Economic Expectation and Outlook | September 2024

As August draws to a close, both the US dollar and Wall Street are showing gains, despite mixed economic data and an uncertain outlook. In Europe, inflation rates across the European Union and Eurozone countries are edging closer to the European Central Bank's target. However, economic data remains troubling, as Manufacturing PMIs persist below 50, indicating a contraction in economic activity. Sentiment indicators like the GfK and ZEW surveys also point to disappointing consumer and business expectations.

In contrast, the UK has seen recent data that offers renewed optimism for improved economic growth. In Asia, a mix of economic indicators and inflation forecasts are posing challenges for the Bank of Japan's policy decisions, creating a complex situation for policymakers. Meanwhile, in China, after months of weak economic performance, there are emerging signs of a potential uptick in domestic consumer demand.

These varied economic signals are unfolding amidst difficult geopolitical conditions. Ceasefire and peace efforts between Israel and Hamas have stalled, and there is little expectation of negotiations resuming between Russia and Ukraine. Given these overarching factors influencing the global economy and markets, we will take a closer look at various economies in September, a month that traditionally sees losses and declines in stock markets.

USA: Wall Street and USD

The US dollar rose against its counterparts last week, breaking a four-week losing streak. The dollar's weakness in August followed comments from several Federal Reserve officials and Fed Chair Jerome Powell's speech at the Jackson Hole Economic Symposium. In his speech, Mr. Powell signaled a shift in the Fed's focus from inflationary pressures to concerns over a weakening labor market, citing a 4.3% unemployment rate and slower Job Openings and Labor Turnover Survey (JOLTS) figures. These more dovish signals have raised market expectations for potential rate cuts by the Fed in the coming months, increasing the importance of the US Non-Farm Payroll (NFP) numbers, which are scheduled for release on Friday, September 6.

The latest economic data shows a mixed picture, complicating the decision-making process for policymakers. Discussions are increasingly centered around the likelihood of a "soft landing" for the economy and the potential magnitude of interest rate cuts at the September meeting.

One of the most crucial data points to consider is the GDP release. Real GDP growth for the second quarter was revised upward to a 3.0% annualized rate, reflecting a substantial improvement in retail sales and personal consumption expenditures (PCE).

August also concluded with significant data that, along with this week's NFP numbers, could provide further insight into the Fed's likely policies and decisions at their September 18 meeting.

According to the US Department of Commerce, personal income rose by 0.3% month-over-month in July, reflecting a corresponding gain in wages and salaries. With higher incomes, personal spending also increased by 0.5%, while real personal spending was up 0.4% for the month. On the inflation front, there were no surprises: both the headline and core PCE deflators matched expectations, rising by 0.2% month-over-month, with year-over-year rates holding steady at 2.5% and 2.6%, respectively. These numbers suggest that inflation continues to trend favorably for the Fed.

After the release of GDP and inflation data, the market focus is now shifting to the labor market. Any updates on this front, including weekly initial jobless claims ahead of the Fed meeting, and the nonfarm employment report, will be key indicators to monitor for clues about the pace and scale of the anticipated rate cuts.

Weaker payroll figures and a rising unemployment rate would likely increase the chances of a 50-basis-point rate cut, while a rebound in payrolls and a lower unemployment rate might suggest that the Fed does not need to act quickly, possibly leaning toward a more moderate 25-basis-point cut. In any case, next Friday's employment report—along with the August CPI and PPI releases in the following week—will play a crucial role in shaping the Fed's actions and the signals sent at the FOMC policy meeting on September 18.

The July report was disappointing for the labor market, providing further justification for more expansionary policies. Nonfarm employment increased by only 114,000, falling well short of expectations. Additionally, there was a net downward revision to the prior two months' hiring figures. With fewer newly created jobs, the unemployment rate rose to 4.3%, marking an increase in the jobless rate over the past year.

The August Employment Situation report will be crucial in determining whether there is a continued rapid deterioration in employment conditions. While a slight recovery is expected, with an estimated 145,000 new jobs that could lower the unemployment rate to 4.2%, this would still be higher than the Fed's initial expectation of 4.1% for this period. Additionally, average hourly earnings growth is anticipated to pick up slightly in August, increasing by 0.3% for the month and by 3.7% over the past year, according to our estimates.

