Market in waiting mode as key data in sight

US Presidential race hots up

Incumbent Vice President Kamala Harris has apparently made a significant step in securing the Democratic party’s nominee status by earning the support of enough delegates ahead of the August 19-22 party convention. Former Speaker of the House, Nancy Pelosi, is the last heavyweight to lend her support to Harris but, interestingly, former President Obama has yet to endorse her. This could mean that the process up to the August 7 nomination might not be as clear cut as currently foreseen.

Poll-wise, VP Harris is not improving on President Biden’s performance against Donald Trump, especially in the ranks of independent voters, which probably means that she has a mountain to climb until November. New polls will surface on a daily basis as her campaigning picks up speed and she adopts a more aggressive stance against the Republican party’s Presidential candidate.

Worries about a possible inflation surge under Trump

In the meantime, Trump remains the favourite for the November election with the market trying to discount his likely second term in office. Using 2017-2020 as a guide, there is increasing talk of another inflation surge, partly due to another trade war, which could considerably complicate the Fed’s job. 

The market is currently fully pricing in two 25bps Fed rate cuts for this year, in September and December. Considering recent comments from Trump, a pre-emptive rate cut by the Fed in September, ahead of the November election, might not be taken lightly by the Republican candidate, especially if data remains strong.

While the September meeting is two months away, every piece of data is important for sentiment. If this week’s data, and more specifically Wednesday’s PMI surveys, Thursday’s advance GDP print and Friday’s PCE report, fail to produce significant downside surprises, then chances for a dovish shift at the July 31 Fed gathering will be considerably curtailed.

The market is in waiting mode

The US dollar is trading sideways against the euro, despite yesterday’s bullish reaction in US equities, with the dollar index being around 1.5% lower in July, which is the steepest monthly drop since December 2023.

Understandably, in these conditions, market participants are trying to position themselves appropriately. The Trump agenda is perceived to favour smaller US stocks with the Russell 2000 index, the most prominent US small-cap stock market index, enjoying its best monthly performance since December 2023.

At the same time, technology stocks are just 1% up in July, lifted by yesterday’s strong show by Nvidia. Alphabet and Tesla are scheduled to report their second quarter of 2024 earnings later today. Interestingly, investors could be rotating to more established stocks as the Dow Jones is outperforming the S&P 500 index in July for the first time since December 2023.

Finally, gold is struggling to remain above the $2,400 mark despite the lack of developments in the Israel-Hamas conflict. Similarly, bitcoin is showing signs of weakness but the upward trend that has been in place since early July is not yet threatened.