Wayne Cole provides an update on the European and global markets for the day ahead.
The start of the week saw a slight decline in risks, with most stock indices in the red, the dollar higher and Treasury yields slightly lower, although there was no catalyst obvious for these movements.
The dollar reached 159.94 yen at the start of the week, which triggered the usual warnings from Japanese authorities against “excessive” volatility, synonymous with intervention alarm. The 160.00 level is considered a red line for the Japanese, given that it came at the end of April when the dollar reached 160.245.
The weak yen is contributing to imported inflation and putting pressure on the Bank of Japan (BoJ) to continue easing policy. Minutes from the central bank’s latest meeting confirmed that there was much discussion about reducing bond purchases and raising interest rates.
The steady decline of the yen is also spilling over into emerging markets, putting a strain on Asian currencies that must fall to maintain the competitiveness of their exports. The Chinese yuan has gained more than 10% against the yen since the start of the year and is approaching its highest level since 1992, which largely explains why analysts suspect Beijing of depreciating its own currency at over time.
Geopolitics also played an important role, with the first US presidential debate on Thursday and the first round of French elections this weekend.
An opinion poll released over the weekend showed France’s far-right National Rally (RN) party and its allies leading the first round of French elections with 35.5% of the vote.
The main data of the week will be the personal consumption expenditures (PCE) price index on Friday, which must be benign for the market to continue betting on a rate cut in September.
The core index is expected to slow to a three-year low of 2.6% year-on-year, from 2.8%, with a range of 2.5% to 2.8%. The benign CPI and PPI reports have the market pricing in a rate of 2.6% or lower, so an upside surprise would hurt a lot.
Analysts also warn that a series of very soft PCE figures from the second half of last year will disappear in the coming months, making it difficult to overcome the base effect. Fed chief Powell cited this factor to explain why the midpoint chart projected that the core PCE index would hold at 2.8% through the end of the year.
Key developments that could influence markets on Monday:
– Ifo survey on the business climate in Germany, June orders from the CBI in the United Kingdom.
– Claudia Buch, Edouard Fernandez-Bollo, Isabel Schnabel and Elizabeth McCaul, members of the ECB board of directors, will speak.
– Austan Goolsbee, Mary Daly and Christopher Waller of the Federal Reserve will speak. Bank of Canada Governor Tiff Macklem speaks.
– Dallas Fed manufacturing index for June
