The Week Ahead
This week kicked-off with the Caixin China composite and services figures, the former easing to 51.2 in July, while the services picked up to 52.1. Later today we have the eurozone PPI and US ISM services index print. Eurozone retail sales, German factory orders and US trade figures follow on Tuesday. China trade data and US consumer credit figures will garner attention on Wednesday, as will US initial jobless claims on Thursday. China’s PPI and CPI figures hit the screens on Friday morning, markets will also have some CPI figures from Germany and Italy to digest. Asset classes will also keep a keen eye on Fed speak this week. Today we’ll hear from the central bank’s Goolsbee and Daly at separate events. Barkin speaks on Thursday.
A rollercoaster week for asset classes saw yields across the UST curve rally, and equity markets slump. This followed markedly more dovish comments from Fed Chair Powell coupled with a disappointing US employment report. The yield on the 10-year UST enjoyed a 40bps fall to close at 3.79%, the lowest close year-to-date. Meanwhile the S&P Index fell for its third straight week, down 2.06%. The dollar (DXY Index) fell 1.06% as expectations for Fed rate cuts ramped up. Oil also suffered, with Brent closing 5.32% lower, at $76.81pb driven by concerns over the world’s two largest economies.
On Wednesday the Fed held pat on rates, however, there was a notable shift in sentiment, with Powell hinting that payroll data might be overstating job growth. Powell signalled a rate cut as soon as September, with further cuts possible depending on economic developments. The nonfarm payroll figures, released on Friday further solidified Powell’s comments, with the headline number falling well short of forecasts (114k versus expectations of 175k). Crucially, the unemployment rate has risen to 4.3% from its low of 3.4% in January last year. Models like the McKelvey Rule and Sahm Rule, which use changes in unemployment to predict recessions, are flashing warning signs.
Elsewhere, the Euro Area saw its GDP rise by 0.3%qoq Q2 2024, beating expectations. However, the picture remains mixed, with France and Spain outperforming while Germany unexpectedly contracted. The region’s inflation figures surprised to the upside, the headline figure was flat on the month in July, versus expectations for a 0.1% fall, up 2.6%yoy. The core remained sticky, with the prelim. reading suggesting a marginal rise to 2.9%yoy. The Bank of England, meanwhile, cut its policy rate by 25bps to 5.00% in a tight 5-4 vote, while cautioning against overly aggressive easing.
In Asia, the Bank of Japan made headlines by hiking its policy rate to 0.25% from a range of 0-0.1%, a level unseen in 15 years. The central bank also announced plans to slow its bond-buying programme. This marks a significant shift away from ultra-loose monetary policies, with Governor Ueda indicating potential further hikes. The move contrasts with global trends and aims to address inflation concerns and yen weakness while gradually normalising policy to minimise market disruptions.
Meanwhile, China's economy is facing challenges as manufacturing enters a low season due to heatwaves and rainfall, with softening demand and production reflected in the manufacturing PMI. The official manufacturing PMI eased to 49.4, while the Caixin figure dropped into contraction, at 49.8. The government is focusing on boosting consumption and expanding domestic demand, as evidenced by the release of the "Opinions on Promoting High-Quality Development of Service Consumption" by the State Council on Saturday. This policy targets sectors like dining, accommodation, culture, entertainment, and tourism to stimulate consumption and cultivate new growth points.
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