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Good morning. The end of the week brings noticeable calm to markets, with no sudden, market-moving headlines. Rather than reacting to individual news items, investors are focused on digesting existing macroeconomic data and positioning portfolios for the ongoing earnings season. The main thread of the market narrative remains central bank policy — particularly that of the U.S. Federal Reserve (Fed) — and the search for an answer to how long interest rates will stay at current, elevated levels.
Top Stories Today
- High U.S. bond yields set the tone. Market commentary indicates that persistently elevated 10-year U.S. Treasury yields are reinforcing the narrative of an extended period of high interest rates in the U.S. Statements from Fed officials — including earlier signals from Chair Kevin Warsh, noted yesterday — generally emphasize that the start of a rate-cutting cycle depends on sustained improvement in inflation data. As a result, the U.S. rate futures market (Fed funds futures) is scaling back expectations for the size of anticipated cuts. A strong dollar, buoyed by higher yields, traditionally increases pressure on emerging market (EM) currencies and raises the cost of servicing debt denominated in U.S. dollars. (Sources: market analyses; macroeconomic commentary.)
- Belief in a “soft landing” remains alive. Many market commentators describe the data flowing in from the U.S. and Europe in recent days as consistent with a scenario of gradual economic slowdown rather than a sharp recession. A “soft landing” is the ideal outcome for central banks, in which inflation is tamed without triggering a drastic rise in unemployment or a collapse in GDP. This backdrop allows equity markets to hold relatively elevated levels despite restrictive monetary policy. (Sources: financial institution reports.)
- Sector rotation and selectivity during earnings season. U.S. equity markets are currently showing a characteristic rotation of capital. Investors are shifting funds between growth sectors (such as technology, which is highly sensitive to the cost of money) and defensive industries (such as healthcare or consumer staples), depending on shifting interest rate expectations. Additionally, the ongoing earnings season typically boosts volatility in individual stock prices. Capital is becoming highly selective, particularly in sectors where expectations had been stretched. (Sources: equity market analyses.)
In the Background
- European debt under the influence of the U.S. and ECB. Markets frequently note that eurozone government bond yields (e.g., German Bunds) show a strong correlation with movements in U.S. Treasuries. Additionally, divergences in expectations regarding future moves by the European Central Bank (ECB) and the Fed often translate into pressure on the EUR/USD exchange rate.
- Asia awaits fresh catalysts. The behavior of equity markets in China and Japan traditionally shapes global risk sentiment (risk-on/risk-off). Investors in Asia are reacting to local data and policy decisions. Amid weaker Chinese growth data noted yesterday, markets are closely watching Monday’s decision from the People’s Bank of China (PBoC).
- Commodities move with fundamentals. Oil and natural gas prices are currently responding to a classic mix of demand factors (global economic health), supply factors (inventories), and general geopolitical backdrop, without one single dominant shock driving moves.
Worth Watching
- 17.07, 11:00 – Eurozone: Final CPI inflation. Final reading of June consumer inflation. Confirmation of slowing price growth could reinforce market expectations for further ECB rate cuts.
- 17.07, 15:15 – U.S.: Industrial production. A key indicator of activity in the American manufacturing sector. It will show how industry is coping with an environment of expensive credit.
- 17.07, 16:00 – U.S.: University of Michigan preliminary sentiment index. This report contains data that is critically important to the Fed on consumers’ own inflation expectations. Their anchoring is a necessary condition for monetary easing.
- 20.07, 03:15 – China: People’s Bank of China (PBoC) interest rate decision. An important event for the start of next week. Changes to loan prime rates (LPR) will signal how willing Beijing is to stimulate its economy.
- 20.07, 14:30 – Canada: CPI inflation. Next week brings key data for the Bank of Canada (BoC), which will shape the path of further rate cuts in the country.