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Weekly Review: PCE brings relief to the market, yen falls below 161, and calls for Biden to step down grow

2024-07-01

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Last week, the global financial market was full of major events. Nvidia's market value evaporated by $430 billion in three days, which caused a sharp drop in popularity at the beginning. The US dollar rebounded strongly and Asian currencies almost collapsed. The market did not react much to the first presidential election debate between Trump and Biden, but the voices about Biden's withdrawal from the election continued to intensify.

From the perspective of market performance, the plunge of Nvidia and Micron Technology last week dragged down Wall Street. Last week, the Dow and S&P 500 fell slightly by less than 0.1%, and the Nasdaq climbed 0.2%; in June, the Dow rose 1.1%, the S&P 500 rebounded 3.5%, and the Nasdaq rose 6%; in the first half of the year, the Dow rebounded 3.8%, the S&P 500 climbed 14.5%, and the Nasdaq soared 18.1%.

The US dollar continued to rebound to near an 8-week high, and the yen once fell below the 161 mark, triggering intervention threats again.

Last week's news summary:

PCE brings relief to the market

Last week, the market focused on the US personal consumption expenditure (PCE) price index on Friday. Prior to this, inflation in Australia and Canada broke out unexpectedly, injecting tension into the market. However, in the end, the inflation indicator preferred by the Federal Reserve was in line with expectations. This relieved the market, expectations of a Fed rate cut increased, and the US dollar fell.

On June 28, the US Department of Commerce released data showing that the month-on-month growth rate of the US PCE price index in May fell from 0.3% in April to 0%, the lowest record since November 2023, and the year-on-year growth rate also fell from 2.7% in the previous month to 2.6%, both in line with market expectations.

More importantly, after excluding the volatile food and energy prices, the year-on-year growth rate of the core PCE price index in May fell from 2.8% in April to 2.6%, which was also in line with expectations and set the lowest record since March 2021. The data also showed that the core PCE price index grew 0.1% month-on-month in May, the lowest since December 2023.

Consumer spending also rose slightly, reinforcing market optimism that the Federal Reserve could facilitate a "soft landing" for the economy.

Personal spending growth accelerated to 0.2% in May from 0.1% in April, lower than expected, and inflation-adjusted spending reversed the decline in April and resumed growth of 0.3%; personal income growth accelerated to 0.5% from 0.3% in April, higher than the expected increase of 0.4%.

After the release of the inflation data, traders continued to expect the Federal Reserve to cut interest rates at least once this year, and bet on a 0.25% rate cut in November, and the chance of a rate cut in September also increased.

According to LSEG calculations, federal funds futures slightly raised the probability of easing in September from about 65% at the end of last Thursday to around 67%. The market also expects one or two rate cuts of 25 basis points each this year.

The 10-year U.S. yield fell 2.73 basis points to a low of 4.2591%, and then soared 11.2 basis points to a high of 4.4%; the interest rate-sensitive 2-year bond yield rose as much as 4.2 basis points to a high of 4.758%.

At the same time, the U.S. dollar fluctuated violently after the data was released, falling to 105.74 at one point, and closed slightly lower on the day.

Seema Shah, chief global strategist at Principal Asset Management, said that the PCE data on June 28 was in line with expectations, which was a relief, and the Fed was also happy to see this. However, the policy path is still uncertain. Further deceleration of inflation, coupled with more evidence of a weakening job market, will pave the way for the first rate cut in September.

Mohamed El-Erian, chief economic adviser at Allianz, believes that the data shows that the U.S. economy is slowing faster than expected, but the Fed may need to wait and see more data, resulting in the risk of interest rates remaining at a high level for too long.

For investors, this week will focus on the U.S. non-farm payrolls report. Recent encouraging inflation data, as well as signs of a slowdown in consumer spending and the housing market, have boosted hopes for a September rate cut by the Federal Reserve, although policymakers don't seem convinced yet.

Persistent tightness in the job market is likely the main reason the Fed is reluctant to abandon its hawkish stance, and Friday's jobs report may do little to change that. Nonfarm payrolls are expected to rise by 180,000 in June, down from 272,000 the previous month, but still considered a solid number. The unemployment rate is expected to hold steady at 4.0% in June, while average hourly earnings are expected to rise 0.3% compared with 0.4% in May.

"The July 5 jobs report will give us a chance to see if the job market is slowing," said David Donabedian, chief investment officer at CIBC Private Wealth, in an email. "The number would have to be a big downside move to signal that the Fed will move to cut rates in July. We expect the Fed to hold its ground unless the job market starts to slide."

