MARKETS DANCE TO THE RATE-CUT BOOGIE

Equity markets enjoyed a steady ascent last week, buoyed by softer economic data amid a holiday-shortened trading week. The S&P 500 climbed 2%, led by the usual index stalwarts tech and communication services, and crossed the 5,500 milestone for the first time, ending the week at a record high.

The shortened week ended with a critical employment report that leaned on the dovish side. U.S. payrolls rose by a stronger-than-expected 206,000 in June, but net downward revisions for previous months tempered this gain. Meanwhile, the jobless rate nudged up to 4.1%, marking three consecutive monthly increases and bringing it up 0.5 percentage points over the past year and 0.7 percentage points from its cycle low. Job vacancies continued their slow descent. Wages, as anticipated, rose 0.3% in June and 3.9% year-over-year, maintaining their slow but steady downward drift.

In other news, U.S. ISMs were looking rather tepid in June, with the manufacturing index dipping further into contraction territory at 48.5 and the services index following suit at 48.8. Twin sub-50 readings rarely spark celebration, but when investors are in a mood where “bad news is good news,” it leaves market participants increasingly optimistic about the prospect of near-term rate cuts.

All in all, the markets seem ready to party, and they hope the Fed will join them in the rate cut boogie.

THE POLITICS OF DANCING

Meanwhile, in France, Marine Le Pen suffered a significant setback in the second round of France's legislative snap elections on Sunday when the National Rally (RN) finished in third place, marking a dramatic reversal of fortunes for the far-right party.

Just a week ago, RN seemed poised for power, having mirrored its success in the EU parliament vote during the first ballot for seats in the new National Assembly. Emmanuel Macron, who had shocked the world by dissolving France's legislature following last month's EU election, called on his remaining allies and even former rivals to unite in a broad, clearly democratic, and republican alliance to block Le Pen in the second round.

This effort, combined with a united leftist front, led to Le Pen falling short of the majority she sought, with RN underperforming Macron's group and finishing third.

The real victor wasn't the right or the center but the left, which surged to victory and could secure as many as 215 seats. Following Labour's historic landslide in the UK, this triumph made it a triumphant week for Europe's political left. Unlike in the UK, where turnout was low, France saw a record turnout aimed at denying the right wing any substantial gains.

DANCING THE WEEK AWAY

Get ready for the main event of the week: Jerome Powell, America's top central banker, stepping into the spotlight for his semi-annual performance on Capitol Hill. Over two days, Powell will face the usual cast of irritable partisan critics.

Expect the familiar song and dance. Both Democrats and Republicans will show their frustration with Powell from all angles. Of course, the politics of inflation will be front and center.

The media will hype Tuesday's session as if it were Super Bowl Sunday, relegating Wednesday's follow-up to a mere high school scrimmage. However, Powell's chances of making statements that drastically shift market expectations for the year are slim.

Following a string of softer economic data, including the June jobs report—which, despite a positive headline, revealed significant downward revisions to previous months and another uptick in the jobless rate—the odds of a Fed rate cut in September are notable. Traders are all in, betting on two cuts by year-end.

With the June plot as stale as week-old bread, attention now shifts to this week’s CPI report; after all these days, everything is about the politics of inflation. The Bureau of Labor Statistics will reveal last month’s inflation figures on Thursday. Consensus expects a mild 0.2% month-over-month increase in the core gauge.

A consensus result would mark the third consecutive acceptable reading on price growth. A lower-than-expected reading (below 0.2% month-over-month) would make a September rate cut seem inevitable.

Traders will again scrutinize the super core measure after May's 0.0% reading. Given that Owners' Equivalent Rent (OER) and Rent have consistently risen by +0.4% for four months, any decrease will be significant as the Fed aims for the pre-pandemic range of 0.2%-0.3% for price stability.

At the headline level, concerns are rising over a 15% increase in WTI oil futures and an 11% rise in gasoline futures prices over the past month. If there aren't offsetting improvements elsewhere, this could drive higher monthly headline inflation in July’s reports.

More By This Author:

The S&P 500 Extends Record Run After Jobs Report: See No Evil, Hear No Evil & Speak No Evil
NFP: Time To Circle The Wagons
Lacklustre Data Fuels Rate Cut Optimism