Week of 20 JULY

A busy data calendar left markets affected by geopolitics, with cooler US CPI offset by Warsh's hawkish tone, while China's economy underperformed despite a rise in its trade surplus. Brent rose to nearly $80 per barrel after Iran said it had closed the Strait of Hormuz over the weekend, then climbed to over $85 on Monday as the war restarted, and subsequently remained around that level for the rest of the week.

The week ahead will likely see geopolitical interference, with data headlines including the ECB rate decision, UK inflation and jobs data and Japan inflation data.

Week in Review

Markets started the week on a negative note as traders digested a drop in AI-related stocks in Asia, which was likely driven by profit-taking and tensions in the Middle East. The US and Iran failed over the weekend to de-escalate mutual counterstrikes after Iran attacked shipping in Omani waters. The situation further escalated late Monday after US President Donald Trump formally restarted the war with Iran and reinstated the blockade of Iranian ports. Gold prices, which had started the week around $4,100 per ounce, dipped below $4,000 after the announcement. Meanwhile, Asian stocks fell sharply amid a sell-off in memory chip stocks but recovered later in the week.

US CPI came in much cooler than anticipated, with core inflation falling to 2.6% rather than remaining at 2.9% as expected. The main drivers were a large drop in energy prices (the biggest since early 2020) and easing transportation and apparel costs. Fed Chair Kevin Warsh spoke before Congress a few hours later, reiterating his commitment to fighting inflation. He addressed the CPI figures, saying there was more work to be done to slow consumer price increases. However, the dollar weakened, and as yields eased, equities found support.

China's trade surplus expanded amid a surge in both imports and exports, but Q2 GDP disappointed by slowing to an annual rate of 4.3% instead of 4.6% expected, leading to calls to expand stimulus, particularly after new yuan loans fell.

The BOC kept rates unchanged as was widely expected, with Governor Tiff Macklem surprisingly optimistic about the economy rebounding later in the year.

UK monthly GDP was in line with expectations, and manufacturing production unexpectedly increased.

The main themes for the week were the resurgence of the US war against Iran, which effectively shut down the Strait of Hormuz, and initial reactions to the start of earnings season. Of the S&P 500 components that have reported so far, 87% have beaten estimates, with US banks posting record trading profits. ASML's earnings helped support the AI trade after seeing solid demand, but TSMC's expanded capex left markets a little nervous.

Biggest Market Movers

• The dollar was generally weaker following easing inflation data and a slight decline in the odds of a rate hike this year.
• The yen was the weakest of the major currencies, as verbal intervention was insufficient to offset downward pressure from rising crude prices.
• Commodity currencies were the largest beneficiaries of the dollar's weakness amid hopes that China would increase stimulus spending.
• Crude prices rebounded amid geopolitical tensions, and Brent remained around $85 for most of the week.
• Precious metals underperformed following Chinese data, with silver the worst performer and erasing 50% of its gains since earlier in the year.

Top Events in the Week Ahead

The coming week has a fairly busy economic calendar that will likely maintain market volatility. The resumption of the war with Iran will be closely monitored to see whether the escalation threatens to spread, but the market appears to expect the Strait of Hormuz to remain closed for now. Andy Burnham is expected to be sworn in as UK Prime Minister on Monday and announce his new Cabinet, including the much-anticipated new Chancellor.

In terms of data, the main theme of the week is likely to be inflation, with the UK, Japan and Canada posting their latest numbers. Inflation will also be the key topic for the ECB's meeting, with markets widely expecting a pause. The PBOC will also hold its policy meeting, with investors watching to see whether the missed Q2 GDP numbers prompt new economic support measures.

ECB Most Likely to Pause

The market is pricing in around 90% odds that the ECB will keep rates unchanged, the first pause in its renewed hiking cycle. The ECB hiked rates at its last meeting just before the MOU to reopen the Strait and will convene after the Strait has been closed again. Inflation pressures are likely to be the focus, with the market pricing in a high chance of a rate hike later in the year. The question is whether President Christine Lagarde will lay the groundwork for a rate hike in September, as the market widely expects, or stick to data-dependent rhetoric, implying a December hike is just as likely. In the latter case, the euro could initially weaken towards 1.1400, but the move could fade fairly quickly as markets would likely see a softer ECB as better for Eurozone growth.

UK Jobs and CPI to Hold the Line

On Tuesday, the May UK unemployment rate is expected to remain unchanged at 4.9%, while the total number of jobs created is expected to ease to 70K from 100K. Then on Wednesday, the May inflation rate is projected to ease to 2.4% from 2.8% a month earlier, as energy prices ease. However, the core rate, which excludes energy and food, is projected to tick up to 2.7% from 2.6% amid sticky services prices. Markets are currently expecting the BOE to remain on hold for the rest of the year, but the odds of a hike could rise if inflation outperforms, potentially leading to a short-term move towards 1.3500 if 1.3400 holds firm.

Japanese Inflation Could Hamper BOJ

The yen has been volatile since the last BOJ meeting, when it hiked rates, amid a widening of the rate outlook for Japan and other central banks. This could renew pressure on the carry trade despite repeated warnings from Japanese government officials. With inflation below the central bank's target, it will be challenging to justify a hike to shore up the yen. On Friday, Japan's June inflation rate is expected to be 1.5%, up from 1.4% in May. The so-called "core-core" rate, which the BOJ tracks more closely, is projected to rise to 2.0% from 1.8% previously and could push USDJPY below the 162.00 handle.

Other Events and Earnings

Monday has Canada's inflation figures. German ZEW economic sentiment comes out on Tuesday. Wednesday includes Japan's trade balance. For Thursday, Australia's unemployment data is expected. And select global flash PMIs come out on Friday.

Earnings season is fully underway this week, with a host of companies reporting, including Ryanair, Novartis, Charles Schwab, 3M, Google parent Alphabet, Tesla, Philip Morris, Intel, RTC, T-Mobile, American Express, and Verizon.