Home Stock Market Global Markets Steady as Bond Market Calms, but Inflation Remains a Key Concern

Global Markets Steady as Bond Market Calms, but Inflation Remains a Key Concern

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In a welcome respite, the bond market has shown signs of stabilization after a period of turbulence. This newfound calm has redirected attention toward the path of interest rates, which now heavily relies on evidence of disinflation despite the resilience of economic activity and the labor market.

With the eagerly awaited U.S. consumer price report slated for release on Wednesday, expectations point to a nearly one percentage point drop in headline inflation to a modest 3.1% for the previous month. In line with this trend, China echoed the chorus of disinflation on Monday, highlighting the emergence of deflation as a genuine concern within the world’s second-largest economy.

Factory gate prices in China experienced the most rapid annual decline in over seven years in June, while consumer price inflation was non-existent, signaling the urgent need for policy stimulus to combat deflationary pressures that loom on the horizon.

Although China faces worrisome challenges due to these developments, the implications extend beyond its borders. A shift toward disinflation within the global economy can help alleviate concerns regarding rising inflation elsewhere.

While the June U.S. employment report revealed the lowest monthly payroll gain in two and a half years, the addition of 200,000 jobs ensured a decline in the unemployment rate to a remarkable 3.6%. Moreover, annual wage growth picked up to a solid 4.4%. While this data tempered the red-hot private-sector jobs figure from the previous day, it left the bond market somewhat bruised, as it remains cautious about the Federal Reserve’s potential for further interest rate hikes. Market participants are now hoping that disinflationary forces will prompt the central bank to take a more cautious approach after one more anticipated rate hike later this month.

Despite a reduction in Treasury bond volatility from six-week highs observed on Friday, the market experienced its largest weekly rise since the tumultuous swings seen during the banking stress in March.

Although another quarter-point rate hike by the Federal Reserve is widely expected at the upcoming July 26 meeting, futures markets have scaled back expectations for subsequent hikes by November. Currently, the market predicts less than a 50-50 chance of a second rate hike occurring this year.

Although two-year Treasury yields fell below 5% on Friday and continued at that level on Monday, ten-year yields remained above 4%. Consequently, the yield curve between 2-year and 10-year bonds steepened, reaching its least inverted level in nearly a month.

However, despite the tentative stabilization of the bond market, stock markets continue to exhibit nervousness. As the second-quarter corporate earnings season commences this week, with expectations pointing to another year-on-year contraction in aggregate S&P500 profits, additional risk factors come into play.

Ahead of Monday’s market opening, stock futures remained in the red, despite gains in Chinese and European bourses. The VIX index, which measures implied equity market volatility, continues to hover above 15, indicating sustained market unease.

Following a dip related to the payrolls data on Friday, the U.S. dollar regained ground, while the offshore Chinese yuan experienced a slight decline.

Meanwhile, U.S. Treasury Secretary Janet Yellen concluded her visit to China without any significant breakthroughs in addressing the trade and industry standoffs between the two economic superpowers. President Joe Biden visited Britain prior to the upcoming NATO summit in Vilnius, where further discussions on global economic cooperation are expected to take place.

In the United Kingdom, markets remain edgy, particularly in the government bond market, where last week’s sell-off exceeded that of U.S. Treasuries. Sentiments were further dampened by HSBC’s bearish note on the UK real estate sector, resulting in a decline of 0.4% for real estate investment trusts and real estate stocks.

Later today, British Finance Minister Jeremy Hunt is scheduled to outline long-awaited plans aimed at encouraging pension funds and asset managers to invest in high-growth sectors and private equity. Additionally, Bank of England Governor Andrew Bailey is set to deliver a speech, providing insights into the central bank’s perspective on the current economic landscape.

In South Korea, concerns in the banking sector escalated as the financial services regulator requested major commercial banks to prepare approximately $4 billion in financing to support a credit cooperative struggling with customer withdrawals.

Key events to watch for later today include the release of U.S. May consumer credit and June employment trends, as well as speeches by several Federal Reserve officials including Vice Chair for Supervision Michael Barr, San Francisco Fed President Mary Daly, Cleveland Fed Chief Loretta Mester, and Atlanta Fed Chief Raphael Bostic. President Joe Biden’s visit to Britain ahead of the NATO summit and the U.S. Treasury’s sale of 3- and 6-month bills will also remain in focus.

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dan saada

Dan hold a master of finance from the ISEG (France) , Dan is also a Fan of cryptocurrencies and mining. Send a tip to: 0x4C6D67705aF449f0C0102D4C7C693ad4A64926e9

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