Macro Matters – Weekly review, w/c June 17

‍Snippet:

US stock indices hit record highs as inflation cools, while bond yields fell amid expectations of slower rate cuts. European markets saw sharp declines after France announced snap elections, raising political uncertainty. This week brings key central bank decisions, inflation data, and global PMI reports.

Article:

TradeDay Macro Matters

Macroeconomic / Geopolitical Developments

• US averages at record levels and bonds to lower yields

• US CPI cools

• Fed signals one rate cut in 2024, market looks for two

• French and European stocks sell off after French snap election called

• What’s Ahead

US Averages at Record Levels and Bonds to Lower Yields

The S&P 500 and Nasdaq reached record levels last week, with the S&P 500 closing at its fourth consecutive high and the Nasdaq achieving its fifth. Declining bond yields, driven by softer CPI and PPI data, highlighted a contrast between rising equities and falling yields. U.S. Treasury yields recorded their largest weekly drop of the year, reflecting safe-haven flows and expectations of slower inflation. In Europe, heightened political risks led to a divergence, with European stocks trading lower amid investor caution.

US CPI Cools

The May Consumer Price Index (CPI) revealed significant cooling in inflation. Monthly CPI remained flat against a 0.1% forecasted increase, while annual CPI dipped to 3.3% from 3.4%. Core CPI rose only 0.2%, resulting in an annual decline to 3.4%, the lowest since core inflation peaked in 2022. Additionally, supercore CPI reversed its upward trend, suggesting easing wage pressures in the services sector.

Despite these positive developments, the Federal Reserve projected just one rate cut in 2024, down from earlier expectations of three. U.S. Producer Price Index (PPI) data supported this outlook, with a 0.2% decline for May. Together, these data points indicate that inflationary pressures are easing, setting the stage for further economic stabilization.

Fed Signals One Rate Cut in 2024, Market Looks for Two

At its recent meeting, the Federal Reserve held interest rates steady at a 23-year high of 5.25%–5.5%, signaling one rate cut in 2024. Fed Chair Jerome Powell described the latest CPI data as “encouraging” but emphasized the need for sustained progress before committing to cuts. Markets, however, remain optimistic, with analysts forecasting two cuts by year-end, potentially starting in September.

Revised Fed projections show the year-end federal funds rate at 5.13%, reflecting a cautious approach. The Fed’s stance contrasts with recent rate cuts by other central banks, such as the ECB and BoC. Economic growth forecasts for the U.S. remain robust, with projected growth of 2.1% in 2024 and core inflation expected to fall to 2.8% by year-end.

French and European Stocks Sell Off After French Snap Election Called

French and European markets saw sharp sell-offs after President Macron announced snap parliamentary elections following strong gains by Marine Le Pen’s National Rally (RN) in EU elections. Concerns over a potential RN victory rattled investors, with French bank stocks like BNP Paribas and Societe Generale falling 12–16%.

The announcement increased the premium on French government debt, pushing spreads over German bonds to their highest level since 2017. The CAC 40 index experienced its largest weekly loss since early 2022, while investor sentiment soured across the eurozone. With elections scheduled for June 30 and July 7, market participants expect continued volatility as political uncertainty intensifies.

What’s Ahead

Central Bank Watch:

• RBA Interest Rate Decision (Tuesday)

• BoJ Monetary Policy Meeting Minutes (Wednesday)

• PBoC and SNB Interest Rate Decisions (Thursday)

• BoE Interest Rate Decision and Monetary Policy Report (Thursday)

Macro Data Watch:

• Inflation data: Germany, EU, UK (various dates)

• Retail sales: China, Canada, US, UK

• Global Flash PMI Data (Friday)

Key Dates:

Date Major Macro Data

06/17/2024 Chinese Industrial Production and Retail Sales

06/18/2024 RBA Interest Rate Decision; US Retail Sales; EU CPI

06/19/2024 BoJ Minutes; UK CPI

06/20/2024 PBoC Decision; SNB Decision; BoE Decision & Report

06/21/2024 Global Flash PMI; Japanese CPI; UK Retail Sales

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