Week Ahead: US CPI and French election aftermath in focus

After the softer than expected US monthly employment data released on Friday, markets get to see the other side of the Fed’s mandate this week. The latest inflation figures published on Wednesday could cement a September rate cut by the FOMC, which is now given around a 77% chance of happening, according to Fed Funds futures. At least the job market is now cooling, especially in the private sector and the unemployment rate has pushed above 4%, which is helping to keep wages in check.

Us inflation is likely to be well behaved after the unwelcome higher monthly prints over the prior six months. Readings of around 0.2% are needed (0.17% to be exact) over a period of time to bring inflation back to the Fed’s 2% target. Household demand should stall in the months ahead meaning demand-driven pressures are reduced as policy remains restrictive. This then opens the door for the start of policy easing, starting in September. Markets are now pricing in just over two 25bps rate cuts this year, with four FOMC meetings to go and a US election.

The dollar has turned sharply lower since coming into resistance above 106 on the Dollar Index. Prices have fallen for seven straight sessions, below the 50-day SMA and long-term trendline support. The 200-day SMA sits at 104.49 with the next Fib retracement level (38.2%) of this year’s high and December low at 104.26. There’s a minor Fib level at 105.12. Markets will also watch Fed Chair Powell’s testimony in front of the Senate on Tuesday and Wednesday. He is likely to reiterate his recent comments that the central bank is getting back on the disinflationary path. We note that the 10-year US Treasury yield is nearing strong support around 4.20% to 4.25%.

The euro will be in thrall to the second round of French elections on Sunday. Markets are betting on no absolute majority (289 seats) for any party, even though the far-right National Rally (RN) won the initial vote last week. A hung parliament and then some sort of coalition could form, which may lead to policy gridlock in Europe’s second biggest economy. More uncertainty could slow the euro’s recent strong rebound from around 1.0690. But bullish momentum could push prices up near to the June highs around 1.09.

In Brief: major data releases of the week

Tuesday, 09 July 2024

–  Fed Chair Powell’s Testimony: Powell’s semi-annual testimony to Congress will be watched to see if he maintains his modestly dovish bias. That is a recognition of better inflation data, though more improvements are required to pull the rate cut trigger.

Wednesday, 10 July 2024

– RBNZ Meeting: Rates are expected to be kept at 5.50%. Downside risks to growth may be highlighted as the job market eases and the economy stalls. But the bank’s hawkish guidance could be maintained due to sticky non-tradable inflation.

– BoE Official: Election purdah is no more, which means we get to hear from a few BoE officials. Chief Economist Pill had been cautious on summer rate cuts in late April. There’s around a 60% of an August 25bps rate cut.

Thursday, 11 July 2024

– UK GDP: Consensus see May m/m print at 0.2% from flat, so the three-month will pick up one-tenth to 0.8%. Retail sales and manufacturing are expected to rebound.

– US CPI: It’s all about the core monthly reading, which is expected to print at 0.2%. The annual figure is predicted to rise 3.4%, still just over half the peak seen in 2022. This will be a relief for the Fed who grappled with hotter data in at the start of 2024.

Friday, 12 July 2024

– US PPI: This price data is important due to its shared components with the PCE number. That is the Fed’s favoured inflation gauge and has been pointing to easing price pressures.