MARKET WRAPS
Watch For:
EU euro area inflation flash estimate, GDP preliminary flash estimate, ECB survey of monetary analysts results published; Germany retail trade; Italy CPI, GDP preliminary estimate, foreign trade non-EU; UK money and credit; trading updates from Legrand, Galp, Nexi, Pearson, Heineken
Opening Call:
Shares may lose ground in Europe on Monday ahead of more eurozone economic data. In Asia, stock benchmarks were mostly higher; Treasury yields gained; the dollar was firmer; while oil and gold declined.
Equities:
European stocks seem poised to retreat on Monday ahead of euro area economic data, and after China's factory activity extended its decline into a fourth month.
The flash estimate for euro area inflation for July, as well as the eurozone preliminary flash estimate for second-quarter gross domestic product, are due to be released later in the day.
Meanwhile, the official gauge of China's manufacturing activity improved slightly in July, but remained in contraction for the fourth straight month, pointing to continued weakness in the world's second-largest economy.
Investors are also digesting U.S. economic data confirming that inflationary pressures have eased in recent months.
"The trend continues to be generally pretty favorable economic data that endorses this view that the Fed is kind of winning," said Ed Perks, chief investment officer of Franklin Templeton's income investors group.
The Fed has been raising interest rates to fight elevated inflation, aiming to cool the economy without triggering a recession.
While Perks said he remains worried about the lag effects from the Fed's monetary tightening. Perks expressed concern that the economy will slow next year, even if it avoids a recession, and that the inflation tailwind benefiting companies with "pricing power" will fade.
"It's going to be tougher for companies to deliver the same kind of revenue growth going forward without that tailwind," he said.
The U.S. consumer-price index report for July, which is due out next month, may show that price pressures are stronger than anticipated, said José Torres, senior economist at Interactive Brokers. "The way I see it now, commodities and services are going to push inflation higher" in July, he cautioned.
Forex:
The dollar notched slight gains amid risk-on sentiment driven by gains across regional equity markets and better-than-expected U.S. economic data.
A "big pause" by major central banks is gradually unfolding, which should damp forex volatility further, said HSBC, adding that lower volatility is supportive for risk sentiment.
"If the Fed pulls off a soft landing (or close to it), that's hardly USD negative," ANZ Bank said.
The Fed is likely to raise rates again in September, Bank of America FX said. It is bullish about the dollar.
"Despite June CPI miss and Fed repricing, we hold our USD upside forecasts for 2023," it said. BofA expects economic developments to keep the Fed on its toes, which would support the greenback.
"U.S. real policy rates positive and highest in G10 through 2024. Inflation expectations and easing financial conditions possible headwinds to expected Fed dovishness," BofA said. It sees EURUSD at 1.05 by year end and USDJPY at 145.
Bonds:
Treasury yields rose amid growing hopes the Fed stays put until it starts cutting rates next year.
In data released on Friday, the PCE price index, which is the Fed's preferred measure of inflation, rose a mild 0.2% in June - matching the expectations of economists polled by The Wall Street Journal.
The employment cost index, a crucial measure of wages, moderated in the second quarter, rising by 1% versus 1.2% in the first quarter. Meanwhile, a University of Michigan survey showed that consumer sentiment reached a 22-month high in July, helped by the slowdown in inflation.
"Friday's PCE suggests that inflation is continuing to decelerate, but it remains firmly above the Fed's 2% target, which suggests that the Fed still has more work to do and may continue raising interest rates. The potential for additional tightening, after over a year of steep rate hikes, risks slowing the economy," said Treasury Partners in New York.
Energy:
Oil prices fell, pulling back after strong gains in July that were driven by robust global demand and Saudi supply cuts.
Goldman Sachs upgrades its 2023 oil-demand forecast by around 550,000 b/d as economic growth in India and the U.S. is expected to offset China's slowdown.
It expects Brent to rise further to $93/bbl in the second quarter of 2024 "as deficits further raise timespreads."
Oil bulls look for crude to remain supported as effects of Saudi Arabia's voluntary cut of 1 million barrels a day of production in July and August are felt.
What may prove more important is whether Saudi Arabia intends to extend its production cut by another month until the end of September, said Commerzbank.
