Japan leads gains in Asian stocks before Powell testimony.
The Nikkei 225 Stock Average climbed to a record, extending gains for the year to more than 23%. Equity indexes in Australia also advanced, along with US stock futures after the S&P 500 closed 0.1% up on Monday to set its 35th all-time high this year. Shares in mainland China and Hong Kong fell, while the dollar edged higher against most major peers.
Traders are focused on Powell’s testimony beginning on Tuesday for guidance on the Federal Reserve’s outlook. He faces pressure from legislators growing impatient for interest-rate cuts and others who are unhappy with the Fed’s latest plan to boost capital requirements for Wall Street lenders. Markets are pricing the chance of two rate cuts this year, with a roughly 70% chance of the first in September, according to swaps data compiled by Bloomberg.
“With the recent signs of softer growth and labour market, markets will closely watch if Powell gives any hints on the timing of rate cuts,” said Carol Kong, a strategist at Commonwealth Bank of Australia in Sydney. “Market pricing for a September cut can increase and the US dollar can fall further if Powell’s comments are perceived as dovish.”
In China, investors are looking ahead to one of the country’s biggest annual policy meetings, approaching next week. There are also uncertainties on the central bank’s new liquidity operations unveiled on Monday with legislators having tightened their grip on interest rates and taken greater control over short-term borrowing costs. Investors read the move as if the PBOC just raised rates, triggering a bond market selloff.
China’s June CPI is due to come out Wednesday with analysts surveyed by Securities Daily expecting it to rise from a year ago due to increases in pork prices.
In Australia, consumer pessimism deepened in July as households worried about the prospect of further rate increases with inflation proving stickier than anticipated. Australian bonds mirrored Monday’s Treasury move, with shorter-term notes underperforming longer ones.
Long bias
Bond markets appear to be beginning the back half of 2024 with a long bias, as economic data weakens as rate cuts approach in the fall, according to Thomas Tzitzouris at Strategas. Despite the long positioning, there are preliminary signs of shorts coming back, he said.
“When we break down the positioning data, we see a market that despite showing a long bias in anticipation of cuts, is not fully convinced this will occur with shorts slowly returning to the market,” Tzitzouris said.
The S&P 500 topped 5,570 on Monday ahead of Powell’s testimony and as traders position for earnings from some of the largest American banks which unofficially kick off the second-quarter reporting season Friday. Expectations for the season are on the rise. Analysts’ upgrades to profit estimates have outnumbered downgrades, while forecasts for 12-month forward earnings stand at an all-time high.
John Stoltzfus at Oppenheimer Asset Management said a robust earnings outlook and a resilient economy could support higher valuations. He raised his year-end S&P 500 target to 5,900. At Goldman Sachs Group Inc., Scott Rubner says the bar for corporate results is high — with lofty expectations already baked in.
“As earnings season kicks off this week, investors should be prepared to see some ‘choppiness,’ but the market will likely climb back up again once companies resume buybacks,” said Mark Hackett at Nationwide.
In commodities, oil was little changed after a two-day decline as Hurricane Beryl looked less likely to pose major disruptions to crude infrastructure in Texas. Gold steadied after dropping by the most in two weeks on Monday.