Weekly Economic Outlook | Week #35

Market reviewLast week was marked by significant developments that greatly influe...

author: Ahura Chalaki

published:Aug 25, 2024 16:17

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10 minutes

category:weekly

Market review

Last week was marked by significant developments that greatly influenced market sentiment. In the US, the preliminary estimate for the 2024 benchmark revision to nonfarm payrolls (NFP) was announced, aligning with expectations of a substantial downward revision. Additionally, several Federal Reserve officials, including Chair Powell, indicated that the time is right to begin cutting interest rates, with the possibility of further reductions in upcoming meetings. A continued decline in the Leading Economic Index further underscored the looming recession risks, bolstering the case for rate cuts.

Outside the US, most economic data—except in the UK—fell short of estimates, suggesting that other central banks may also contemplate more aggressive rate cuts or even initiate easing cycles.

Russia and Ukraine continue to report territorial gains against each other on the political front. Meanwhile, cease-fire talks between Israel and the Palestinians, initially held in Qatar, have been relocated to Egypt after failing to resolve last week. The United States is actively working to reduce tensions in the Middle East, a move that may be met with resistance from Russia. In a surprising twist in the US, Robert F. Kennedy Jr. suspended his independent presidential campaign and endorsed GOP nominee Donald Trump on Friday. Speaking in Phoenix, Kennedy explained that he was backing the former president because he saw no viable path to the White House for his own campaign.

Economic Calendar in the week ahead:

Monday: Germany’s Ifo Business Climate Index for August and US durable goods orders for July.
Tuesday: UK’s CBI Industrial Trends and US Consumer Confidence, both for August.
Wednesday: Australia’s CPI rates for July and the UK’s Nationwide House Prices for August.
Thursday: Australia’s Q2 Capital Expenditure, Sweden’s final Q2 GDP rate, Eurozone’s Business Climate Index for August, Canada’s Business Barometer for August, Germany’s preliminary HICP rate for August, the US second estimate for Q2 GDP, and weekly initial jobless claims. Canada will also release its Q2 current account balance.
Friday: Tokyo’s CPI rates for August, Australia’s retail sales for July, France’s final Q2 GDP rate and preliminary CPI rates for August, Switzerland’s KOF Economic Barometer for August, the Czech Republic’s final Q2 GDP rate, Eurozone’s preliminary HICP rate for August, the US consumption rate for July, the US Core PCE Price Index for July, Canada’s Q2 GDP rates, the final US University of Michigan Consumer Sentiment for August, and China’s NBS PMI figures for August.

Wall Street and the USD

While the dollar was the week's main loser, equity markets did not benefit much from the easing sentiment, likely because they had already rallied significantly.

The Federal Reserve has two key goals mandated by the U.S. Congress: promoting maximum employment—defined as the highest level of employment or the lowest level of unemployment that the economy can sustain while maintaining a stable inflation rate—and promoting stable prices. The Federal Reserve adjusts its policies based on its progress toward achieving these two goals.

According to recent labor market data, jobless claims show a slight sign of cooling, indicating a softening in the labor market. Additionally, the Bureau of Labor Statistics (BLS) payroll employment revisions reduced the level of employment by 818,000 over the 12 months ending in March 2024, as published last week. This supports the likelihood of a rate cut.

On the inflation front, the focus in the upcoming week will be on Friday’s release of data on Americans' income and spending. Despite some weakness in the labor market, data shows that American spending remains robust. We can expect more than a 0.5% increase in overall personal spending for July, which would mark the fastest pace of spending in four months. Optimism about this data is supported by the retail sales numbers reported so far. US retail sales rose by about 1.0% in July, which, in dollar terms, accounted for 25% of the total gain from the previous two years in just one month. The latest Quarterly Services Report also indicated that service consumption was stronger in Q2 compared to the first quarter, likely driven by summer holidays.

Based on data published so far, such as retail sales and CPI numbers, we expect both the headline and core PCE deflator to rise by 0.2% in July. The expected numbers on Friday could temporarily halt the recent weakness of the US dollar during the week, although stock market bulls may face disappointment. However, with a moderating labor market, we expect personal income to rise by only 0.2% in July, which is softer than the growth in spending. This suggests we may see another drop in the personal saving rate, which had already fallen to its lowest level in 18 months in June, leaving consumers more financially vulnerable over time.

We should also consider the developments of the previous week when analyzing the expected data. Last Friday at the Jackson Hole Economic Symposium in Wyoming, Fed Chair Powell confirmed that the "time has come" for a monetary policy pivot, now that inflation is subsiding and the labor market is showing signs of faltering. The minutes from the most recent FOMC meeting in July, released this week, also reveal that more members now support initiating the rate-cut cycle.

From a fundamental perspective, pressure on the US dollar may continue ahead of Friday's data. However, weaker economic data may not strongly support the stock markets, even with expectations of rate cuts.

From a technical perspective, the US dollar index is in a clear downtrend. However, with significant money withdrawals from the market and a weak RSI in the oversold area, as seen on the chart, a correction before the next downward move is the most likely scenario. The first resistance and target for this correction could be 102.15.