Falling inflation figures in the US increase the likelihood of a pause at the September Fed meeting

July 31, 2023

At Friday’s close, the Dow Jones Index (US30) increased by 0.5% (+0.65% for the week), while the S&P 500 Index (US500) added 0.99% (+0.85% for the week). The NASDAQ Technology Index (US100) closed positive by 1.90% (+1.67% for the week) on Friday.

Core PCE data is the Fed’s preferred inflation gauge. The 0.5% decline from the May reading only reinforced hopes that the Fed has likely ended the current rate hike cycle. Combined with labor costs rising at the slowest pace in two years, this may explain some of the weakness in the US Dollar late last week. There is a lot of US labor market data coming out this week, including the NFP report. This data will provide another snapshot of the state of the US economy. Average hourly earnings will again be a key indicator for the Fed, as strong wage growth has been cited as a problem in the ongoing fight against inflation.

Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE40) rose by 0.39% (+2.13% for the week), France’s CAC 40 (FR40) gained 0.15% (+0.96% for the week), Spain’s IBEX 35 (ES35) declined by 0.09% (+2.86% for the week), and the UK’s FTSE 100 (UK100) closed positive by 0.02% (+0.40%for the week).

This week, the Bank of England will hold a monetary policy meeting on Thursday. Analysts at HSBC expect the Bank of England to maintain a hawkish stance and raise the rate by 50 basis points to 5.50%. At the same time, JP Morgan believes that even though the Bank of England still has a lot of work to do, an increase of 25 basis points is expected.

Interest rate hikes by the US Federal Reserve and the European Central Bank are holding back gold and silver prices. However, Fed Chairman Jerome Powell and ECB President Christine Lagarde were cautious in their press conferences, reinforcing expectations that interest rates are close to peaking. This means that once the US and ECB central banks complete their tightening cycle, precious metals will receive fundamental support. Analysts predict that late 2023 and all of 2024 will be a bullish period for gold and silver on the back of a declining dollar index.

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Crude oil prices (WTI and Brent) continued their upward movement. Many factors contributed to this, but primarily the weakening of the US dollar. This week will start with the release of key data from China, the NBS PMI, which is expected to push oil prices higher. In connection with the recent announcement of OPEC+ on the extension of production cuts for August, whether the organization will decide to continue the reduction in September has been raised again. Market experts are inclined to believe that the production cut will continue.

Asian markets grew steadily last week. Japan’s Nikkei 225 (JP225) gained 0.34% for the week, China’s FTSE China A50 (CHA50) jumped by 6.12%, Hong Kong’s Hang Seng (HK50) gained 5.56% for the week, and Australia’s S&P/ASX 200 (AU200) closed positive by 1.23% for the week.

On Friday, traders saw two major surprises from Japan. First, the Bank of Japan adjusted its yield curve control policy slightly and made it more flexible in its management. Second, inflation in Tokyo unexpectedly rose to 3.2% in July. But despite this, the BoJ lowered its long-term inflation forecasts, thus keeping the possibility for further easing.

S&P 500 (F)(US500) 4,582.23 +44.82 (+0.99%)

Dow Jones (US30) 35,459.29 +176.57 (+0.50%)

DAX (DE40) 16,469.75 +63.72 (+0.39%)

FTSE 100 (UK100) 7,694.27 +1.51 (+0.020%)

USD Index 101.70 -0.07 (-0.07%)

Important events for today:

– Japan Industrial Production (m/m) at 02:50 (GMT+3);
– Japan Retail Sales (m/m) at 02:50 (GMT+3);
– Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
– China Manufacturing PMI (m/m) at 04:30 (GMT+3);
– China Non-Manufacturing PMI (m/m) at 04:30 (GMT+3);
– German Retail Sales (m/m) at 09:00 (GMT+3);
– Switzerland Retail Sales (m/m) at 09:30 (GMT+3);
– Eurozone Consumer Price Index (m/m) at 12:00 (GMT+3);
– Eurozone GDP (q/q) at 12:00 (GMT+3);
– Eurozone GDP (q/q) at 12:00 (GMT+3);

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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Falling inflation figures in the US increase the likelihood of a pause at the September Fed meeting