"If so, the oil market would be undersupplied to an even greater extent in the third quarter, which would give further tailwind to oil prices. A sudden end to the voluntary cuts, causing production to surge by 1 million barrels per day in September, would presumably put the oil price under pressure, on the other hand," it said.
Since it is in Saudi Arabia's interest to at least keep oil prices stable near current levels, Riyadh could decide to gradually withdraw production cuts, it added.
Metals:
Gold prices slipped in Asia after closing higher Friday, following U.S. data showing price increases slowed in June, increasing expectations the Fed's tightening cycle could be nearing its end.
Last week's interest-rate hikes by the Fed and the ECB "are keeping a lid" on prices of the precious metal, DailyFX, said.
"However, Fed Chair Jerome Powell and ECB President Christine Lagarde sounded more neutral at the respective press conferences, boosting expectations that interest rates are close to peaking," it said. Gold typically moves inversely to interest rates.
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Copper edged higher on hopes for China stimulus measures.
Early last week, the industrial-metals market was buoyed by a Politburo statement that called for actively expanding domestic demand and resolving debt risks, ANZ Research said.
Last Friday, China's Minister for Housing and Urban Development called for homebuyers who had paid off previous mortgages to be considered first-time buyers, it said, adding that any support for the property sector would be perceived as positive for copper demand.
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Iron-ore futures were lower, with investors still bearish on the steel-making commodity.
While Beijing's housing stimulus policies unveiled last week brightened the demand side, there has been rising chatter about steel production curbs after steel mills in China's southwestern Yunnan province were asked to cap 2023 output at last year's level, analysts said.
On the supply side, shipments from Brazil have been strong, and global shipments have rebounded, Nanhua Futures said.
TODAY'S TOP HEADLINES
China's Official Manufacturing PMI Rose Slightly in July
The official gauge of China's manufacturing activity improved slightly in July but remained in contraction for the fourth straight month, pointing to continued weakness in the world's second-largest economy.
China's official manufacturing purchasing managers' index rose to 49.3 in July from 49.0 in June, the National Bureau of Statistics said Monday. A reading above 50 indicates an expansion in activity while a reading below it indicates a contraction.
China State Planner Rolls Out Consumption Support as Recovery Slows
China's state planner on Monday released a notice outlining measures to expand the country's consumption, as the post-Covid recovery in the world's second largest economy runs out of steam.
The National Development and Reform Commission urged local governments to ease car purchase restrictions and roll out measures to stimulate new car purchases. It told local officials to promote the use of electric vehicles in the countryside and upgrade EV charging infrastructure, including the construction of battery replacement stations.
While Everyone Else Fights Inflation, China's Deflation Fears Deepen
Signs of deflation are becoming more prevalent across China, heaping extra pressure on Beijing to reignite growth or risk falling into an economic trap it could find hard to escape.
While the rest of the world tussles with inflation, China is at risk of experiencing a prolonged spell of falling prices that-if it takes root-could eat into corporate profits, sap consumer spending and push more people out of work. Its effects would ripple across the globe, easing prices for some products that countries like the U.S. buy from China, but would also deprive the world of important Chinese demand for raw materials and consumer goods, while also creating other problems.
Why the Drivers of Lower Inflation Matter
Recent good news on inflation has ignited a debate over how much central banks' interest-rate increases are responsible.
The answer matters for where inflation and interest rates are headed. The Federal Reserve and the European Central Bank in the past week lifted their benchmark interest rates to 22-year highs and left the door open to additional increases.
Apple, Amazon, Starbucks to Report in Packed Earnings Week
Apple, https://urldefense.com/v3/__http://Amazon.com__;!!F0Stn7g!GVFwTsYoWtiUjebxrIaUgEhJk1RR2NLybwvttBRdN9Vh-T1AbNoGpESGQyhWxivaS3j7-Bd7eOV3cMIlka2nWi2BR_npYVcHsxaWBz5CmWQ$ and Starbucks will report earnings this week, offering insights into where consumers are spending their money as inflation eases and interest rates rise.
Uber Technologies is also set to report, along with pharmaceutical companies Pfizer and Amgen, online payment giants PayPal and Block, and food conglomerates Kraft Heinz and Kellogg.
Russia Says It Downed Three Ukrainian Drones Over Moscow
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07-31-23 0018ET
