Fed Chief Powell Flags Looming Rate Cut; Microsoft Gives Up OpenAI Board Seat; Chinese Inflation Data Points to Slowing Recovery

  1. Powell Flags Rate Cut, Labor Market Perspective

Federal Reserve Chair Jerome Powell delivered the opening remarks of his semi-annual Congressional testimony Tuesday, anew signaling the central bank's willingness to lower interest rates amid mounting economic headwinds. In his first appearance before Congress since the Fed's hawkish pivot in January, Powell acknowledged the recent decline in the labor market, citing the need to sustain a tight monetary policy to bring down inflation despite this development. Market participants interpreted his remarks as paving the way for a rate cut in September, with the fed funds futures contract implying a 50/50 chance of a quarter-point reduction then.

Powell emphasized that the Fed is "highly attentive to the consequences of our policy decisions for labor market conditions," acknowledging that "employment has declined significantly from its peak last year." He deemed the current labor market situation as "notable" and a factor that would influence the Fed's policy trajectory, stating that "employment has returned to about where it was on the eve of the pandemic." In addition to the labor market, Powell also highlighted the impact of monetary policy on inflation, noting that the central bank needs to prevent the current high inflation from becoming entrenched.

The Fed Chair's comments came ahead of his second day of testimony on Capitol Hill on Wednesday, when he faces questioning from the House Financial Services Committee. Market participants will closely scrutinize Powell's remarks for further clarity on the Fed's policy path and any hints of a potential rate cut in September. The Fed's cautious stance and acknowledgment of broader economic risks beyond inflation may also suggest a shift in its policy approach, with a greater emphasis on the labor market and economic growth.

  1. Microsoft Divests OpenAI Board Seat

Microsoft (NASDAQ: MSFT) has decided to relinquish its seat as an observer on the board of OpenAI, the AI research company behind the viral chatbot, ChatGPT. The software giant's decision comes amid growing regulatory scrutiny of the company's influence over OpenAI and the broader generative AI space. Microsoft's investment of over $10 billion in OpenAI and its acquisition of an observer seat on the company's board had fueled concerns among antitrust regulators and policymakers in the U.S. and Europe.

In a letter to OpenAI dated July 9, Microsoft's President and Vice Chairman, Brad Smith, stated that the company has decided to relinquish its board seat as "an observer is no longer necessary given the company's growth and the governance framework that has been put in place." Smith highlighted the company's confidence in OpenAI's "direction and progress" over the past eight months.

OpenAI will establish a new engagement approach with its strategic partners, including Microsoft and Apple, to ensure collaboration and alignment, according to an OpenAI spokesperson. The move comes as OpenAI is said to be in talks to raise money at a valuation of around $29 billion, which would make it the world's most valuable AI startup.

  1. Chinese Inflation Slows, Points to Slowing Recovery

Inflation in China continued to slow in June, with consumer prices contracting for a second consecutive month on a monthly basis, raising concerns over the country's economic recovery. The continues to contract for 20 consecutive months, indicating a lukewarm rebound in prices paid by consumers for a wide range of goods. Meanwhile, year-over-year inflation increased by only 0.2% in June, falling short of the 0.4% consensus estimate.

The slump in consumer inflation suggests that demand remains weak, as high unemployment rates and concerns over the property market downturn have led consumers to rein in discretionary spending. This presents further near-term headwinds for China's economic recovery, indicating that more stimulus measures may be needed.

The also showed that producer price index (PPI) inflation decreased 0.8% in June, an improvement from the 1.4% contraction in May but still indicating a slowing pace of price increases for producers. The PPI has been contracting since November 2021, with the exception of two months of mild inflation. The shrinking PPI suggests that the recent rise in commodity prices has yet to translate into higher selling prices for Chinese producers, adding to the concerns about the global economic outlook.

  1. Crude Prices Sink on Weak Chinese Inflation Data

Crude prices extended their decline Wednesday, amid concerns that deflation in China could exacerbate global economic woes. Chinese consumer prices shrunk for a second consecutive month in June, with month-on-month CPI inflation declining 0.2% compared to expectations for a 0.1% contraction. This weak inflation data added to fears that the world's second-largest economy is losing momentum and raising the possibility of a rate cut by the Chinese central bank.

Despite the slump in Chinese inflation, the American Petroleum Institute (API) reported a larger-than-expected draw in U.S. crude inventories. According to the API, crude stocks fell by 1.9 million barrels last week, surpassing estimates of a 1.45 million-barrel draw. Official EIA data is due later Wednesday and could confirm this sizeable inventory decline, which would lend some support to crude prices.

Overall, the downward trend in crude prices seen over the past three sessions continued Wednesday, with both benchmarks down around 3% amid concerns over Chinese deflation and a potentially softer economic outlook. Though the API inventory data offered some near-term support, the broader concerns over demand and global economic growth weighed on sentiment.

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