. markets later on Tuesday:
* US June NFIB Small Business Survey, Mexico June Inflation Rate
* Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee, along with Fed Governor Michelle Bowman and Fed Vice Chairman for Supervision Michael Barr.
* Leaders gather in Washington for NATO summit
* The U.S. Treasury will auction $58 billion in three-year notes and $46 billion in 12-month notes.
(Writing by Mike Dolan; Editing by XXXX mike.dolan@thomsonreuters.com)