Fed Chair Powell's Testimony to Influence Markets

This week, traders are gearing up for Federal Reserve Chair Jerome Powell's semi-annual Congressional testimony. Scheduled for Tuesday, Powell's remarks are expected to drive market expectations regarding the Fed's policy direction, particularly as signs of a cooling economy and falling inflation bolster hopes for rate cuts. Other Fed officials, including Michael Barr, Michelle Bowman, Austin Goolsbee, Alberto Musalem, and Raphael Bostic, are also slated to speak throughout the week, providing additional insights.

Key U.S. Inflation Data in Focus

The economic calendar features significant U.S. data releases, with Thursday's Consumer Price Index (CPI) and Friday's Producer Price Index (PPI) taking center stage. These reports will be scrutinized to determine if progress towards the Fed's 2% inflation target continued in June. Core CPI is expected to hold steady at 0.2%, while PPI may nudge up to 0.1% from a 0.2% monthly decline in May. Other important releases include weekly jobless claims and the University of Michigan's preliminary July consumer sentiment and inflation expectations.

European Markets Eye French Election Outcome

In Europe, attention will be on the outcome of France's parliamentary election, which has resulted in a hung parliament. This unexpected result has heightened market concerns about fiscal policy. Data releases in Europe are limited, with German June inflation being the highlight. However, the election outcome is likely to dominate market sentiment.

RBNZ Rate Decision and Economic Outlook

The Reserve Bank of New Zealand (RBNZ) is widely expected to maintain the official cash rate at 5.5% during its Wednesday meeting. The RBNZ may highlight upside risks to consumer spending and inflation from the government's 2024 budget, balanced against concerns over a sluggish economy and deteriorating business confidence.

China's Economic Data and Stimulus Expectations

China's economic calendar includes consumer inflation, which is likely to hold steady, and producer price data, where declines may continue to ease. The patchy economic recovery will keep pressure on the government to introduce more stimulus measures. Trade data will be closely watched for signs of export strength, while import figures may reflect ongoing domestic consumption fragility. June credit data is also anticipated.

Japan's Economic Calendar

Japan's data releases include overtime pay, producer prices, current account figures, trade data, and machinery orders. These indicators will provide a snapshot of the economic health and inform the Bank of Japan's policy decisions.

UK Economic Data and BOE Commentary

The UK will publish key economic indicators, including May GDP, industrial and manufacturing production, and trade data. Bank of England Monetary Policy Committee member Jonathan Haskel is scheduled to speak on UK inflation on Monday, potentially offering insights into future monetary policy.

Australian Data and Market Reactions

Australia's light data calendar includes consumer and business confidence and inflation expectations. There are no significant data releases from Canada this week.

Dollar Impacted by Mixed U.S. Jobs Data

The dollar's performance against other major currencies was influenced by mixed results from the U.S. June payroll data. Non-farm payrolls (NFP) exceeded expectations at 206,000, compared to the 190,000 estimate. However, significant downward revisions to previous months, coupled with a surprising rise in unemployment to 4.1% from the expected 4.0%, added complexity to the market reaction. These revisions and the uptick in unemployment led to a sharp decline in U.S. Treasury yields, reinforcing expectations of potential rate cuts by the Federal Reserve in 2024 and possibly more aggressive cuts in 2025.

Currency and Bond Market Movements

The mixed economic signals sent the U.S. dollar generally lower against major currencies, except for the Canadian dollar, which fell following a downbeat June employment report. EUR/USD and GBP/USD reached three-week highs, USD/JPY fell to a five-session low, and AUD/USD hit a six-month high. The U.S. 2-year Treasury yield dropped to a three-month low, while the 10-year yield fell below its 200-DMA, hitting a four-session low. These movements reflected market anticipation of future rate cuts and contributed to a softer dollar.

Equity Markets and Commodity Prices

Equity markets responded positively to the softer yield environment, with the S&P 500 and NASDAQ indexes reaching fresh record highs. Gold prices also benefited, climbing to a one-and-a-half-month high as risk sentiment improved.

Looking Ahead: Key Economic Events and Data

The upcoming week holds significant event risks, including Fed Chair Powell's testimony and key U.S. economic indicators such as June CPI, PPI, and the July University of Michigan sentiment index. These events and data releases will be crucial in shaping market expectations for future Fed policy moves and could further influence currency and bond markets.

Conclusion: Navigating Market Uncertainty

The mixed U.S. payroll data and subsequent market reactions underscore the growing uncertainty surrounding the Fed's policy path. With expectations of rate cuts in 2024 and potentially more aggressive easing in 2025, the focus will shift to upcoming economic data and Fed communications. The potential for further dollar weakness remains, especially if upcoming data reinforces the view of a slowing economy. Conversely, any signs of economic resilience or hawkish signals from the Fed could provide some support for the dollar. Traders will need to remain vigilant as they navigate these uncertainties.

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