03 Jul

Lower US inflation boosts hopes for less hawkish Federal Reserve policy

July 3, 2023

By JustMarkets

On Friday, the PCE inflation rate, which is closely monitored by the US Central Bank, showed that price pressures are easing, fueling hopes that the Fed is nearing the end of its rate hike cycle. Investor optimism improved, leading to active buying of stocks. At the close of the stock market, the Dow Jones Index (US30) gained 0.84% (+2.01% for the week), and S&P 500 (US500) jumped by 1.23% (+2.43% for the week). On Friday, the NASDAQ Technology Index (US100) closed positive by 1.45% (+2.37% for the week).

The PCE price index, the Federal Reserve’s preferred measure of inflation, slowed slightly more than expected. But the figure is still growing, albeit at a slower rate. On an annualized basis, the index fell to 4.6%, the lowest level of core PCE inflation since October 2021. A more detailed report shows that services inflation appears to have peaked.

According to the final June data released Friday, the University of Michigan Consumer Sentiment Index rose to 64.4 (the previous 63.9). The rise reflects a recovery in sentiment caused by the resolution of the debt ceiling crisis early last month, as well as more positive sentiment about easing inflation.

The US Treasury Secretary Janet Yellen said Friday that the US economy is on track to maintain a strong labor market while lowering inflation. Yellen also added that solid household and corporate balance sheets would be a source of US economic strength, along with a continued surge in factory construction.

Equity markets in Europe were mostly up on Friday. Germany’s DAX (DE30) gained 1.26% (+1.72% for the week), France’s CAC 40 (FR40) gained 1.19% (+3.12% for the week) on Friday, Spain’s IBEX 35 Index (ES35) gained 0.99% (+3.47% for the week), Britain’s FTSE 100 (UK100) closed up by 0.80% (+0.93% for the week).

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The inflation rate in the Eurozone declined from 6.1% to 5.5% y/y (5.6% expected). Core inflation (which excludes food and energy prices) rose to 5.4% (5.5% expected) from 5.3% y/y. Inflation in the Eurozone is becoming more resilient, making it harder to decide when to stop raising interest rates, European Central Bank Governing Council spokesman Gabriel Makhlouf said Friday. According to analysts, until services inflation begins to decline in Europe, it is too early to talk about ending the tightening cycle.

In Switzerland, the KOF economic barometer was 90.8 points, down 0.6 points from May. This is the third consecutive drop in the barometer. Thus, the outlook for the Swiss economy in the second half of the year remained below average (100).

Gold prices failed to maintain the upward momentum of the first three months of the year in the second quarter and fell more than 3% by the close of June. The yellow metal came under pressure from rising yields and a reassessment of monetary policy expectations in both the US and Europe in response to tight inflation. But banking analysts are confident in gold and believe the second half of the year will be upward for gold as central banks begin winding down their tightening programs.

Asian markets mostly rallied last week. Japan’s Nikkei 225 (JP225) gained 1.66% over the week, China’s FTSE China A50 (CHA50) gained 0.33%, Hong Kong’s Hang Seng (HK50) ended the week down by 0.09%, and Australia’s S&P/ASX 200 (AU200) ended the week up by 1.47%. Most Asian stocks rose on Monday as lower US inflation boosted hopes for less hawkish Federal Reserve policy, and data showing improved sentiment toward the Japanese economy sent the Nikkei Index back to a 33-year-high.

A Bank of Japan survey showed the country’s business sentiment improved in the second quarter, indicating that the economy is recovering as more firms pledged to increase capital spending.

Home prices in Australia rose for the fourth straight month. Australian households are among the most indebted in the world, and housing affordability recently hit a record low. The report indicates that higher interest rates and lower sentiment negatively affect the number of active home buyers.

S&P 500 (F) (US500) 4,450.38 +53.94 (+1.23%)

Dow Jones (US30)34,407.60 +285.18 (+0.84%)

DAX (DE40) 16,147.90 +201.18 (+1.26%)

FTSE 100 (UK100) 7,531.53 +59.84 (+0.80%)

USD Index 102.92 -0.42 (-0.41%)

Important events for today:
  • – Switzerland Consumer Price Index (m/m) at 09:30 (GMT+3);
  • – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
  • – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
  • – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
  • – US ISM Manufacturing PMI (m/m) at 17:00 (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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