Three things to watch this week: Key elections and inflation data

Financial markets have opened the week in a muted fashion. Bond yields in Europe are up slightly, the dollar is lower on a broad basis and stocks are up slightly. However, this could be the calm before the storm. This week we have some key elections in France and the UK, and we get inflation data from the US and major European economies that will determine the course of interest rates in the coming months.

Britvic fizzes with takeover excitement

UK takeover news is buzzing this morning.  The FTSE 250 is in focus this morning after Britvic, the fruit juice manufacturer, took a step closer to being acquired by Carlsberg. It rejected Carlsberg’s initial two offers, however, at the weekend it was announced that Britvic’s agreement with PepsiCo to provide all its bottling requirements would be waived if a deal with Carlsberg was to be accepted. Carlsberg has not committed to a third offer, and now has until 19th July to make another offer for the UK drinks firm. The overall FTSE 250 is lower today, but Britvic is the best performing stock on the index. It is the second-best performer on the FTSE 250 in the past month and is up 17%. This is a sign of how M&A is pumping up the value of British stocks now and could be a feature as we move into the second half of the year.

EU takes another bite out of Apple

Elsewhere, another day, another accusation by European regulators that Apple is breaking its tech rules. This time the EU Commission said that Apple is breaching its rules because it does not allow customers of its App store to be steered to alternatives. Apple seems to be on a merry-go-round of EU regulatory scrutiny. It's share price is up slightly in pre-market trading, however, the intense regulatory focus on Apple in recent years is one of the reasons why the stock is lagging the performance of other tech titans, and why it is the second weakest performer in the Magnificent 7 so far this year.

Looking ahead to this week, these are three things that we think are worth watching in financial markets.

Inflation

There is growing speculation that the major central banks could push forward their interest rate cuts due to progress being made on inflation. In the UK, headline price growth is now 2%, and there is now a 66% chance of a rate cut in August. In the US, the prospect of a Fed rate cut in September has been boosted to 62%. The core PCE inflation report for May is released this Friday and it will be intensely scrutinized to see if it could increase the chances of a September rate cut from the Fed. The market is looking for the core PCE deflator to moderate to a 2.6% annual growth rate, down from 2.8% in April. If this estimate is accurate, then it would be the lowest level since 2021. The monthly rate of growth for the core PCE deflator is expected to come in at 0.1%, which would be the slowest rate of monthly growth since December. If we do see a decline in the rate of the growth in the core PCE deflator this would be important for Fed policy for a couple of reasons: 1, it is the Fed’s preferred inflation measure and 2, it would suggest that the recent spike in price growth that we saw at the end of Q1 and into Q2 may have been a blip, so a rate cut could be justified. As we start the week, the dollar is fading, and we may see more dollar weakness especially vs. the EUR and GBP, as we lead up to the inflation report that is due on Friday.

In Europe, France, Spain, and Italy will also report preliminary inflation readings for June on Friday. Spain’s report is considered a leading indicator for the rest of the currency bloc. It is expected to see its inflation rate moderate to 3.3% from 3.6% for headline inflation, and core price growth is expected to decline to 2.9% from 3%. If inflation does moderate in Spain, this would end the uptrend in price growth this year, which has been worrying the ECB. The ECB may have cut interest rates this month, but they also raised their inflation forecasts. Thus, signs that inflation is moderating in Spain could boost hopes of a September rate cut, the market is currently pricing in a 66% chance of a second cut from the ECB in September.

A moderation in inflation in the US and the currency bloc that boosts the prospect of late summer or early Autumn rate cuts could boost risk sentiment as we move into the peak of the summer months.

Commodity watch

There are some interesting developments in the commodity space that are worth watching. Copper is no longer the most loved commodity and has backed away from the $10,000 per tonne level, as fears about Chinese economic growth trumps hedge fund demand. The oil price is bouncing back, and Brent crude is higher by 4.6% so far this month. The oil price may get a further boost this week if the dollar declines, as we expect. Chinese property woes are also impacting the cost of iron ore, which has fallen to its lowest level since April. Property investment in China is still falling at a more than 10% annual rate. Iron ore, which is a major ingredient for steel, closed lower for the fourth straight week, which is its longest losing streak since October. And there could be more bad news to come. Inventories of iron ore at Chinese ports are at their highest level for 2 years, and there is a concern that the support measures put in place to boost the economy by the Chinese government, will not spur demand for property. Thus, commodities could be in for some volatility this summer. However, it may be short lived, especially if inflation recedes and the prospect of near-term interest rate cuts cheer financial markets.

The Yen

The yen is once again in focus. There was a chance that the BOJ could intervene in the currency markets on Friday after USD/JPY broke back above 159.00, however, that did not happen, and the dollar has continued to rise vs, the JPY and is fast approaching the 160.00 level. There is going to be intense focus on whether the BOJ intervenes in the coming days, otherwise the market may test fresh record highs for this pair. The weaker than expected inflation report on Friday spurred the yen weakness. This week we will get Japanese retail sales and Tokyo CPI for June. The yen is reacting to Japanese domestic economic data, so this is worth watching closely.