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U.S. and global markets are grappling with mixed signals, both domestically and internationally. Despite the persistent inflation challenges that keep the Federal Reserve from hinting at interest rate cuts, global sentiment is less anxious. Fed Chair Jerome Powell, in his congressional testimony, remained noncommittal about the timing of potential rate cuts, acknowledging a changing employment landscape. Investors continue to anticipate 50 basis points of rate cuts this year, twice the amount indicated by the Fed.
U.S. Treasury markets remain steady, with the 10-year yield hovering just below 4.3%. The upcoming $39 billion auction of 10-year notes and last Tuesday's successful 3-year note sale have contributed to a prevailing calm in global markets, even with the approaching U.S. inflation data update for June.
Meanwhile, in China, the inflation scenario reflects a subdued global goods price surge. China's consumer price index edged up just 0.2% in June, falling short of expectations, and deflation at factory gates persisted. This decline has affected the stock market, putting the Chinese indices at a loss for the year and marking an unusual situation of being 10% lower than five years ago. Concurrently, the yuan also dipped.
The Reserve Bank of New Zealand, known for its hawkish stance, hinted at potential monetary easing in response to diminishing inflationary pressures. This dovish commentary led to the kiwi dollar dropping 0.7%, hitting a 16-month low against its Australian counterpart. The markets now expect earlier rate cuts from New Zealand.
In the UK, anticipation is building around Bank of England's chief economist Huw Pill's stance in the wake of the recent election. Market confidence in a potential BoE rate cut as early as next month has grown, with money markets predicting a 60% likelihood of a move by August 1. This has bolstered the pound against a stable dollar.
French markets have also stabilized post-election, with stocks and bonds rebounding after Moody's warned of potential credit rating issues due to parliamentary gridlock. Wall Street saw the S&P 500 notch its sixth consecutive gain, driven largely by Big Tech, despite most index constituents ending in the red. Following Tesla’s recovery, all top 'Magnificent 7' stocks are now positive for the year. The outlook for the tech sector remains optimistic, as evidenced by TSMC’s robust second-quarter revenue growth fueled by high demand for AI applications, which boosted its stock by 0.5%.
Key events anticipated to guide U.S. markets include Jerome Powell’s continued congressional testimony, speeches from various Fed officials, and important inputs from the Bank of England. Market participants will also keep an eye on the NATO summit and the $39 billion Treasury auction of 10-year notes.
