The effects of the European elections and US inflation data

The effects of the European elections and US inflation data
The effects of the European elections and US inflation data

This week, investors will be closely watching European markets react to the French presidential election. In addition, China and the United States are due to release their consumer price index (CPI) data, which will provide information on the trajectory of inflation in the world’s two largest economies.

In addition to the important economic data to be released by major European countries, market reactions to the French elections will be particularly scrutinized this week. In addition, the United States and China are about to publish their inflation data for June, which will offer clues on the monetary policy outlook of their respective central banks.

L’Europe 

The outcome of the French elections could have a significant impact on stock markets and the euro in the region. Stocks and the single currency could rally further if the far-right National Rally party fails to win enough votes to form a government. However, history shows that elections can only influence financial markets temporarily. Post-election politics and economic developments tend to shape long-term market trends.

On the economic front, Germany will publish its trade balance for May and the wholesale price index (WPI) for June. The German trade surplus narrowed slightly to $22.1 billion (€20.36 billion) in April, from $22.2 billion (€20.45 billion) the previous month, due to a weaker increase in exports compared to imports. Exports to the UK and Russia in particular jumped, while sales to the US fell. The trade surplus is expected to decline further to $19.9 billion (€218.33 billion) in May, according to the consensus.

Germany’s wholesale price index is a key gauge of inflation, as wholesale prices are typically passed on to consumers. The index slowed in May, rising just 0.1% month-on-month, suggesting that the country’s inflation is on a downward trend. Last week, the preliminary CPI showed that German inflation slowed to 2.2% in June after rising for the previous two months. Consensus suggests that wholesale prices could rise 0.2% in June from the previous month.

Along with similar economic trajectories in other European economies, these data offer encouraging signs that the ECB will continue its rate-cutting cycle, providing bullish factors for stock markets.

In the UK, monthly gross domestic production (GDP) for May is due to be released on Thursday. The economy resumed growth in the first quarter after a technical recession in the second half of 2023. According to Forex Factory’s survey, the country’s GDP could grow by 0.2% month-on-month in May, recovering from stagnant growth the previous month.

United States

This week, two economic events and data will be at the forefront of global markets’ minds: the testimony of the Federal Reserve (Fed) Chairman Jerome Powell’s testimony and the June U.S. CPI. Chairman Powell’s testimony before the Senate Banking Committee is a critical event for Wall Street and global markets. During this session, Powell will answer questions from the committee on the state of the U.S. economy and the Fed’s monetary policy. Unexpected questions or answers could lead to market volatility.

U.S. CPI data will be in particular focus, providing clues about the trajectory of the country’s inflation. Consumer prices rose 3.3% year-on-year in May, after slowing 3.4% the previous month and 3.5% in March. This downward trend is promising for the Fed to start cutting interest rates in September, which would be the first time since March 2020, when the pandemic struck. A further easing of price pressures is likely to lift Wall Street. The consensus is for prices to increase 3.1% year-on-year in June, suggesting inflation is slowing at a stronger pace.

In addition, the producer price index (PPI) is also an important indicator of inflation, representing the change in prices at the factory gate.

The United States will open earnings season with major banks including Citigroup, JPMorgan Chase and Wells Fargo. The financial sector is a bellwether for global economic health because of the close ties between these major banks.

Asia Pacific

China’s June CPI data is of considerable importance for consumer demand as the country faces economic challenges due to its housing crisis and post-pandemic recovery. On a positive note, Chinese inflation rose for the third consecutive month in May, suggesting that Beijing’s efforts to shore up its economic growth have paid off. In June, economists expect consumer prices in China to rise 0.4% annually. The data could further boost commodity prices, indicating positive economic activities in the world’s second-largest economy.

The Reserve Bank of New Zealand (RBNZ) is also set to decide on its official policy rate (OCR), with hopes of keeping it at 5.5% for the eighth consecutive time. The bank remained aggressive at its last meeting in May, signalling that interest rates could remain restrictive for longer than expected. New Zealand only releases quarterly CPI, which was 4% year-on-year in the first quarter, which remains well above the RBNZ’s target level of 1% to 3%.

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