Rise and shine everyone.

Yesterday’s focus was, as we suspected, Fed Chair Powell’s testimony. After the discussion on labor market pressures, the market has started to price in the possibility of a rate cut in September. (Summary of testimony below) Chair Powell returns for his second session today in front of the House of Representatives.

Japan's 20-year government bond yields reached their highest level since May 2011. Meanwhile, 10-year yields are just below 1.10%. Following a bond market participants' meeting, recommendations were made for the BOJ to reduce monthly JGB purchases.

US Equity Futures are marginally higher. Commodities are mixed with precious metals higher but oil and copper are pulling back.

Chair Powell’s Testimony

Fed Chair Powell noted that while labor market conditions have cooled, they remain strong. The Federal Reserve has made progress toward its 2% inflation goal, with restrictive rates helping balance demand. However, easing too soon could reverse this progress, and first quarter data did not support confidence in cutting rates, with GDP growth moderating in the first half of 2024.

In a Q&A session, Powell stated that recent labor market data signals cooling, with the next likely rate move being a hike. The Fed is studying the implications of Supreme Court decisions on regulation and working on revisions to the Basel 3 Endgame proposal. Powell emphasized the importance of Fed independence and the strong financial footing of the banking sector.

Powell mentioned that long-term immigration has been neutral to inflation and stressed the need for more good inflation data before considering rate cuts. While the labor market has cooled significantly, it is not currently a source of inflationary pressures, and the Fed will proceed carefully with rate adjustments.

China still seeing deflationary pressures

China continues to face significant deflationary pressures, with June's year-over-year Consumer Price Index (CPI) barely above zero. Monthly CPI figures also contracted more than anticipated, underscoring the persistent economic challenges. The Producer Price Index (PPI) marked its 21st consecutive negative reading, highlighting ongoing weaknesses in industrial prices. Additionally, food prices saw a sharper decline, with the Food CPI deflating at a rate exceeding 2% year-over-year.

Chart of the Day

BofA: The ongoing unstable price action highlights a crucial observation we've made recently: single stock fragility is increasing, especially around earnings and other events that offer forward guidance. In fact, the average magnitude of fragility events in the largest S&P stocks is now at its highest level since 1992.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)