Weekly Market Outlook (29-02 August)

Upcoming Events:

• Monday: U.S. Treasury Refinancing Financing Estimates.
• Tuesday: Japan unemployment rate, Eurozone Q2 GDP, US job openings, US consumer confidence.
• Wednesday:Japan Industrial Production and Retail Sales, Australia CPI, China PMI, Bank of Japan Policy Decision, Eurozone Spot CPI, US ADP, Canada GDP, US Consumer Confidence, US Treasury Refinancing Announcement, FOMC Policy Decision.
• Thursday:China Caixin Manufacturing PMI, Bank of England Policy Decision, US Jobless Claims, Canada Manufacturing PMI, US ISM Manufacturing PMI.
• Friday:Australian PPI, Swiss CPI, Swiss Manufacturing PMI, US Non-Farm Payrolls.

Tuesday

The number of job openings in the United States is expected to reach 8.025 million jobs, compared to 8.140 million jobs previously. Job openings have been on a steady downward trend since peaking in March 2022 and are approaching pre-pandemic levels.This is good news for the Fed as the labor market continues to rebalance through reduced job availability rather than more layoffs. However, the labor market is a place to watch carefully at this part of the cycle.

The U.S. consumer confidence index is expected to come in at 99.5, down from 100.4 previously. The latest report saw a slight decline in confidence, though the index has been in a range since 2022. “Confidence fell in June, but It remained within the same narrow range it has been in for the past two years, as the strength of current labor market views continued to outweigh concerns about the future.However, if fundamental weaknesses emerge in the labor market, confidence could weaken as the year progresses.”

Wednesday

Australia’s second-quarter CPI is expected to come in at 3.8% year-on-year versus 3.6% previously, while the fourth-quarter gauge is expected at 1.0% versus 1.0% previously. The headline CPI is expected to average 4.0% year-on-year versus 4.0% previously, while the quarter-on-quarter measure is expected to come in at 0.9% versus 1.0% previously.Finally, the weighted average on an annual basis is expected to reach 4.3% versus 4.4% previously, while the quarterly reading is expected to reach 1.0% versus 1.1% previously.

As a reminder, the market was expecting a rate hike from the RBA after the recent hot monthly CPI readings, but ultimately, RBA Governor Hauser poured cold water on those expectations by saying it would be better to keep rates on hold.

But a hot CPI report is likely to spark another hawkish reaction and the odds of a rate hike could rise to around 50% (if not higher) from the current 22%. A weak report won’t change anything in the bigger picture, but it should cool hawkish expectations.

The Bank of Japan is expected to keep interest rates steady at 0.00-0.10%, despite Market gives 70% chance of 10bp rate hikeThe central bank is expected to announce its plan to scale back its bond-buying program, with most looking to reduce bond purchases to 5 trillion yen per month (currently around 6 trillion yen per month).

Meanwhile, there is There are no strong signs that inflation will accelerate again.It is difficult to see any rate hikes given that Japan has sought to achieve inflation for decades, and could destroy that achievement by tightening monetary policy too quickly.

Tokyo’s core consumer price index (CPI) excluding food and energy slowed to 1.5% year-on-year last week, so I personally believe that the expectations of interest rate hikes are unjustified, and they open the door to an opportunity to “sell the truth.”This also seems like an asymmetric bet, because if they raise rates, they probably won’t be able to raise them again for a long time, and if they don’t, there’s a lot of pullback ahead. So shorting the yen and long the Nikkei look like good bets from a risk-reward perspective.

I can also see the Bank of Japan meeting as the most important event this week for financial markets.In fact, most of the moves we have seen over the past 10 days appear to have been driven by deleveraging as a result of the strong yen. Essentially, the carry trade pressure has been felt across all other markets. The Bank of Japan’s decision may be the turning point in returning to the old scenario..

Eurozone spot CPI is expected to come in at 2.4% YoY versus 2.5% previously, while core CPI is expected to come in at 2.8% YoY versus 2.9% previously. ECB members continue to reiterate that September is a direct meeting for another rate cut and that market expectations of two more cuts this year “seem reasonable.”.

After this report, we will have another report at the end of August before the ECB decision on September 12th.^DThe central bank will want to see the deflationary trend continue so that it can cut rates in September, and if we see a new acceleration, they may wait and hold off on cutting for another month.

The US Employment Cost Index (ECI) for Q2 is expected to come in at 1.0% versus 1.2% previously. This is the most comprehensive measure of labor costs.Unfortunately, it is not as timely as average hourly earnings data. However, the Fed is watching this indicator closely.Although wage growth remains high by historical standards, it has begun to slow over the past two years.

