Global Economic Outlook | Week #29

Next Week in Calendar

Monday: China’s GDP rates for Q2 and the Eurozone’s industrial production rate for May. 
Tuesday: Germany’s ZEW Economic sentiment and current conditions figures for July, the US retail sales rate, and Canada’s CPI rates both for June. 
Wednesday: New Zealand’s CPI rate for Q2, Japan’s Tankan index figures for July, followed by the UK’s CPI rates, the Eurozone’s final HICP rate, and the US industrial production rate and Housing Starts, all for June. 
Thursday: European Central Bank Policy Rate, Japan’s trade balance figure, and Australia’s employment data both for June, followed by the UK’s employment data for May, the US weekly initial jobless claims figure, and the US Philly Fed business index for July. 
Friday: Japan’s CPI rates for June, UK’s retail sales for June, and CBI business optimism figure for Q3, as well as Canada’s retail sales rate for May.
 

Wall Street

US inflation numbers were in focus last week, presenting mixed results. While consumer inflation eased to its lowest rate since April 2021, producer inflation increased again. The latest Consumer Price Index (CPI) showed that headline consumer prices declined by 0.1% in June. When excluding food and energy, the core CPI rose by just 0.1% during the month, marking the smallest monthly increase in core prices since mid-2021. After May’s flat inflation remained at 0%, and while the market expected a 0.1% inflation rate for June, these numbers surprised investors.

 

However, this optimism did not last long. The next day, on Friday, PPI numbers once again revived inflationary concerns. According to the US Bureau of Labor Statistics (BLS), the US PPI in June increased by 0.2% monthly and 2.6% annually, above the previous month and estimates. In addition, the Core PPI, excluding food and energy prices, rose by 3.0% annually against an estimated 2.5%. Monthly, the Core PPI rose by 0.4% compared to the 0.2% forecast. These mixed numbers suggest that inflationary pressures remain persistent, as businesses are experiencing higher costs for goods and services, which may eventually be passed on to consumers.

 

Still, in the short term, the market welcomed this data. FedWatch tools show more than a 74% chance of a 25 basis point rate cut in the September FOMC meeting, and it was enough to see a shortfall in US bond yields.

 

Yields slid, with the two-year Treasury yield dropping to the lowest level since March, and 10-year bond yields falling to 4.18%. Now it is clearer that the Fed can kick off its easing cycle in September due to not only favorable inflation data but also softer labor market data. This was evident from Mr. Powell's testimony before the Congress as well.

 

In the week ahead, we will have a light calendar in the US, with most focus on retail sales numbers and Fed speakers. However, the earnings calendar will be exciting and interesting enough to capture market participants' attention.

 

Retail sales numbers, which will be released on Tuesday, are one of the most reliable indicators of the economy’s supply-and-demand balance, which is a primary market driver. Investors and market participants are not expecting a surprise in this area, with most estimates predicting weaker numbers. However, while goods spending has lost momentum, household spending continues, which can keep the headline number around 0.0% to 0.2%.

 

From a technical point of view, the S&P 500 still moves in a clear uptrend, while the RSI at 52 shows low strength among bulls. We have the first support at 5,580, with a strong pivot at 5,520. Moving above these levels supports the bulls, and only falling under 5,440 can change the market direction. 

 

Earnings of the Week!

Last week, banks started the Q2 earnings reports, and this week, more banks and other companies will continue reporting. The direction of the stock markets and the sustainability of the current uptrend will be significantly influenced by these results. Therefore, make sure to follow both the results and the outlook for the rest of the year. This week's biggest names to watch closely include Goldman Sachs (GS), UnitedHealth (UNH), Bank of America (BAC), Morgan Stanley (MS), Charles Schwab (SCHW), J&J (JNJ), Taiwan Semiconductor (TSM), Netflix (NFLX), and American Express (AXP).

Forex

It is expected to be a volatile week for the forex market. The Euro will be affected by the upcoming ECB meeting. The Sterling will react to UK inflation data, the Yen to Japanese CPI numbers, and the Yuan to Chinese GDP and industrial production data.

                 

US Dollar

Economic data published so far confirms the weakness of US economic growth compared to previous estimates. Meanwhile, calls for President Biden to end his presidential campaign have intensified, but he continues to deny them, increasing uncertainty in the US economic environment.

 

On the data front, the unemployment rate for June ticked upwards to 4.1% from 4.0% in May. Mr. Powell also expressed his concerns about the labor market in his testimony before Congress. Moreover, the US CPI for June, both on a core and headline level, came in lower than expected, implying easing inflationary pressures in the US economy. This adds more reason for FOMC policymakers to consider cutting rates in the September meeting, increasing pressure on the US dollar.

 

In the week ahead, if Fed speakers reiterate Fed Chair Powell’s comments, it could weigh more on the dollar.

