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Reasons for a Quieter August in Financial Markets
Summer Holidays: Many traders, investors, and financial professionals take vacations in August, especially in Europe and North America. With key market participants away, trading volumes typically decrease.
Reduced Corporate Activity: Many companies operate on reduced schedules during August. Fewer corporate announcements, earnings reports, and other market-moving events contribute to lower market activity.
Seasonal Trends: Historically, August has been known for lower volatility and trading activity. Many investors and traders recognize this pattern and adjust their strategies accordingly, further contributing to the reduced activity.
Market Cycles: Financial markets often experience cyclical patterns of activity. The summer months, especially August, tend to be slower due to the combination of lower participation and fewer significant events.
Economic Releases and Policy Announcements: Fewer major economic reports or central bank meetings are scheduled during August. This results in fewer catalysts to drive market movements.
Global Economic Overview
Despite higher rates and many challenges, the US economy remains resilient. After slower growth in the first quarter, the US economy performed much better in the second quarter, while inflation seems under control. In the remaining months of this year, election rallies and the election itself will play an important role in the US economy and the global economy. In August, the market will react to the changing odds between former President Donald Trump and Vice President Kamala Harris, as they have different economic policies.
In Europe, inflation is more controlled, not just in the Eurozone but in the UK and other non-EU countries. However, some European countries, such as France, the UK, and Switzerland, have slightly better conditions compared to others. On average, we expect 1% GDP growth for most European economies. This marks an improvement from the stagnation seen in 2023, although it still lags behind pre-crisis levels.
In Asia, while the Bank of Japan is finally considering ending its ultra-dovish policies, China's economy faces more challenges. The People's Bank of China and the government are trying to encourage consumer spending with more supportive policies and changes to laws, such as those governing house purchases. China's economic growth is forecast to slow down to 4.6 percent in 2024 from 5.2 percent in 2023, mainly due to the subsiding surge in consumer demand and spending.
Let us examine the major economies of the world in more detail and the outlook for the next month.
US: Wall Street and USD
The US economy remained quite resilient through the first half of the year. Q2 2024 GDP growth showed the economy expanded at a 2.8 percent annualized pace. Considering the US economy's average growth rate of 1.8%–2.0%, Q2 growth is clearly above average. However, there are signs of the economy gradually coming under pressure due to the "higher for longer" interest rate environment, as evidenced by weakening retail sales, construction investment, and the labor market.
In June, the US economy added 180K jobs, with the unemployment rate staying at 4.1%. While similar numbers were expected for July, the NFP report on August 2 surprised the market. According to the Bureau of Labor Statistics, nonfarm payrolls increased by only 114,000 in July, with unemployment rising to 4.3%. This indicates that the economy added significantly fewer jobs than anticipated, marking the lowest rise since January 2021. Additionally, the June reading was revised down heavily from an initial mark of 206,000 to 179,000. The May reading was also revised down by 2,000 to 216,000, resulting in a combined downward revision of 29,000 for May and June.
On the economic data front, retail sales decreased, the Leading Economic Index (LEI) remains in negative territory, and durable goods orders fell by 6.6% in June. This data package suggests that the Federal Reserve may have enough reason to start cutting rates, as some members advocated during the July meeting.
The Federal Reserve kept its target rate in the 5.25%–5.50% range on Wednesday for the 8th consecutive meeting, where it has been since last July. However, they also opened the door to reducing borrowing costs at the September meeting. Comparing the Fed's statement with previous statements this year, it's clear that FOMC members have softened inflation risk warnings and focused more on labor market weakening. A cooling labor market provides the Federal Reserve with more ammunition to cut interest rates from their more than two-decade highs, potentially as soon as the September meeting.
If the sharp fall in July payrolls repeats in the August report, it is possible that the Fed could begin its loosening cycle with a 50 basis point cut instead of the currently estimated 25 basis points.
Some fresh data stoked fears over a possible recession and the notion that the Federal Reserve could be too late to start cutting interest rates. Initial jobless claims rose the most since August 2023. The ISM manufacturing index, a barometer of factory activity in the U.S., came in at 46.8%, worse than expected and a signal of economic contraction. After these releases, the 10-year Treasury yield dropped below 4% for the first time since February.
The US Treasury yield curve has been inverted since mid-2022, a historically strong recession indicator. The New York Fed’s recession probability model suggests there is still a chance of a US recession within the next six months.
While a cooling labor market, slowing economic growth, and softening consumer spending can worry investors about the path of the US economy, these indicators could also be positive as they might convince the Fed that inflation may soon trend steadily lower, allowing them to cut rates—a favorable outcome for businesses and the stock market.
On the earnings front, results have been weaker compared to the first quarter, providing another warning signal about the short-term path of the US economy.
Given these data points, we do not expect significant cash flow in August, and the overall downtrend may continue, albeit slowly, as the market awaits the August payroll report in early September. Regarding the US dollar index, a dovish Fed could put it under pressure, but numerous geopolitical risks and stock market volatility could increase demand for cash and the USD as a safe haven.
While the August Calendar is not so busy, but still for the rest of the month we have data to watch, including S&P Global and ISM Services PMI (5th), Consumer Credit (6th), PPI (13th), CPI (14th), Retail Sales (15th), US Leading Index (19th), Existing Home Sales (22nd), and New Home Sales on Augusta 23rd.
UK, GBP, and Stock Markets
While the UK faced the highest inflation and worst economic conditions among G10 countries post-COVID-19, recent data shows significant improvement. May’s 2% CPI inflation was repeated in June. With an expected 2.25-2.5% consumer inflation, the UK seems to have controlled inflation effectively, and the Bank of England (BoE) has almost completed a successful mission. Declines in energy prices and average weekly earnings growth, which fell to 5.6% in the three months to May, along with a decline in service consumer price inflation to 5.7% in June, have all contributed to the slowdown in headline inflation.
