The US-Iran deal and technology sales in stock markets set the scene this week. The US-Iran deal continued to push oil prices lower, with the price of Brent crude falling to US$73 from US$120 at the height of the war. However, the peace is fragile, and uncertainty prevails over the opening of the Strait of Hormuz. Currently, lower oil prices are reversing the stagflationary trend in the global economy, providing a boost to growth and lower inflation in the coming months. The Eurozone in particular benefits from this compared to the United States, just as the Eurozone was relatively more affected by the oil shock. The reversal was also evident in equity markets where Euro stocks have outperformed US stocks recently.
The Euro’s outperformance was driven by AI anxiety that returned to the market this week Which led to losses in US technology stocks of about 5%. Right now, it feels more like another bump in the road than something bigger. US investment plans remain important, and stocks are also supported by the US consumer engine that is still running and now receiving a boost from lower oil prices.
On the data front, US PMIs were stronger than expected With the manufacturing PMI rising from 55.1 to 55.7, the highest level since 2022. European PMIs also beat expectations in the composite PMI, which rose from 48.5 to 49.5 supported by a recovery in the services PMI. The improvement should continue in the coming months as the oil shock fades again. The German Ifo Index showed a slight increase in the expectations index from 83.9 to 84.1. On the inflation front, the US core PCE rate rose from 3.3% y/y to 3.4% y/y, in line with expectations. However, it is the highest level in nearly three years, and highlights the ongoing challenge of getting US inflation back to the 2% target. New US Fed Chairman Kevin Warsh confirmed at the recent FOMC meeting that the Fed has not met its target in more than five years, indicating that the Fed will tighten its policy later this year. We are looking at a rate hike in December, but the risks are towards an early hike. There is a 50% chance that the Fed will raise interest rates by September. However, bond yields fell this week on the back of lower oil prices and tensions in stock markets.
The United Kingdom is set to have a new Prime Minister again After Keir Starmer announced his resignation. Nominations for the Labor leadership run from July 9 to 15, and if no other contender other than Andy Burnham comes forward, he could take office on July 17. If Burnham becomes the next Prime Minister (which is very likely), the next major thing to watch is who he picks as Chancellor. Current Chancellor Rachel Reeves has been favored by markets, as her focus has been on adhering to financial rules. The last time rumors of her departure spread, UK revenues rose significantly.
Next week It’s time for US labor market data again with the JOLTS Job Openings and Nonfarm Payrolls report, which is scheduled to be released on Thursday this time due to the national holiday on the Friday before July 4th. The preliminary CPI for the euro for June will be released on Wednesday. Over the summer, we have the next ECB meeting on July 23, where we expect interest rates to remain unchanged. The Federal Reserve is scheduled to meet on July 29 with markets estimating the likelihood of a rate hike at 25%.
