Written Commentary
STOCK INDEX FUTURES
Stock index futures are higher as signs of slowing economic growth and falling commodity prices eased expectations over how high the Federal Reserve will raise interest rates to rein in inflation.
Recent economic reports, on balance, have indicated the U.S. economy, and potentially inflation, may be beginning to cool off. The latest evidence came Friday as the University of Michigan revised lower its June reading of inflation expectations over the next five to 10 years to 3.1% from 3.3%.
Durable goods in May increased 0.7% when a gain of 0.1% was expected.
The 9:00 central time May pending home sales index is anticipated to show a 2.5% decline.
The June Dallas Federal Reserve manufacturing index will be released at 9:30. The May report was negative 7.3.
The rate of inflation remains the key driver to this market. A likely bottom could come when there are indications that the rate of inflation is slowing, which could influence the Federal Reserve to become less hawkish.
CURRENCY FUTURES
The European Central Bank starts a three-day forum today in Portugal, which is just a few days after its policymakers made clear that it would be raising interest rates next month. Recently a jump in Italian bond yields prompted the ECB to announce it was devising an “anti-fragmentation” tool.
The main event will be Wednesday’s panel discussion, which includes ECB President Christine Lagarde, Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey, for insights on how the central banks view the trade-off between curbing inflation, while still trying to ensure a soft-landing for the global economy.
INTEREST RATE MARKET FUTURES
The Treasury will auction five-year notes today.
This year the Federal Open Market Committee will continue on its path of hiking the fed funds rate.
There is a 93.9% probability that the Federal Open Market Committee will hike its fed funds rate by 75 basis points and a 6.1% probability that the rate will increase by 50 basis points at the July 27 meeting.
Currently the Federal Reserve’s focus is clearly on inflation, while a slowing economy will be problem for the Fed to deal with later. Economic growth is slowing, maybe even sooner than expected, which should allow the Fed to soften at some point.
Financial futures markets are now predicting the Fed could return to accommodative late in 2023.
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