Given the expected data and figures, it is unlikely that the Fed will implement more than a 25-basis-point rate cut, which is already priced into the market. Therefore, the market reaction will largely depend on the updated dot plots and Fed Chair Powell's comments during his press conference. For now, we anticipate a slight recovery of the US dollar and a gradual decline in US stock markets.

In addition to the key data mentioned, several other important economic indicators will be released in September. These include ISM Manufacturing PMIs (3rd), Beige Book, Factory Orders and JOLTs (4th), ISM service PMIs (5th), NFP (6th), CPI (11th), PPI (12th), Retail Sales (17th), House market data (18 &19th), House market data & Consumer confidence (24th), Durable Goods Orders (26th), and Personal Spending and Income on September 27.

UK, GBP, and London Stock Markets!

September in the UK begins with Prime Minister Sir Keir Starmer warning, "Things will get worse before they get better." He has emphasized that the Labour Party inherited a government with financial constraints and struggling public services, such as healthcare and prisons, which he claims are in worse condition than anticipated before winning the election.

This assertion can be challenged, as recent UK economic data does not fully support it. However, the Conservatives argue that the Labour Party has always intended to raise taxes. If the market starts to price in expectations of higher taxes, as suggested by the political rhetoric, UK stock markets could suffer, especially after a recent recovery following a dip in early August.

Keir Starmer, calling for the British public to accept "short-term pain for long-term gain," has stated that the government’s October budget will be "painful." Despite this, recent gains in UK stock markets and the strength of the pound against most of its rivals, particularly the USD, JPY, and Euro, suggest market confidence in Prime Minister Starmer. At the same time, the UK Prime Minister appears to be seeking a closer relationship with the EU. Any improvement in EU-UK relations could prove beneficial for the pound and London stock markets at a fundamental level.

The pound (GBP) saw significant gains against most of its rivals, especially the USD, JPY, and Euro, in August. This trend seems likely to continue in September, aligning with stronger economic data from the United Kingdom.

The Bank of England (BoE) cut rates by 25 basis points at its August meeting, a move that is expected to be repeated in September as inflation moves closer to its target and economic activities grow at an acceptable pace. Both Services and Manufacturing PMIs are above the 50-expansion level, unemployment has eased to 4.2%, and GDP grew by 0.9% in the second quarter.

Given these estimates and expectations, we believe September could be a positive month for British stock markets. However, how the pound (Cable) will benefit from the expected policies remains uncertain.

To trade the GBP, UK100, or other symbols in the UK stock markets, it is crucial to closely follow the economic calendar, especially key data releases such as PMIs (September 4), Labor Market Data (September 10), GDP and Industrial Production (September 11), Inflation Data (September 18), BoE Meeting (September 19), Retail Sales (September 20), and PMIs (September 24).

Euro and Eurozone!

Unlike the UK, the Eurozone is facing challenges, and the Euro is under pressure against most of its rivals. While inflation has decreased and appears less of an immediate concern, other economic indicators reveal a decline in activity across the region.

July's headline CPI inflation came in as expected at 2.2% year-over-year, down from 2.6% in June. Core inflation also ticked down slightly to 2.8%. However, a closer look shows that service inflation—a major concern for ECB policymakers—rose to 4.2% annually. Given the combination of slowing inflation and weak PMI numbers, we expect the ECB to cut rates by another 25 basis points at its September and December meetings, targeting an end-2024 Deposit Rate of 3.25%.

We believe that while progress on headline and core inflation has been made, persistent price pressures in the services sector will likely prompt the ECB to continue easing its policy rates cautiously. As a result, we forecast a 25 basis-point rate cut at the ECB’s September meeting, followed by two additional cuts in October and December.

This expectation regarding ECB policies is likely to keep the common currency under pressure, especially given the weaker economic outlook for the Eurozone compared to other economies.

