Ahead of the game: 1 July 2024

US equity markets edged higher this week, with investors in a cautious mood ahead of crucial inflation data and month/quarter end. With one session left to go, the Nasdaq is up 6.76% month-to-date (MTD). The S&P 500 cash is up 3.89% MTD, and the Dow Jones has added 36 points, or 0.09%.

The ASX 200 lost ground following a red-hot inflation report for May, which increased the chances of a Reserve Bank of Australia (RBA) rate hike before year-end. Nonetheless, with one trading session left to go before the end of the financial year (FY) 2024, the ASX 200 is set to gain 8% for FY 2024 and about 12.5% when dividends are included. This is not as spectacular as the 32% gain for the Nasdaq in the same period or even the Nikkei’s +19% gain, but it is significantly better than what can be earned from leaving the money in a term deposit.

• In the US, the consumer confidence index (CCI) eased to 100.4 from a downwardly revised 101.3 in May
• Continuing jobless claims rose by 18,000 to 1,839,000. This is the highest since November 2021
• Fed Governor Bowman said she does not expect any rate cuts in 2024 and reiterated a willingness to hike rates if "progress on inflation stalls or even reverses"
• In Germany, the Ifo Business Climate indicator unexpectedly declined to 88.6 in June from 89.3 in May
• German CCI dropped to -21.8 in July, below forecasts of -18.9
• The Japanese yen fell to its lowest level since 1986
• In Australia, the monthly consumer price index (CPI) indicator rose to 4% year-on-year (YoY) in May, surpassing both the April figure of 3.6% and the consensus forecast of 3.8% YoY
• The RBA's preferred measure of inflation, the trimmed mean, surged to 4.4% in May from 4.1% in April
• Crude oil gained 1.42% to $81.88 per barrel, its third straight week of gains
• Gold gained 0.25% this week to $2,327
• Wall Street's gauge of fear, the volatility index (VIX), fell to 12.25 from 13.19 prior.

• AU: RBA meeting minutes (Tuesday, 2 July at 11.30am AEST)
• AU: Retail sales (Wednesday, 3 July at 11.30am AEST)
• AU: Balance of Trade (Thursday, 4 July at 11.30am AEST)

• CN: Caixin Manufacturing PMI (Monday, 1 July at 11.45am AEST)
• JP: Consumer Confidence (Monday, 1 July at 3.00pm AEST)
• CN: Caixin Service PMI (Wednesday, 3 July at 11.45am AEST)

• US: ISM Manufacturing PMI (Tuesday, 2 July at 12.00am AEST)
• US: Fed Chair Powell Speech (Tuesday, 2 July at 11.30pm AEST)
• US: JOLTS Job Openings (Wednesday, 3 July at 12.00am AEST)
• US: ADP Employment (Wednesday, 3 July at 10.30pm AEST)
• US: ISM Services PMI (Thursday, 4 July at 12.00am AEST)
• US: FOMC meetings (Thursday, 4 July at 4.00am AEST)
• US: Non-Farm Payrolls (Friday, 5 July at 10.30pm AEST)

• EA: Inflation (Tuesday, 2 July at 7.00pm AEST)
• UK: General Election (Thursday, 4 July)

• CN

Caixin Manufacturing PMI

Date: Monday, 1 July at 11.45am AEST

Both the Caixin manufacturing and services purchasing managers' index (PMI) have beaten expectations in May. The manufacturing sector has turned in its seventh straight month of expansion at 51.7, which is its fastest pace since June 2022 amid rising new orders. The services segment has been resilient as well, with its 17th straight month of expansion at 54.0, reflecting its fastest pace since July 2023.

Nevertheless, some fizzling in momentum is expected for the upcoming June read, with consensus for the Caixin manufacturing PMI to come in at 51.2, down from the previous 51.7.

The recent run of mixed data out of China has raised concerns of an uneven recovery picture, with stronger retail sales being offset by weaker-than-expected inflation data, fixed asset investment, and industrial output. Until now, authorities remain confident of achieving the 2024 growth target of around 5%, with any easing of recovery momentum likely to drive expectations for more supportive policies into the second half of the year.

