Week of July 22

Over the previous week, the markets had much to consider in the geopolitical arena, which overshadowed developments relating to Chinese GDP, UK inflation and the ECB interest rate decision.

The upcoming week has a busy agenda, with the BOC interest rate decision and US Q1 GDP and PCE, which could move the markets if geopolitical issues do not once again take precedence over the economic data.

Week in Review

Markets began the week by reacting to the attempted assassination of US presidential candidate Donald Trump, pricing in an increased likelihood of his election victory, implying lower taxes and higher tariffs. Both the US dollar and stock markets gained strength, with the Dow Jones hitting a record high of 41500.

On Monday, Chinese Q1 GDP was also released, coming in at an annualised rate of 4.7%, below the expected 5%. However, ongoing news from the Chinese Communist Party's Third Plenum dominated the week's headlines.

As widely anticipated, the ECB kept policy unchanged and provided no specific guidance for the next meeting in September, allowing markets to view this as maintaining the potential for further easing. EURUSD ended the week mixed after failing to hold onto earlier gains to $1.095.

US manufacturing data was once again negative but not as poor as forecast, while retail sales outperformed expectations. Federal Reserve Chair Jerome Powell spoke of growing confidence in inflation moving towards the target but refused to signal future interest rate actions.

UK inflation came in somewhat higher than anticipated, indicating stickiness, leading the market to reduce expectations of a rate cut in August and shift focus to September. Cable reversed from 1-year highs of $1.3050 to conclude the week near $1.29.

New Zealand inflation was marginally lower than expected, with non-tradable core inflation falling below 5% for the first time since early 2024. This prompted banks to bring forward estimates for the first-rate reduction to October. As a result, Kiwi lost over 1% in a retest of round support at 60 cents.

On Friday, several sectors, including global airlines and banking, experienced disruption related to an IT issue with Microsoft 365 following an update from CrowdStrike, resulting in many US airlines grounding flights.

Geopolitical events included reports of high-ranking Democratic officials privately pressuring President Joe Biden against continuing his campaign and his diagnosis with Covid-19 mid-week, which reduced his public schedule. Donald Trump nominated US Senator for Ohio JD Vance as his vice presidential running mate. The US warned allies about stricter trade rules in China as part of its chip crackdown, reportedly naming Tokyo Electron and ASML specifically. European Commission President von der Leyen announced her 5-year plan after reappointment following the European general election, pledging to cut greenhouse gas emissions.

Biggest Market movers

• Gold hit a record high on Tuesday after rising around 3% as markets priced in two interest rate hikes from the Fed this year but reversed all gains by the end of the week.
• The Japanese yen strengthened substantially to 155.50 on Wednesday amid speculation of a second round of intervention by the BOJ but USDJPY recoiled near 157.50.
• Crude oil reversed early losses to gain significantly mid-week following reports that OPEC+ members would not raise production at the upcoming meeting and US inventory data showing a surprise drawdown, though continued ti downward trajectory on China conserns.

Top Events in the Week Ahead

The US will be the primary focus for the coming week as key economic figures are released while FOMC officials enter their pre-rate decision communication blackout period.

US PCE and GDP in Focus During Blackout Period

Probably the most notable data point is the PCE Price Index on Friday, as this is the Fed's preferred inflation gauge. With the headline reading expected to return to its lowest level so far this cycle, investors will likely monitor the data to see a similar pattern and consolidate expectations around an interest rate cut in September. The Core PCE price index is anticipated to remain unchanged on a monthly basis at 0.1%, which would reduce the annual rate to 2.5% from the prior 2.6%.

Prior to that, on Thursday is the concurrent release of US Q2 GDP along with durable goods orders, as investors look to ascertain if the US economy will continue demonstrating resilience given the recent weakness in employment numbers. Flash Q2 GDP for the US is projected to accelerate to 2.5% annual growth from 1.4% in the first quarter. Durable goods are also anticipated to increase for June at a monthly rate of 0.3% compared to 0.1% in May.

The BOC Could Move Towards Fighting Disinflation

Markets anticipate the BOC delivering back-to-back interest rate reductions when it meets on Wednesday. After cutting in June, unemployment rose and inflation undershot, leading to a consensus to shift towards another rate decrease, or at minimum, a dovish hold, signalling a cut in September is practically guaranteed. USDCAD has been pricing in the event, with next resistance near the 1.3750/75 region.

Global Growth Concerns Remain

Flash Manufacturing PMIs will also be in focus, particularly for Europe, as the ECB hesitates to ease amid a very sluggish recovery. French and German manufacturing are projected to remain in contraction, though improving slightly, while the UK industrial sector is seen moving further into expansion. EURUSD may continues its upside if support at 1.0850 holds firm, opening the door to $1.10.

Other Events and Earnings

The week begins with China's Loan Prime Rate on Monday. Tuesday will see data from the United States on existing home sales. German consumer confidence figures from GfK are scheduled for Wednesday. Germany's Ifo business climate index is expected on Thursday. Friday will provide an update on consumer sentiment in the United States through the University of Michigan's index.

This week also marks an intense period for corporate earnings reports, with over 40% of S&P 500 listed companies expected to announce results by the end of the week. Major corporations scheduled to disclose earnings include Verizon, Ryanair, Microsoft, Alphabet, Visa, Tesla, Lloyds, Thermo Fisher, IBM, AbbVie, AstraZeneca, Unilever, Exxon Mobil, 3M and Bristol-Myers Squibb.