While many Eurozone economies are struggling, Germany, the largest economy in the Eurozone, is performing even worse than anticipated, adding further pressure on the Euro.

Beyond economic activities and data, there are political and geopolitical risks, such as elections across Europe and growing disagreements over how to handle the Russia-Ukraine conflict.

On the data front, we do not expect any meaningful progress, with inflation likely to remain at 2.2%, suggesting that current conditions in the currency and stock markets in Europe may persist.

In September, key economic data to watch include manufacturing PMIs (2nd), Service PMIs (4th), GDP (6th), ECB meeting (12th), EZ Industrial Production (13th), EZ ZEW Economic Sentiment, Inflation numbers (18th), Eurozone Consumer confidence, sentiment, and Industrial production (27th), German and Italy GDP, and CPI on September 30. 

JPY and BoJ's Hawkish Comments

Despite a volatile August, the Japanese Yen ended the month close to where it began against most major currencies. The Bank of Japan’s (BoJ) monetary policy stance has been the primary driver behind the JPY's recent movements.

On the data front, the Services PMI rose above 53, while Household Spending, although missing estimates, improved from a 0.3% decline in May to a modest 0.1% growth in June. GDP also surprised the market with a 3.1% year-over-year increase in the second quarter. However, Manufacturing and Industrial Production data were weaker than expected, both compared to estimates and previous months.

Tokyo's Consumer Price Index (CPI) rose by 2.6% year-over-year in August, up from 2.2% in July. Additionally, Tokyo's Core CPI increased to 2.4% YoY in August, exceeding both the estimated 2.2% and market expectations. Meanwhile, Japan’s unemployment rate unexpectedly climbed to 2.7% in July, surpassing both the market estimate and June's rate of 2.5%, marking the highest jobless rate since August 2023.

These mixed economic indicators suggest uncertainty, but market expectations for another rate hike by the BoJ remain strong, with a September rate hike nearly fully priced in and a marginal expectation for another in December. This sentiment was reinforced by comments from BoJ Deputy Governor Ryozo Himino, who expressed the bank’s readiness to raise interest rates if inflation remains elevated.

If there are further indications that the BoJ is preparing to hike rates at its upcoming meeting, we could see the Yen gaining ground against its rivals. Conversely, if carry trade positions with the Yen on the short side gain momentum, we may see the JPY retreating.

Key Economic Data and Events for JPY in September: Capital Spending and PMI (2nd), Service PMI (4th), House Hold Spending (6th), GDP (9th), PPI (12th), Trade Data (19th), National CPI and BoJ Meeting (20th), Service and Manufacturing PMIs (24th), and Industrial Productions on September 30.

China

August was a challenging month for China. PMI data, alongside industrial production figures, highlighted the need for further stimulus measures to counteract weak demand both domestically and internationally, as well as to support a weakening currency. Both exports and imports increased by about 7%, which was lower than the growth seen in the previous month. While inflation showed a slight increase of 0.5% in its latest release after several months of weakness, this optimism quickly faded amid weak data from other sectors, such as industrial production and the labor market.

Widening bond yield differentials between the U.S. and China, driven by diverging monetary policies, have further pressured the yuan. Compounding these challenges, the World Bank recently cut its growth projection for China's economy due to ongoing domestic headwinds. In its latest update, the World Bank revised its 2024 GDP growth forecast for China down to 4.4% from 4.8%, while maintaining its 2023 GDP growth forecast at 5.1%.

Alongside weaker domestic demand, slowing global growth and persistently tight financial conditions worldwide are also adding to concerns about China's economic prospects.

In August, the People’s Bank of China (PBoC) held its rates steady following a cut in July, while injecting $81 billion into the markets to help stabilize the economy and support small businesses. This move has had some positive effects, with an increase in the number of loans to small businesses in China.

Looking ahead to September, we see some signs of recovery, and we expect Chinese stock markets to perform somewhat better compared to recent months.

We anticipate the Manufacturing PMI to rise above the 50 level once again and for exports to increase ahead of Canadian tariffs on Chinese electric vehicles (EVs), which are set to take effect in October.