Morning Bid: Focus Shifts to Inflation vs. Elections, Powell in Spotlight

Market Focus Shifts from Election Risk to Monetary Policy

Following a month dominated by global election risks, market attention has swiftly returned to monetary policy and the potential for a decrease in borrowing costs amid signs of disinflation. The pivotal event this week for investors is the U.S. consumer price update for June, expected on Thursday. Forecasts suggest the headline inflation rate may drop to 3.1%, although core rates are likely to remain at 3.4%.

As Federal Reserve Chair Jerome Powell begins his semi-annual congressional testimony, the CPI forecast appears to reflect the Fed's cautious optimism. Although U.S. unemployment has risen above 4.0% for the first time since late 2021, there are hopes for a nuanced approach from Powell, given the real-time GDP estimates showing growth slowing to around 1.5%.

Optimistic Indicators for the Fed

Recent data has offered some reasons for optimism. A New York Fed survey indicated eased inflation expectations for the coming years, with one-year forecasts dropping to 3% and five-year expectations falling to 2.8%. Additionally, crude oil prices have dropped over 3% from last week's highs, reducing annual oil price gains to 10%, partly due to lesser-than-expected hurricane damage in Texas.

Before Powell's testimony, an update on U.S. small business confidence will be released. In the stock markets, record-high U.S. indexes are poised to extend gains, with S&P500 futures showing positive movement. Market forecasts suggest two quarter-point rate cuts by year's end, and ten-year Treasury yields remain below 4.3% ahead of extensive debt auctions totaling $119 billion.

Currency and Political Dynamics

The dollar has seen marginal gains against the euro, yen, yuan, and pound. Politically, the U.S. sees hints that President Joe Biden may be the Democratic candidate for the upcoming November election. In Europe, the UK's new government is starting to emphasize supply-side reforms to stimulate growth amid tight public finances. Meanwhile, France is adapting to a gridlocked parliament, with the reappointment of centrist Prime Minister Gabriel Attal potentially steering the country through the Olympics and the next budget season.

Global Market Movement

European stocks and the euro dipped slightly following Monday's rally, which was fueled by the French election outcomes. French government bond yields remained stable. In Asia, stocks showed diverse trends, with Japan's Nikkei gaining almost 2% while Hong Kong's Hang Seng closed down.

Key Developments to Watch

Several key events on Tuesday could influence U.S. markets, including the NFIB small business survey and Mexico's inflation data for June. Federal Reserve Chair Jerome Powell will testify before the Senate Banking Committee, accompanied by remarks from Fed Governor Michelle Bowman and Vice Chair for Supervision Michael Barr. Additionally, leaders are gathering in Washington for a NATO Summit, and the U.S. Treasury will auction $58 billion in three-year notes and $46 billion in 12-month bills.