Week of 6 JULY

This week, markets responded to softer Eurozone CPI and US jobs figures, as data took over from geopolitics as the driver. Gold prices started the week just below $4,100 per ounce and fell below $4,000 after hawkish remarks from Warsh at the Sintra Forum. However, they later climbed back towards $4,200 after an early June NFP release showed fewer jobs created than forecast.

The week ahead is quite light on the data front, with the highlight being the release of minutes from the last FOMC meeting, the RBNZ rate decision and Canadian jobs data.

Week in Review

The main theme in markets over the last week was a rotation back into defensive stocks amid monetary policy events that once again left traders worried about high valuations in the tech sector. Once again, the Magnificent 7 underperformed, although hardware producers saw continued gains. Tesla shares dropped 7.5% amid disruption from SpaceX, despite beating delivery estimates. The Nasdaq lagged other major indices as the DJIA hit a new all-time high at its weekly close on Thursday.

The US June NFP was published a day early due to a holiday, coming in at the very bottom of the expected range at 57K, compared to the downwardly revised 129K in the prior month. The unemployment rate unexpectedly ticked down to 4.2% from 4.3%, driven by a three-decimal drop in the participation rate. The unexpectedly poor jobs numbers helped revise dovish sentiment, which had been hurt earlier in the week when Fed Chair Kevin Warsh emphasised the need to fight inflation in remarks at the ECB's Forum at Sintra.

ECB President Christine Lagarde also spoke at the Forum, emphasising a return to "basics" and indicating that central banks were moving away from unconventional policy measures such as QE, negative rates and forward guidance. Markets seemed to interpret her remarks as signalling that the ECB has no predetermined rate path and will be data-dependent at the next meeting. Flash June Eurozone CPI fell to 2.8%, below the 3.0% expected, while the core rate also fell short of expectations. Markets cut the odds of an ECB rate hike to 50-50 by the end of the year.

The yen was in focus after breaching above 162.00 on Tuesday but then suddenly fell back to 161.00 on Thursday, raising speculation about intervention. The sudden drop came ahead of the US NFP data, which weakened the dollar.

In geopolitics, markets got a reprieve from the ongoing war in the Middle East, with no major events affecting them. Crude shipments increased through the week. In the UK, PM candidate Andy Burnham gave a much-anticipated speech on the economy but spoke mostly in platitudes. He said he hadn't decided who would be Chancellor and that Cabinet appointments would be announced after the leadership contest, while also suggesting there was room for tax adjustments within the Labour manifesto pledges.

Biggest Market Movers

• The dollar was broadly weaker amid softer data that contradicted Warsh's hawkish rhetoric.
• NZD was the strongest performer of the major currencies against the dollar as markets priced in an 80% chance of a hike at the next RBNZ meeting.
• The USDJPY rose at the early part of the week but corrected lower amid speculation of Japanese interference.
• Gold was higher by the end of the week amid a weaker dollar and lower yields.
• Silver had the strongest performance among precious metals, with a rebound in the yen helping the metal gain.
• Natural gas prices surged amid a US heatwave that raised demand for peaking power.

Top Events in the Week Ahead

The coming week's economic calendar is relatively quiet, which could give geopolitics greater influence on markets. Central banks will likely be the theme of the week, with investors closely watching the Fed's latest move and the expected RBNZ rate hike. Overall, markets are likely to remain in a holding pattern in the last week before earnings season and the next rate cycle.

Fed Minutes: More Warsh Clues

Wednesday's release of the FOMC minutes will attract extra scrutiny this time, given the changes enacted by the new Fed Chair. Traders will be looking for more insight on the rationale behind Warsh's policies and the lineup of hawks and doves. The recent weakness in the job market will bring FOMC members' comments on the labour market back into focus. After Warsh's hawkish comments, a more dovish interpretation of the Fed's outlook could push gold to $4400/oz.

RBNZ Divided Hike

Markets are pricing odds of a rate hike at the RBNZ's Wednesday rate decision, with a divided vote. At the last meeting, Governor Anna Bremen cast the tie-splitting vote in favour of a hold. Analysts are suggesting she will break in favour of a hike this time. However, the market is not showing significant confidence in this outlook, meaning there could be a swing in the NZD regardless of what happens. A hold would likely weaken the currency, opening the door to 0.5600, unless Bremen makes a solid case for a hike at the next meeting.

Canadian Jobs Data As BOC on Hold

One of the key takeaways from last week's ECB forum, which included BOC Governor Tiff Macklem, is that data will be more important to the policy outlook. Macklem agreed with Lagarde on being more data-dependent and using "framework guidance", which implies explaining how data could influence policy more than offering a rate path. Traders could react more strongly to Friday's Canadian jobs data, with the unemployment rate expected to fall back to 6.65% from 7.0%. If USDCAD maintains 1.4100 ahead of the event, it could revisit 1.4250. Otherwise, the focus will shift back to 1.4000 and

Other Events & Earnings

Monday has the US services PMI. The US trade balance comes out on Tuesday. Wednesday includes Japan's current account. For Thursday, Germany's trade balance is expected. Friday sees Japan's PPI.

The week ahead is the quiet before the start of earnings season, with a small selection of notable names updating investors, including Levi Strauss, PepsiCo, Delta Air Lines, and production results from Shell.