However, underlying inflation remains high. For example, core inflation, which excludes food and energy prices, was 3.5% in June 2024, and service sector inflation was 5.6% in June. This higher service sector inflation has been a factor in the Bank of England’s Monetary Policy Committee's (MPC) refraining from cutting interest rates significantly.
As expected by financial markets, on August 1, the BoE cut interest rates by 25 basis points to 5.0%. It is now anticipated that by the end of 2024, the BoE could cut rates by another 25 basis points to 4.75%.
GDP has picked up sharply so far this year, but the underlying momentum appears weaker. For the rest of 2024, quarterly GDP growth is expected to fall back to 0.4% in Q3 and to 0.2% in Q4, consistent with current survey signals. These numbers indicate a resilient recovery after the technical recession in Q3 and Q4 of 2023. This can be confirmed by recent economic indicators. The Purchasing Managers Index (PMI) showed better-than-expected performance in both the manufacturing and service sectors, indicating positive business activity in June and July, which is expected to grow further in August. However, while the short-term outlook for the UK economy has improved, longer-term challenges remain.
The UK now has a new government. The Labour Party is back in power after 14 years, and the new Chancellor, Rachel Reeves, addressed the House of Commons about public spending on July 29. Citing cost pressures likely to increase spending beyond existing budgets, the Chancellor made some changes to spending commitments for this year and next, which helped improve market sentiment about the UK economic outlook.
For August, we are overall positive about the UK stock market and the Pound Sterling. Key economic data to watch for the rest of August includes the House Price Index (7th), labor market data (13th), inflation (14th), GDP (15th), and retail sales (16th).
Eurozone Economic Outlook
Compared to the US and UK, Eurozone economic growth faces more unfavorable conditions, and the positions of economic powers within this bloc are also shifting.
However, lower energy prices in recent months compared to a year ago have enabled the Eurozone economy to return to growth and inflation to slow down. Although July's CPI and Core CPI came in 0.1% higher than expectations, at 2.6% and 2.9%, respectively, the inflation outlook remains benign for the rest of the year.
The Eurozone has managed to overcome some internal political uncertainty after elections across Europe, yet the economy faces two major threats: the divergence between the monetary policies of the European Central Bank (ECB) and the US Federal Reserve (Fed) and deteriorating economic relations with China.
The ECB cut rates by 25 basis points in its June meeting and maintained the 4.25% rate in the July meeting. Given the current conditions and expectations, we anticipate the ECB will cut rates by 25 basis points each quarter until the deposit rate bottoms out at 2.5% in the third quarter of 2025.
On the economic growth front, we expect the August data to show a slight improvement, helping the overall Eurozone economy grow by 0.7% this year and 1.4% next year. Lower inflation is expected to significantly aid the manufacturing sector's recovery. This includes a better labor market outlook, with unemployment expected to be around 6.5% in August.
This positive outlook could also help the common currency regain its appreciation against rivals, especially the US dollar. On the stock market front, we expect Euronext to continue an overall uptrend, albeit at a slower pace, for the rest of August.
Several reasons are helping us to be more positive about the Eurozone economy. The Spanish economy is moving so fast, not just in the tourist sector but in the industrial and manufacturing sectors as well, and it is acting as the driving engine of the Eurozone economy. Also, the lower energy costs helped the German economy emerge from recession in the first quarter of 2024, thanks to a recovery in production in energy-intensive sectors such as the chemicals industry. However, recently published data from Germany has, to some extent, increased concerns about Germany's economic future and its special position in the euro area.
In addition, with easing monetary policy, lending rates should continue to fall, and it can also help businesses grow, especially in the housing sector.
The August economic calendar for the Eurozone is relatively light, but there are still some important data and events to watch, including PMI numbers (5th), ZEW Economic surveys (13th), GDP and Industrial Production (14th), and inflation data on August 20.
Asia Economic Outlook
Japan
Despite the rate hike on the last day of July, we remain positive about Japan’s economic outlook for August. The Bank of Japan (BoJ) recently increased the target rate by 15 basis points to 0.25%, surprising market participants with such a significant step. The BoJ is likely to continue its incremental monetary tightening, which has helped stabilize the yen. This could support import and export growth, although overall economic growth is expected to be modest.
After a challenging start to 2024, Japan’s economy is expected to see a modest recovery in the second half of the year. Real GDP growth is anticipated to pick up, driven by stronger wage growth and consumer spending. However, with these BoJ policies, August might not be an exceptionally strong month for Japanese stock markets. Still, it could help slow down the 2.6% inflation rate and strengthen the yen against its rivals.
China
China’s economy is facing more challenges than anticipated. The People's Bank of China (PBoC) and the government are trying to stimulate consumer spending through supportive policies and changes to laws, such as easing restrictions on house purchases. However, economic growth is forecast to slow down to 4.6% in 2024 from 5.2% in 2023, primarily due to the subsiding surge in consumer demand and spending. The focus for August will be on how effectively these measures can boost consumer confidence and spending.
In addition to the US, China now has trade tensions with the Eurozone as well. Tensions over electronic cars could undermine the close relationship between the two blocs. In terms of trade, China is Europe's second most important partner after the US. It accounts for 10% of total EU exports and 22% of EU imports, around half of which are products critical to the European economy.
EU foreign direct investment in China has remained steady at around €7 billion–€8 billion annually, according to the European Commission, mostly concentrated in the automotive sector. It is not just about the investment; in terms of technology, the two blocs have become highly interdependent. With current jitters and tensions, continuing these investments and cooperation is questioned.
Considering the above-mentioned data and estimates, we do not have a positive outlook for the Chinese stock markets and currencies in August.
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