Fed Chief Sees Return of Cooling Inflation Trend

For the week ending 3 July 2024

As of midday Wednesday, global equities traded near record territory as dovish comments from US Federal Reserve Chair Jerome Powell and signs that France’s National Rally party won’t achieve an absolute parliamentary majority buoyed markets. The yield on the US 10-year Treasury note rose 8 basis points from last Friday to 4.34% amid speculation that former President Donald Trump is increasingly likely to retake the White House, though weak purchasing managers’ data in the United States caused a bond rally Wednesday morning. The price of a barrel of West Texas Intermediate crude oil rose $1.25 to $83.20 while volatility, as measured by the Cboe Volatility Index (VIX), fell to 12.

MACRO NEWS

Odds of right-wing majority in France dwindle

Though Marine Le Pen’s National Rally (RN) party took the largest share of the vote in the first round of parliamentary elections last Sunday, political blocs on the left and in the center are working together ahead of Sunday’s final round of voting to keep RN from achieving an absolute majority in the National Assembly, the lower house of the French parliament. Le Pen said Tuesday that she will seek to form an RN-led coalition if her party falls a few deputies short of the 289 needed to secure a majority. The spread between 10-year French government bonds and their German equivalent narrowed 12 basis points from last week’s highs to 68 basis points on the growing odds of a hung parliament unlikely to push through major reforms.

Powell sees signs disinflationary trend resuming

Speaking at the European Central Bank’s annual Forum on Central Banking in Sintra, Portugal, Fed Chair Jerome Powell said that after stalling in the early part of the year, prices appear to be resuming a disinflationary trend. Powell noted that the US labor market is showing signs of cooling off, as hoped, and that the job market is moving toward better balance. The Fed chair said he sees inflation in the low-to-mid-2% range a year from now. He refused to be drawn into a political discussion, saying the Fed stays out of politics. Regarding fiscal policy, Powell indicated that debt sustainability needs to be a focus going forward and action needs to be taken sooner rather than later. The odds of a September rate cut crept up after Powell’s remarks.

High court rules Trump has “significant immunity”

The US Supreme Court ruled on Monday that former US President Donald Trump has significant immunity from prosecution for official acts taken while in office. The president “may not be prosecuted for exercising his core constitutional powers, and he is entitled, at a minimum, to a presumptive immunity from prosecution for all his official acts,” Chief Justice John Roberts wrote in the majority opinion. But the President “enjoys no immunity for unofficial acts, and not everything the President does is official,” Roberts added. The ruling is expected to delay the cases pending against Trump while lower courts litigate which charges against the former president are related to official acts and which are unofficial. Trump’s sentencing in the New York false business records case, originally scheduled for 11 July, was postponed until 18 September after Trump’s attorneys filed a motion to overturn the verdict, arguing that the state should not have been allowed to introduce evidence about official acts Trump took while in office. After the Supreme Court ruling, bond yields rose as the decision is seen as boosting the former president’s electoral chances. Markets anticipate that the likely policy mix during a second Trump turn will be inflationary.

QUICK HITS

Purchasing managers’ indices weakened in June, especially the US services sector, where the index tumbled to its lowest level since the early days of the pandemic. The odds of a September rate cut from the Fed rose to 75% after the weak data. In Japan, the composite PMI slipped into contraction for the first time since November. The yen continued to weaken this week, hitting a 38-year low near 162 to the dollar.

The S&P 500 and Nasdaq Composite indices closed in record territory on Tuesday, with the S&P closing above 5,500 for the first time.

Thursday’s election in the United Kingdom is expected to be a nonevent for markets as the Labour Party is widely expected to secure a large majority.

The Bank for International Settlements forecasts that the global economy is on course for a “smooth landing.”

On Monday, China’s benchmark 10-year government bond fell to a record-low yield of 2.18%. The People’s Bank of China hinted Monday that it may sell bonds to moderate the rally.

The minutes of the Reserve Bank of Australia’s 17 to18 June meeting showed that the board discussed raising rates before leaving them unchanged at 4.35%.

Inflation in the eurozone edged down to 2.5% in June from 2.6% while the core rate held steady at 2.9%. The unemployment rate was unchanged at 6.4% in May.

US President Joe Biden demanded Tuesday that drugmakers lower the prices of GLP-1 medications or he will do everything in his power to do it for them.

The US job openings and labor turnover survey (JOLTS) showed a rise in job openings to 8.14 million in May from a downwardly revised 7.92 million in April.

Several US military bases in Europe have been placed on heightened alert amid terrorist threats. The current threat level is the highest in at least a decade, according to CNN.

On Tuesday, China and the Philippines agreed to deescalate tensions over a disputed island in the South China Sea, the government of the Philippines said. Increasing friction in the region has raised concerns that the US, which has a mutual defense pact with the Philippines, could be dragged into the dispute.

In this year’s round of wage negotiations, union members in Japan earned pay increases averaging 5.1%, the biggest annual gain since 1991.

THE WEEK AHEAD

On Monday, Sentix investor confidence data for the eurozone will be released, UK GDP and industrial production are due on Tuesday, as is US CPI. Fed Chair Jerome Powell will deliver his semiannual Monetary Policy Report to Congress on Tuesday and Wednesday. On Friday, US PPI will be released.