U.S. Indexes closed higher on Monday following the long Independence Day weekend, with the NASDAQ outperforming as Technology led the advance. Semiconductor stocks were among the strongest performers (SOXX +3%), while memory names rallied around 7% ahead of Samsung’s preliminary earnings release overnight. Alongside Technology, Communication Services, and Consumer Discretionary outperformed, while the traditional defensive sectors of Health Care, Consumer Staples and Real Estate lagged. In FX, the Dollar surrendered its early gains as Sterling and the Australian Dollar outperformed, supported by the broader risk-on tone and carry demand at the expense of the lower-yielding Yen and Swiss Franc. The Euro also posted modest gains against the Greenback. The New Zealand Dollar underperformed ahead of the RBNZ decision this week, where the NZIER Shadow Board recommended leaving the Official Cash Rate unchanged at 2.25%, compared with market pricing implying around an 80% probability of a 25bp hike to 2.50%. Precious metals also weakened, with both gold and silver closing lower. Energy prices edged lower after Saudi Aramco reduced the official selling price of its Arab Light crude to Asia by USD 11.00/bbl, taking it to a USD 1.50/bbl discount versus the regional benchmark—the largest reduction in 26 years. Geopolitical developments were limited, although reports suggested Islamabad is the leading candidate to host the next round of US-Iran technical talks, with July 11th emerging as the tentative meeting date. Treasuries settled little changed, with the curve modestly steepening as investors looked ahead to this week’s FOMC minutes and Treasury supply. Some pressure was also seen amid a busy slate of corporate bond issuance. On the macro front, the ISM Services PMI came in slightly below expectations, although the employment component returned above the 50 threshold while the prices paid index declined, providing a somewhat more constructive inflation signal. Fed Governor Waller also reiterated that the balance of risks has shifted, arguing that the labour market now appears broadly stable while inflation has become the more pressing concern for policymakers. On communications, he stated that forward guidance can be a useful policy tool in certain circumstances but is not always appropriate. Looking ahead, attention turns to the RBNZ policy decision on Tuesday night (EDT)/Wednesday morning (BST), the FOMC minutes on Wednesday, Fed Governor Williams on Thursday and this week’s Treasury supply. Equity investors will also be closely watching Samsung’s preliminary earnings for another read on conditions within the global memory chip sector. The ISM Services PMI eased to 54.0 in June (exp. 54.2, prev. 54.5), remaining firmly in expansion territory for a 24th consecutive month, with all four components of the Composite Index above their respective 12-month averages. Business Activity slowed to 55.4 from 57.7, while New Orders eased to 55.1 from 57.3, indicating activity and demand remained healthy despite moderating from May’s pace. The Employment Index returned to expansion for the first time in four months, rising to 51.2 from 47.9, while the Prices Index fell to 67.7 from 71.3, its lowest level since February, signalling that cost pressures remained elevated but continued to ease. Elsewhere, the Supplier Deliveries Index fell to 54.4 from 55.2, however there was an increase in commodities listed as “in Short Supply”, rising to nine from five. The Backlog of Orders Index rose to 54.9 from 51.3. Oxford Economics said the report points to a resilient services sector and is consistent with its forecast for US GDP growth of around 2% this year, despite the recent energy price shock. Oxford also noted that while supply-chain stress and price pressures are easing, some industries continue to expect higher input costs in the months ahead. Regarding the labour market, Oxford views the improvement in the employment index as a sign of stabilisation rather than reacceleration, supporting its expectation that the Federal Reserve will remain on an extended pause as it continues to focus on inflation. Fed Governor Waller stated risks have flipped around, noting the labour market seems stabilised, and inflation has been taking off, which changes how you think about policy. He stressed policymakers have always been committed to 2% inflation, and it is a credible pledge. However, he did say he would prefer the inflation target to be set as a range, but changing the target at this point would not be credible. Waller also stated that if the Fed’s reaction function is not well understood, policymakers need to talk about it. On forward guidance, which Chair Warsh is adverse to, Waller said that it can speed the impact of monetary policy and be a valuable tool, but it can be a hindrance if it is too strong or rigid, and it is problematic when policymakers confront different economic outcomes, all with a significant probability of occurring. Waller added that in some cases, it is best not to use forward guidance at all. Elsewhere, Oil closed flat while Gold ended Monday’s session with a 0.5% fall.
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