Last week, the dollar index rallied 1.17% and closed the week on a high. The Dow Jones index surprised the market with a 2.07% rally compared to SP500’s 0.69% gain and the Nasdaq’s 0.75% drop. Tesla ended the week down 9.29% and Netflix down 3.99% despite both companies reporting better-than-expected earnings.
This week, three central banks are set to announce their interest rate decision, release a monetary policy statement, and afterward, hold a press conference. This is expected to increase volatility for the dollar, the Yen, and the Euro. In addition, more than 150 of the SP500 companies are expected to report earnings this week.
The Fed is expected to vote on a 25-basis point rate hike to 5.25%-5.50% range on Wednesday at 9:00 pm EAT. Analysts estimate that this is likely to be the last rate hike of this cycle since inflation is almost reaching the Fed’s target. In June, US inflation dropped to 3%, just 1% above the Fed target of 2%. Traders will be focused on the Federal Open Market Committee (FOMC) press conference to gather hints about future Fed monetary policy.
The European Central Bank (ECB) is expected to announce its policy decision on Thursday at 3:15 pm EAT. Analysts estimate that the ECB will hike interest rates by 25 basis points to 4.25% to address the high inflation that stood at 5.5% in June. After losing 0.95% to the dollar last week, the Euro may likely mount a comeback this week following bets that the ECB has a long way to go in its monetary tightening cycle.
As cost pressures in energy and food continue to fade, the ECB projects that inflation will drop to 3% by 2024 and that the Eurozone GDP will rise to 0.9% in 2023.
The Bank of Japan (BOJ) is expected to hold interest rates steady at -0.10% during its tentative meeting on Friday. The BOJ has maintained its yield curve control program that limits the yield on 10-year bonds at +-0.50% and is expected to continue until there’s sufficient evidence that inflation remains well above its 2% target. In June, Japan’s inflation rose to 3.3%. This was the 15th consecutive month that inflation stayed above target. This policy has led to a weaker Yen and Japan’s ministry of finance has threatened to intervene in the currency markets if the Yen continues to slide against the dollar.
After banks reported better-than-expected earnings followed by surprise upbeat earnings from Tesla and Netflix, more mega-cap companies are expected to report this week. Among the highlights, Alphabet (Google) and Microsoft are expected to report earnings on Tuesday’s close while Amazon will report on Thursday after market close.
Investors will also be interested in learning the strength of the American consumer and the willingness to spend through a set of retail companies that will be reporting this week. This includes earnings from McDonald’s’, Domino’s, Chipotle, Coca-Cola, and Hershey’s.
The S&P Global monthly report on economic growth was released on Monday morning and it showed contractions in both manufacturing and services sectors in Australia, Japan, Eurozone, and the UK. The report for the US manufacturing and services PMI will be released on Monday at 4:45 pm EAT. This paints a picture of a slowing global economy amid high inflation and rising interest rates.
The S&P Global Stanbic Bank Kenya PMI report showed that Kenya’s private sector business slowed in June to 47.8 from a previous reading of 49.4 in May. The PMI index uses 50.0 as a neutral point and readings below 50.0 indicate contractionary conditions while those above indicate expansionary conditions. The volume of new business acquired by the private sector contracted for the 5th consecutive month as businesses reported that customers have a weaker purchasing power due to the high inflation that stood at 7.9% in June.
Brent oil prices are expected to continue the current 4-week rally as the OPEC countries continue to tighten supply to support prices. While the slowing global economy is dampening the demand outlook for oil, the OPEC output cuts have significantly helped oil prices remain above $70 per barrel. On Monday, Brent oil prices breached the $81.60 price, a level last seen in April.
Gold is likely to extend its 3-week rally and retest last week’s high of $1,987 per ounce. If the Fed’s meeting on Wednesday results in a weaker dollar, gold will likely rally above $2,000 this week. Gold tends to outperform equities when the manufacturing PMI is below 50.0. US manufacturing PMI has been below 50.0 in 7 of the last 8 months.
Rufas Kamau
Lead Market Analyst FXPesa
