Stillness Before The Storm?
By John Persinos
Pivotal economic and political news awaits this week. As investors hold their collective breath, the markets have slipped into a rare calm, much like the stillness before a summer storm.
This week promises to break the silence with Federal Reserve Chair Jerome Powell's remarks in Congress on Tuesday and Wednesday, and key inflation reports on Thursday and Friday. Meanwhile, the bond markets remain in a steady state, with rates standing firm after a slight dip in the 10-year yield.
Adding to the suspense, political dramas are unfolding on both sides of the Atlantic. The beleaguered candidacy of President Biden and surprising twists in France's national election are injecting an extra dose of turmoil into an already charged atmosphere.
The left-center coalition in France unexpectedly beat back a challenge from the far right, although not enough to win an outright majority. In Britain, a left-center groundswell put the Labour party back in power with a landslide.
In the U.S., we'll see how the right-versus-left contest pans out in November. Biden has been sinking in the polls due to his disastrous debate performance. The prospect of Donald Trump returning to the White House is causing severe anxiety among a wide swath of the electorate. Many world leaders and corporate chieftains are worried as well.
Despite these weighty political factors, the main focus of Wall Street remains on the combined outlook for inflation, Fed policy, and the economy, resulting in steady markets as investors await further details to refine their expectations.
Recent economic data suggest a slowdown in the economy. The June jobs report and latest initial jobless claims indicate a slight easing in the labor market. ISM manufacturing and services data also reveal a deceleration in activity.
While a recession does not seem imminent, the economy appears to be shifting to a slower pace.
The most recent economic signals may prompt the Fed to consider easing policy sooner to support growth before the economy loses further momentum. However, inflation remains above the level that would fully support monetary stimulus, complicating the Fed's decisions.
These uncertainties have not stopped the S&P 500 from hitting record highs (see chart).
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