Daily Market Analysis - MONDAY JULY 17, 2023

Daily Market Analysis - MONDAY JULY 17, 2023

Key events:

China - Industrial Production (YoY) (Jun)
Eurozone - ECB President Lagarde Speaks
Eurozone - ECB's Lane Speaks
USA - NY Empire State Manufacturing Index (Jul)

Friday witnessed a modest dip in US stocks, yet investor optimism prevailed amidst signs suggesting a prolonged era of disinflation. With contemplation on interest rates, market performance, and Federal Reserve decisions, the prevailing sentiment remained buoyant.

NASDAQ Indices daily chart

S&P500 Indices daily chart

Dow Jones Indices daily chart

Market sentiment reflects a growing confidence in the potential for a smooth economic landing. Yields have witnessed a notable decline, particularly towards the week's end, driven by factors widely regarded as favorable. Investors are recalibrating their expectations by removing inflation premiums, rather than assuming imminent rate cuts by the Federal Reserve as a response to inflationary pressures.

The unexpected decrease in US CPI has triggered market reactions, resulting in a narrowing of US-EU front-end rate spreads and a deepening inversion in US front-end rates. However, with the alleviation provided by the inflation drop and indications of progress towards a gentle economic landing, the Federal Reserve is likely to maintain its current stance and refrain from significant rate adjustments for the next 12 months. Consequently, the US Dollar is not expected to undergo a substantial depreciation.

US Dollar Currency Index

In terms of the rates outlook, there is limited divergence observed within a significant portion of the broad Dollar index. Many policymakers in emerging markets (EM) are already taking action in response to the lower inflation environment. The Eurozone is anticipated to follow suit, aligning its rate adjustments accordingly.

While US rates were predominantly influenced by domestic factors, there were indications towards the end of the week that Eurozone rates were starting to respond. This suggests that developments in the US economy and relief from inflation are beginning to influence global rate trends, including those in the Eurozone.

The upcoming second-quarter earnings season is set to commence, with Tesla (NASDAQ: TSLA) being the first among the prominent growth and technology companies that have been the driving force behind the US stock market's performance this year. Tesla's earnings report is scheduled for Wednesday.

Tesla stock daily chart

Tesla is a prominent member of the "Magnificent Seven," a group of colossal stocks that includes Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), Amazon (NASDAQ: AMZN), Nvidia (NASDAQ: NVDA), and Meta Platforms (NASDAQ: META). These companies have experienced remarkable share price surges ranging from 40% to over 200% this year, playing a significant role in driving the overall rally of the S&P 500.

While the market rally appears to be extending to other sectors, it's crucial to acknowledge that these substantial gains have been accompanied by high earnings expectations. Failure to meet these expectations by Tesla or any of the other megacap companies during this quarter's earnings reports could have a severe impact on equity indices.

In addition to Tesla's earnings report, several other major companies are scheduled to disclose their results in the upcoming week. The banking sector's earnings season continues, with Bank of America (NYSE: BAC) announcing its results on Tuesday and Goldman Sachs (NYSE: GS) on Wednesday.

Tuesday will also see the release of US retail sales data for June, with an anticipated 0.5% increase attributed to a recovery in auto sales and higher gasoline station sales. This indicates that consumer demand remains resilient despite certain challenges.

Investors will also closely monitor reports on regional manufacturing activity, which is expected to remain sluggish. Furthermore, the weekly data on initial jobless claims will provide insights into the current state of the job market.

US Retail Sales

Wednesday will see the release of the UK's June inflation data, a significant factor that will impact the potential magnitude of the Bank of England's next interest rate increase.

It is expected that the headline consumer price index will moderate to 8.2% year-over-year, down from May's 8.7%. This easing is mainly attributed to a decrease in food and fuel prices. While core inflation is anticipated to show a slight decline, the services component is expected to remain stable at a post-COVID high of 7.4%.

GBP/USD daily chart

In the minutes of the June meeting, the Bank of England emphasized the potential need for further tightening if the economy demonstrated sustained inflationary pressures, particularly in the services consumer price index (CPI).

Consequently, the upcoming August meeting of the Bank of England is expected to be closely contested. Should there be an increase in the services CPI, it would likely strengthen expectations for another 50-basis point rate hike. Conversely, a lower reading would likely shift the balance towards a more modest 25-basis point increase. The inflation data will hold substantial sway in shaping the central bank's decision regarding future adjustments to interest rates.