CN Caixin manufacturing and services PMI chart

• AU

RBA meeting minutes

Date: Tuesday, 2 July at 11.30am AEST

At its June board meeting, the RBA kept its official cash rate on hold at 4.35%, as widely expected. In the accompanying statement, the RBA noted that high rates are continuing to work to rebalance demand and supply and that the “persistence of services price inflation is a key uncertainty.”

The board retained its neutral-sounding forward guidance that it’s “not ruling anything in or out.” However, the return of the comment that the RBA will do “what is necessary” to return inflation to target was viewed as a hawkish development.

RBA Governor Bullock’s comments in the press conference that "a lot needs to go our way if we want to get inflation back to the target," and confirmation that the board discussed the option to hike rates but not the option to cut rates, added to the hawkish tone.

Following this week’s hotter-than-expected May inflation data, the minutes will be closely scrutinised to see how close the RBA was to raising rates in June, and for any clues as to whether May's hot inflation data will be enough to trigger a rate hike at the August meeting.

RBA cash rate chart

• EU

EA inflation

Date: Tuesday, 2 July at 7.00pm AEST

The Eurozone's core inflation for May has seen an uptick to 2.9% from 2.7% prior, marking its first increase in ten months. The headline inflation has also moved higher, from 2.4% in April to 2.6% in May.

Regardless, the European Central Bank (ECB) followed through with its pledge to cut its interest rate by 25 basis points (bp) in the June meeting, previously signalling greater confidence that inflation is on track to return to its 2% target. However, policymakers did warn that any further reductions will be dependent on inflation easing.

With rate expectations pricing a 35% chance for another rate cut from the ECB in the July meeting, markets will be watching the upcoming inflation data for validation that the May uptick is just a blip. Any further pick-up in inflation could see markets pricing out a July rate cut amid concerns that it will take longer for inflation to return to target.

Current consensus is for the Eurozone's June headline inflation to come in at 2.5% YoY from 2.6% prior. The core read is expected to come in at 2.8% from 2.9% prior.

EA inflation chart

• US

FOMC meeting minutes

Date: Thursday, 4 July at 4.00am AEST

At its meeting in June, the FOMC left the target range for the Fed Funds unchanged at 5.25%-5.5%, as widely expected, for a seventh straight meeting.

Fed Chair Jerome Powell noted the recent improvement in inflation. However, he said, “we’ll need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%.” Providing a hawkish surprise, policymakers signalled via the median dot that they now expect to cut rates only once this year, compared to projections for three rate cuts in March.

Fed officials have repeatedly said that interest rates will stay higher for longer. This week, we heard from Fed Governor Bowman, who said she does not expect any rate cuts in 2024 and reiterated a willingness to hike rates if progress on inflation stalls or reverses. Nevertheless, the minutes will be closely analysed for clues on the timeline for the Fed’s cuts and policymakers’ views on the inflation and growth outlook.

Fed Funds rate chart

• US

Non-farm payrolls

Date: Friday, 5 July at 4.00am AEST

In May, the US economy added 272,000 jobs, the most in five months, rebounding from a downwardly revised 165,000 in April and exceeding forecasts of an increase of 185,000.

Providing some offset to the hot establishment survey, the household survey was soft, with the unemployment rate increasing 0.1 percentage point (pp) to 4.0%, driven by a 408,000 decrease in household employment. All the decline in household employment and the increase in the unemployment rate were accounted for by workers under 25 years old. The participation rate fell to 62.5% from 62.7%.

In the lead-up to next week’s Non-farm payroll report, initial jobless claims recently hit a 10-month high of 243,000. While continuing claims this week rose by 18,000 to 1,839,000, the highest since November 2021, adding evidence to cooling in the labour market.

This month, the preliminary expectation is for the US economy to add 165,000 jobs and for the unemployment rate to remain stable at 4.0%. The participation rate is expected to rebound to 62.7%, and average hourly earnings are expected to fall to 3.6% YoY from 4.1% YoY prior.

US Unemployment rate chart