The Fed is expected to keep interest rates steady at 5.25-5.50%. The overall decision is likely to be dovish given the easing labor market and inflation, but the bank is unlikely to commit to anything in advance. The market has already fully priced in two rate cuts in September and December with some chance of two in a row in November.

The upcoming CPI release will be crucial (barring a rapid deterioration in the labor market) as we are likely to see another benign report that signals Fed Chairman Powell’s pre-commitment to a September rate cut at the Jackson Hole symposium.

Thursday

The market is pricing in a 50% chance of a 25 basis point rate cut by the Bank of England, taking the bank rate to 5.00% from its current 5.25%. I think the forecast is wrong as there is supposed to be a strong possibility of prices remaining stable..

The Bank of England’s chief economist Hugh Bell said the question was whether now was the right time to cut interest rates, adding that more data would come before the next policy decision, but They had to be realistic about how much any one or two releases could add to their valuation..

This suggests there is little appetite for a first cut in August unless inflation data is very good or jobs data shows a very ugly picture. Well, the latest UK CPI was not great with core and services inflation unchanged. On the labor market side, the latest report was mostly in line with expectations with wage growth remaining high.

Therefore, I would say that the Bank of England is likely to keep interest rates steady at 5.25%.

US unemployment claims remain one of the most important data to follow each week, as they are a more accurate indicator of the state of the labor market.

Initial claims remain largely stable around cycle lows and within the 200K to 260K range that has been established since 2022. Continuing claims, on the other hand, have been on a steady rise, though they have stabilized recently.

This shows that layoffs are not accelerating and are remaining at low levels while hiring is more subdued.This is something to watch out for. Initial claims this week are expected to come in at 236K vs. 235K previously, while continuing claims are expected to come in at 1,856K vs. 1,851K previously.

The US ISM Manufacturing PMI is expected to come in at 48.8 versus 48.5 previously. Last week, the US S&P Global Manufacturing PMI fell to 49.5 from 51.5 previously, although the comments were largely positive.

The survey brought some welcome news regarding inflation, noting that “The rate of increase in average prices for goods and services has slowed, falling to a level consistent with the Federal Reserve’s 2 percent target.”

On the downside, “both manufacturers and service providers report Growing uncertainty over the election“This growth in energy demand has clearly slowed investment and employment,” and “input costs have risen at an increasing rate, linked to higher costs of raw materials, freight and labour. These higher costs could lead to higher selling prices if they persist or are sustained.” Causes pressure on margins“

Friday

Swiss CPI is expected to come in at 1.3% YoY vs. 1.3% previously, while the monthly measure is expected at -0.2% vs. 0.0% previously. As a reminder, the Swiss National Bank cut interest rates by 25 basis points to 1.25% at its last meeting and lowered its inflation forecast.

In a related context, the central bank expected the inflation rate to rise slightly to reach 1.5% on average in the third quarter, so this is the basis for their decision and if the inflation rate comes in below expectations, the Swiss National Bank will make another interest rate cut in September. The market is already pricing in a 75% chance of a September rate cut given that Latest CPI Report It came out softer than expected..

The US nonfarm payrolls report is expected to show 175,000 jobs added in July versus 206,000 in June, and the unemployment rate is expected to remain unchanged at 4.1%. Average hourly earnings are expected to come in at 3.7% year-over-year versus 3.9% previously, while average monthly earnings are expected to come in at 0.3% versus 0.3% previously.
The Fed is currently focusing heavily on the labor market as it fears a rapid deterioration..

As a reminder, the Fed is projecting an average unemployment rate of 4% in 2024, so I can imagine they will get a little uncomfortable and cut rates if the unemployment rate rises to 4.2%. Again, this wouldn’t be surprising as they are already expected to cut rates in September, so on the sidelines, The market may increase the chances of two consecutive interest rate cuts in November..

Currently, the data suggests that the labor market is rebalancing through a decline in hiring rather than an increase in layoffs, and overall, there are no material signs of deterioration.

The latest report was somewhat less severe than expected, but still good. The rise in the unemployment rate was initially seen as bad news, but looking at the details it wasn’t that bad.

In fact, the entire rise in unemployment during the first half of 2024 was due to new arrivals and returnees, not layoffs.This is something we have also seen from other data such as job openings and unemployment claims where the weakness in the labor market has come from a decline in hiring rather than an increase in layoffs.

For more information about the latest report click here.