Before the nonfarm payrolls, there will be other indicators of the job market, including JOLTS job openings and Challenger layoffs data on Tuesday, and the ADP employment report on Wednesday. In addition, the minutes of the June FOMC meeting will be released on Wednesday, which may reveal more about policymakers' thinking, after most predicted only one rate cut in 2024 in the latest dot plot.

If investors cannot get more clarity from the employment indicators, they will focus more on the ISM Purchasing Managers Index. The manufacturing PMI will be released on Monday and the services PMI will be released on Wednesday.

The former will rise from 48.7 to 49.0, while the latter will fall from 53.8 to 52.0. As long as the decline is not more than expected, the weaker services PMI is good news for Wall Street. But more importantly, the market will want to see a slowdown in factory price inflation for industrial products.

After a steady rise over the past month, the dollar is vulnerable to a sell-off if the upcoming data is generally weak.

The yen fell below 161, and the currency tsar changed its commander-in-chief

Last week, under the weight of the strong dollar, the yen almost collapsed, once falling below the key 161 mark, below the level of record intervention by the central bank. At the same time, the Japanese government appointed a new currency tsar.

The yen plunged to a 38-year low of 161.27 against the dollar in Asian trading on Friday, just as U.S. President Biden and former President Trump held their first election debate. This heightened expectations that the Japanese government will intervene in the market to boost the yen.

The yen fell 6% against the dollar in the second quarter and has fallen 12% so far this year, the biggest drop among G10 currencies. The yen was at 172.37 against the euro, a record low, indicating that the market is testing the Japanese authorities' determination to intervene.

In late April and early May, Japanese authorities spent 9.79 trillion yen (about 60.94 billion U.S. dollars) to push the yen back 5% from a 34-year low of 160.245.

"In a low volatility environment, the desire for carry trades continues," said Ray Attrill, head of foreign exchange strategy at National Australia Bank in Sydney. "Now that the yen has broken through 160 (to the dollar) without intervention, I think the market's fear before 160 has subsided."

As the yen plummeted, according to the latest report from Nikkei, Japan also appointed Atsushi Mimura as its top currency diplomat, replacing Masato Kanda. Mimura is the director of the International Bureau of the Ministry of Finance of Japan. Previously, Japan's top monetary official Masato Kanda said this week that the Japanese government is ready 24 hours a day if necessary.

"The long-term high-interest rate environment in the United States is undermining hopes for a recovery in Asian currencies," said Christopher Wong, a foreign exchange strategist at OCBC Bank in Singapore. "And now, with the yen weakening again, problems are increasing. Central banks may have to take more forceful intervention measures to smooth volatility."

Other emerging market currencies have not been spared, with the Turkish lira and Brazilian real both falling more than 10% this year.

The first US presidential debate has sparked public opinion! Biden's resignation is on the rise

At 9 p.m. on June 27, Eastern Time, the first televised debate between the Democratic and Republican presidential candidates was held in the studio of CNN's Atlanta headquarters. Biden (81 years old), representing the Democratic Party, and his Republican opponent Trump (78 years old) faced off on the same stage again after four years. The two did not shake hands before entering the venue.

The two elderly candidates clashed over topics such as the US economy and inflation, immigration, abortion rights, the Russian-Ukrainian war and the Gaza war. Both Biden and Trump repeated their usual remarks, making the debate dull.

The first face-to-face debate between the two turned into a disaster for the Democratic president. Biden seemed overwhelmed, stuttered, and couldn't keep up with his own thoughts many times. Trump still had no purpose, but he didn't interrupt Biden's conversation tyrannically as he did four years ago.

Before Thursday's debate, the predictive polling model showed that the two were evenly matched, and FiveThirtyEight called it a coin toss probability. But political betting markets turned dramatically against Biden during and after the debate - Real Clear Politics' average betting odds on Friday showed Biden had only a 19% chance of winning the presidency.

Democrats reported growing panic within the party on Friday because of a "disastrous" debate performance, with supporters believing Biden will have trouble defeating Trump in the November election.

A donor who planned to attend a Biden fundraiser in the Hamptons on Saturday said: "This is a disaster, it's worse than I thought. Everyone I know thinks Biden should drop out."

Last Friday, the New York Times editorial board called on Biden to withdraw from the race. It said Democrats should "acknowledge that Biden can't continue to run and create a process to select a more capable person to replace him."

Despite growing calls to withdraw from the race, he refused to withdraw and vowed to win the presidential election. Biden, 81, said at a campaign rally that he is not young anymore, not as fast as he used to be, not as fluent in speech and not as good at debate, but if he believes he is not competent for the presidency, he will not seek re-election.

"I promise you, I will not run again if I don't believe 100 percent that I can do this job," Biden said at a campaign event in North Carolina. "I am determined to win in this state in November."

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Weekly Review: PCE brings relief to the market, yen falls below 161, and calls for Biden to step down grow

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