Anticipated US Inflation Report and Economic Dynamics Shape Investor Sentiment | Daily Market Analysis

Key events:

• USA - FOMC Member Harker Speaks    
• USA - Exports
• USA - Imports
• USA - Trade Balance (Jun)
• USA - EIA Short-Term Energy Outlook

On Monday, Wall Street made gains, overcoming early volatility that followed a relatively lackluster performance last week. Investors opted to build positions ahead of the eagerly anticipated US inflation report scheduled for Thursday.

Last week saw the primary stock indices closing lower, as investors seized the opportunity to secure profits following months of steady gains. This move was prompted by concerns about economic data, mixed corporate earnings results, and the upward trajectory of Treasury yields.

The year 2023 has witnessed a robust surge in US stocks, notably exemplified by the benchmark S&P 500 which has notched a 17% increase year to date. This upward momentum has been driven by optimism surrounding artificial intelligence advancements and expectations of a controlled economic slowdown for the world's largest economy.

The upcoming week places the entertainment sector under the spotlight, with anticipated reports from major players including Walt Disney (NYSE: DIS), News Corp (NASDAQ: NWSA), and Fox (NASDAQ: FOX). Particularly concerning Disney, a series of underwhelming film releases and challenges in its theme parks have raised concerns about its performance.

Meanwhile, despite a slight decrease on Monday, oil prices remain close to their highest levels since mid-April. This follows the announcement by top producers Saudi Arabia and Russia late last week of plans to extend output cuts for another month, a move aimed at further tightening global markets.

This week, the US consumer price data set to be released on Thursday is poised to provide insights into the potential course of the Federal Reserve's monetary policy. Following the recent employment report that reignited concerns about the possibility of an extended period of higher interest rates, this upcoming data could influence the central bank's decision-making.

Anticipated for July, the consumer price index is expected to accelerate to an annual rate of 3.3%, up from the prior month's 3.0%. Conversely, the core figure, which excludes volatile elements like food and energy, is projected to show a slowdown to a 4.7% year-on-year rate.

The inflation outlook will be completed by Friday's release of producer prices, with core PPI expected to see a year-on-year increase of 2.3%.

While Monday's schedule was relatively quiet, today sees several Fed officials scheduled to speak, including Philadelphia Fed President Patrick Harker. Simultaneously, the corporate landscape is entering the final stretch of the second-quarter earnings season. According to FactSet data cited by CNBC, over 84% of S&P 500 companies have already reported, with around four-fifths of these surpassing Wall Street expectations.

The second notable event of the week revolves around the US Treasury's quarterly refunding process, wherein a total of $103 billion in three, ten, and thirty-year US Treasuries will be auctioned off from Tuesday through Thursday. While instances of poorly received Treasury refunding are rare, characterized by consistently low bid-to-cover ratios or similar metrics, there exists a potential risk that dealers might incorporate certain concessions into bond prices prior to the auctions. This preemptive measure could maintain stability in US yields, resulting in a mixed investment landscape.

Considering the prevailing circumstances, the prospects for a substantial decline in the dollar that would facilitate a rally in other global currencies seem unlikely this week. Moreover, developments in the Black Sea region and their potential influence on food and energy prices might leave investors apprehensive about fully embracing disinflationary trends. Currently, it's doubtful that statements from Fed speakers will exert a significant impact on the dollar's valuation. As a result, it is anticipated that the US Dollar Index (DXY) will continue to oscillate within a range of 101.80 to 102.80.

Today, gold prices experienced a minor decrease, extending losses from the previous session. This decline was attributed to the prevailing uncertainty surrounding the Federal Reserve's future actions, coupled with expectations of a robust inflation reading this week. These factors contributed to strengthening the dollar and driving up Treasury yields.

Over the past week, there has been notable activity in both the dollar and the bond market, resulting in a rise in the greenback's value. This upward movement is in anticipation of the forthcoming consumer price index (CPI) reading on Thursday, which is expected to indicate signs of persistent inflation.

Gold, however, witnessed limited interest from investors and consequently drifted lower. The outlook for assets without yield was dampened by the potential for further interest rate hikes, which led to a subdued attractiveness for gold as an investment option.