Eyes switch to inflation vs elections, Powell up

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

Last updated at 4:28 AM Eastern time

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After an intense month focused on election risk around the world, markets quickly switch back to the more prosaic matter of the cost of money – and whether disinflation is resuming to the extent it allows borrowing costs to finally fall.

Thursday’s U.S. consumer price update for June is the key moment of the week for many investors – with the headline rate expected to have fallen two tenths of a percentage point to 3.1% but with ‘core’ rates still stuck at 3.4%.

With Federal Reserve chair Jerome Powell starting his two-pronged semi-annual congressional testimony later on Tuesday, the consensus CPI forecast probably reflects what the central bank thinks of the situation right now – encouraging but not there yet.

But as the U.S. unemployment rate is now back above 4.0% for the first time since late 2021, markets may look for a more nuanced approach from the Fed chair that sees it increasingly wary of a sudden weakening of the labor market as real time quarterly GDP estimates ebb again to about 1.5%.

U.S. Federal Reserve Chair Jerome Powell delivers remarks in Washington, U.S., June 12, 2024. REUTERS/Evelyn Hockstein

There were some other reasons for Fed optimism in the lead-up to the testimony.

The path U.S. inflation is expected to follow over coming years generally softened in June, amid retreating projections of price increases for a wide array of consumer goods and services, a New York Fed survey showed on Monday.

Inflation a year from now was seen at 3% as of June – down from the expected rise of 3.2% in May – and five-year expectations fell to 2.8% from 3%.

Crude oil prices too are better behaved this week too, falling more than 3% from the 10-week highs hit late last week and halving the annual oil price gain to 10%. The losses on Tuesday came after a hurricane that hit a key U.S. oil-producing hub in Texas caused less damage than expected – easing concerns over supply disruption.

Before Powell starts speaking later, there will also be an update on U.S. small business confidence for last month.

Ahead of the bell, record high U.S. stock indexes look set to extend their gains and S&P500 futures were in positive territory yet again.

Fed funds futures have two full quarter-point rate cuts priced for the remainder the year – with ten-year U.S. Treasury yields hovering below 4.3% ahead of another heavy week of debt sales. Some $119 billion of coupons go under the hammer this week, starting with 3-year notes on Tuesday and then 10s and 30s later in the week.

The dollar was marginally higher, edging up against the euro, yen, yuan and pound. 

In the messier world of politics, the picture was even less clear – though most of the recent soundings from the White House suggest President Joe Biden will remain the Democrat candidate going into November’s election.