INFLATION NUMBERS DOMINATE MINDSPACE?

Impact of Inflation Data on Federal Reserve Decisions

The Federal Reserve’s interest rate determinations are significantly impacted by inflation data. As there is no scheduled Federal Open Market Committee (FOMC) meeting in August, the release of another set of inflation data before the September meeting is of particular importance. This data can exert considerable influence on the market, potentially setting the stage for a recovery in August without the added pressure from the Fed.

 

Market Reactions to Q2 Results and Valuation Considerations

Q2 results, though better than expected, were met with worse than expected reactions. Dow Jones fell over 1%, while both S&P 500 (SPX) and Nasdaq fell over 2%. Investors are maintaining a cautious approach as valuations appear stretched vis a vis Treasury yields. Although Wall Street began on an upbeat note, with  Dow Jones up over 1% while both S&P 500 (SPX) and Nasdaq were up nearly 1%, Apple and Tesla corrected by 1% each. Small Cap 2000 remained flat, indicating a lack of participation by the broader markets.

Market Interest Rates and Inflation Expectations

Market interest rates are exhibiting fluctuations in response to prevailing economic conditions. The yield on benchmark US 10-year rose to 4.08%, indicating market participants’ adjustments to expectations. The two-year yield, often influenced by traders’ anticipation of higher Federal Reserve fund rates, reached 4.76%. Anticipated inflation readings in the US point to a slight acceleration in July. The core inflation rate is expected to remain unchanged at 4.8%.

China’s Inflation Projection and Policy Outlook

The decline in China’s consumer price index poses challenges for policymakers as concerns about potential deflationary pressures persist. The Federal Reserve remains cautious about potential upside risks to elevated inflation, particularly as demand for labor continues to outpace supply. This cautious stance could influence policy decisions aimed at maintaining a restrictive policy rate.

Asian Market reactions

Following a strong overnight session in U.S. markets, Australian and  Japanese markets rose in early sessions but soon succumbed to minor profit booking. The dollar rose against the yen at 143.26. The EUR/USD traded flat. While the dollar index was up at 102.19. U.S. WTI crude held up $81 a barrel. Gold slightly lower, with the spot price at $1967 per ounce. The Hang Seng Index in Hong Kong declined by 1.73%, while Shanghai’s SSEC and CSI Index remained weak. Indian Nifty50 saw profit booking to close 

Bitcoin below $30,000 and Ethereum lower than the $2,000 level confirms both Bitcoin, and Ethereum are in a downtrend even with low volume. This indicates crypto participants, too, are in wait-and-watch mode ahead of crucial US and China CPI numbers to be released on Thursday and Wednesday respectively.

Conclusion

The weaker Chinese trade data has reverberated through global markets, affecting investor sentiment and prompting closer scrutiny of inflation readings. The anticipation of inflation data from both China and the US holds significant implications for the global economy. Amidst uncertainties, investors are navigating a complex landscape, considering the delicate balance between economic challenges and potential stimulus measures.

 

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