 

From a technical point of view, the US dollar index is still bearish. If it breaches the 104 mark, it will likely settle in the next range between 103 and 104 before the personal income and spending numbers are released at the end of the month.

 

Euro

After a 25 bps rate cut in its early June meeting, we expect the ECB to keep policy rates steady this Thursday and emphasize a cautious stance toward future rate cuts, depending on upcoming data. We will likely see the next rate cut at the September meeting.

 

Similar to what we saw in the US, European headline inflation has also been falling in recent months, which was the main factor prompting policymakers to lower interest rates. However, service inflation and wage growth will necessitate a gradual pace of rate cuts ahead. It is important to note that in June, service inflation held steady at 4.1% annually. Therefore, it is likely we will see a continuation of current policies, with an emphasis on upcoming labor market data and inflation numbers as key indicators for the next step in cutting rates.

 

On the economic data front, there are other market drivers to watch. Germany’s ZEW figures are expected to showcase an optimistic outlook for the German economy, which may provide some support for the EUR before the ECB meeting. Additionally, monitoring the release of the Eurozone’s final HICP rate is crucial. If it comes in higher than expected, implying persistent inflationary pressures, it could bolster the common currency against its rivals.

 

From a technical point of view, EUR/USD bulls are trying to overcome the first resistance at 1.09. Breaching above that level can put 1.098 and then 1.105 on the radar.

  

Gold

Fed Chair Powell’s testimony pushed the gold price higher. The Fed Chair’s comments appeared relatively dovish, implying that the labor market is cooling and that progress is being made toward bringing inflation down to the bank’s 2% target. This suggests the Fed can start easing its hawkish policies and cutting rates, which weighed on the greenback and provided support for gold’s price. Additionally, easing inflationary pressures on a year-on-year basis increased pressure on Fed policymakers to start cutting interest rates as soon as September.

 

Furthermore, the decline in US yields tends to reduce the attractiveness of US bonds as an alternative safe-haven investment. Should US yields continue to decline in the coming week, we may see investments being diverted from US bonds towards gold, thus providing more bullish tendencies for gold’s price. Meanwhile, geopolitical and tariff tensions across the globe persist, and the Chinese central bank is attempting to buy more gold after a two-month pause.

 

From a technical point of view, in addition to maintaining the 38.2% Fibonacci level, the yellow metal is also trying to stabilize at the 23.6% Fibonacci level and has set its target at the previous high of $2,450.

 

Oil

Last week, API reported a significant drawdown of -1.923 million barrels, compared to the previous indicator of -9.163 million barrels. Similarly, the EIA confirmed the tightness of the US oil market with a drawdown of -3.443 million barrels, less than the prior week's -12.157 million barrels. This confirms that US oil production has not met market demand, yet oil prices closed the week lower due to unfavorable signals and reports.

 

In its July 2024 report, the International Energy Agency (IEA) expects slower oil demand growth for 2024 and 2025, citing potential decreased demand from China. However, OPEC has a different outlook. In its July monthly oil market report, the Organization of Petroleum Exporting Countries (OPEC) forecasts robust oil demand, projecting a global increase of 2.25 million bpd in 2024 and 1.85 million bpd in 2025. These mixed data, along with the potential peace agreement between Israel and the Palestinians, may explain the recent price decline.

 

Looking ahead, Chinese GDP growth figures for Q2-2024 will be crucial for further insights into the energy market. Consensus economists expect the Chinese economy to lose momentum in the second quarter, with quarterly growth of 0.9% and annual growth of 5.1% in GDP. Additionally, industrial production and retail sales data for June will be released next week, providing more clarity on recent Chinese economic activity. Market participants are cautious about upcoming Chinese data, which could impact the energy market negatively.

 

From a technical standpoint, WTI crude oil has reached its key support at 61.8% of its Fibonacci Fan. Breaching this level could open doors to lower price levels. Conversely, if WTI holds at $82, prices could potentially rise above $85 in the coming week.

  

BTC 

The Bitcoin fear and greed index has plunged into 'extreme fear' territory for the first time since January 2023. Despite this, selling pressure in the crypto market has been overcome by positive developments. However, uncertainty abounds, and Bitcoin continues to search for direction.

 

The German government's apparent end to Bitcoin sales contrasts with looming Mt. Gox repayments, which could potentially dampen prices. On the flip side, with slower inflation growth and a weaker USD, there may be increased BTC demand, possibly mitigating the current bearish sentiment.

 

Last month, Mt. Gox began repaying its creditors, distributing approximately $9 billion in Bitcoin and Bitcoin Cash over the next three months. While this development concerns the Bitcoin market, the impact on market dynamics is expected to be limited due to the dispersed and relatively small amounts involved. Many users may opt to hold onto their Bitcoins, anticipating future price increases.

 

Technically, Bitcoin remains directionless within the range of $57,000 to $60,000. Any significant upward or downward movement would need to sustain itself above or below these levels.