Ahead of the game: July 24, 2023

The Dow Jones gained for a ninth straight session this week, closing above 35,000 for the first time in twenty-two months. The gains in the value-laden Dow Jones come as the markets price out the chance of recession and earnings from value stocks, including banks, exceed expectations.

In contrast, in the tech space, there has been a classic “buy the rumour, sell the fact” type reaction after Tesla and Netflix fell 9.74% and 8.41%, respectively, following their earnings reports. Fellow tech giants Microsoft, Apple, Meta, and Amazon will need to deliver outstanding performances in their earnings reports next week to avoid a similar fate.

Locally, the ASX 200 marked time supported by gains in the Financial Sector. Better-than-expected US bank earnings and buying ahead of the upcoming bank dividend season helped the ASX 200 Financial sector to its highest close in nearly five months.

In economic news, the Australian economy added 32k jobs in June versus 15k expected, and the unemployment rate surprisingly fell back to 3.5% against 3.6% expected. The hotter-than-expected jobs numbers, which saw the unemployment rate edge back towards a 50-year low, despite 400bp of rate hikes from the RBA, leave no room whatsoever for an upside surprise in next Wednesday's Q2 CPI data.

Next week, the key events will be inflation reports in Australia and the US and interest rate meetings for the Bank of Japan and the ECB. Q2 2023 earnings season continues with companies including Microsoft, Apple, McDonald's, Boeing, Meta, Amazon, and Apple set to report.

• Australian economy added 32k jobs in June, beating the 15k forecast, and unemployment dropped to 3.5%
• Dow Jones extended its winning streak to nine sessions, buoyed by a rotation into value stocks
• UK inflation eased to 7.9% YoY, with core inflation down to 6.9% YoY
• China's Q2 GDP hit a lower-than-expected 6.3% YoY
• Crude oil climbed 0.46% this week to $75.77, as market anticipates further Chinese stimulus
• Gold touched $1985 for the first time in two months before facing resistance
• Bitcoin fell below $30,000, rejecting last week's 18-month peak
• Wall Street's fear gauge, the VIX index, rose 4.88% to 13.98.

• AU: Q2 CPI (Wednesday, 26 July, 11:30 am AEST)
• AU: Retail Sales (Friday, 28 July, 11:30 am AEST)
  

• JP: Bank of Japan Interest rate meeting (Friday, 28 July, no set time AEST)

• US: FOMC meeting (Thursday, 27 July, 4:00 am AEST)
• US: Q2 GDP (Thursday, 27 July, 10:30 pm AEST)
• US: PCE Price Index (Friday, 28 July, 10:30 pm AEST)
  

• EA: HCOB Flash PMIs (Monday, 24 July, 6:00 pm AEST)
• UK: S&P Flash PMIs (Monday, 24 July, 6:30 pm AEST)
• EA: ECB interest rate meeting (Thursday, 27 July, 10:45 pm AEST)

• Australia

Q2 CPI

Wednesday, 26th July at 11.30 am AEST

The RBA meeting minutes for July, released earlier this week, firmly placed the spotlight on the incoming data ahead of the RBA's August Board meeting. "The Board would have the benefit of additional data on inflation, the global economy, the labour market and household spending, as well as an updated set of staff forecasts and a revised assessment of the risks."

Confounding those looking for signs of cooling, the Australian labour market added 32k jobs in June versus 15k expected, and the unemployment rate remained at 3.5% despite a record 400bp of RBA rate hikes.

The robust labour force data saw the rates market increase the probability of an RBA rate hike in August from 20% to 50%, with the final decider likely to be Wednesday's Q2 CPI data.

Expectations are for headline inflation to fall to 6.2% YoY from 7%. The RBA's preferred measure of core inflation, the Trimmed Mean, is expected to fall to 6.1% YoY from 6.6% previously.

AU headline inflation chart

• US

FOMC Meeting

Thursday, July 27 at 4.00 am AEST

The CME Fed Watch Tool indicates that a 25 basis-point (bp) rate hike by the Fed is fully priced in for the upcoming meeting. However, rate expectations suggest a prolonged rate pause after July, which contrasts with the views of Fed policymakers. Fed policymakers have previously indicated a cumulative 50 bp worth of tightening by the end of this year.

Given the recent unexpected falls in US inflation, market participants will be closely observing how the Fed might address this, although the Fed is likely to maintain its data-dependent stance and hold firm in its assertion that the US inflation fight is not yet won.

Fresh updates on the Fed’s economic projections will only be presented at the meeting in September, leaving interpretation of the Fed’s rate path to be gleaned from the Fed’s policy statement and Fed Chair Jerome Powell’s press conference.

Fed funds rate chart

• EA

ECB interest rate meeting

Thursday, July 27 at 10.15 pm AEST

In June, the ECB raised the deposit rate facility by 25bps to 3.5% as was widely expected. The decision was accompanied by hawkish undertones as the ECB’s inflation projections for 2024 and 2025 were revised upwards. ECB President Lagarde stated that a rate hike in July was very likely, and that the ECB was not considering a pause.

“Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation.”

Despite indications of a further slowdown in June, including the confirmation that the Eurozone entered a technical recession in Q1 of 2023, inflation remains the ECB’s main concern. As a result, a 25bp rate hike to 3.75% next week is widely anticipated.

The focal interest will lie in the communication regarding future meetings and whether next week’s hike will be the last or if more are to follow. If next week's hike is flagged as the last, it will trigger a dovish reaction. However, it is more likely that the ECB will keep the possibility of another 25bp rate hike at the September meeting open, with currently over 14bp priced in

ECB deposit rate chart

• US

US Q2 GDP

Thursday, July 27 at 10.30 pm AEST

The advance estimate for US Q2 GDP is expected to come in at 1.8% quarter-on-quarter, which is a tad softer than the 2% read in Q1, but nevertheless suggests that the US economy remains resilient.

A stronger-than-expected read may likely provide more conviction for present ‘soft landing’ hopes and further push back against recession chatters. But given that the data is lagging, the heavier focus on forward-looking conditions could still leave more attention on the US earnings season and FOMC meeting.

US GDP chart

• JP

Bank of Japan Interest rate meeting

Friday, July 28, no set time

The latest Japanese inflation data for June revealed a lower-than-expected headline print (3.3% versus 3.5% year-on-year), but the core aspect continues to demonstrate some persistence with a match of consensus at 4.2%. Accompanied by a recent surge in Japanese wage pressures, speculation of a tweak in policy settings from the Bank of Japan (BoJ) is likely to persist into next week's meeting.

Despite some pushback from authorities lately against a July move, the consensus remains that a policy shift will be a matter of when, not if, with broad expectations that it could eventually occur by the October meeting.

• US

PCE Price Index

Friday, July 28 at 10.30 pm AEST

Last month the PCE Price Index increased by 3.8% YoY, the lowest reading since April of 2021, as it fell from 4.3% the previous month. The Feds preferred measure of inflation, the Core PCE Price Index, which excludes food and energy, increased by 4.6% YoY in May, easing from 4.7% in April.

This month the PCE Price Index is expected to fall to 3.1% from 3.8% prior. The Core PCE Price Index is expected to fall to 4.2% YoY from 4.6% prior.

Nonetheless, Core PCE at 4.2% is still twice the Fed’s inflation target of 2% and will do little to support the idea that next week's Fed Rate hike will be the last of this cycle.

PCE price index chart

• US

US Q2 2023 earnings

Q2 2023 earnings season continues with companies including Microsoft, Apple, McDonald's, Boeing, Meta, Amazon, and Apple set to report.