Global Economic Outlook | Week #31

Monday: Sweden’s preliminary GDP rate for Q2 and the UK’s CBI distributive trades figure for July. 

 

Tuesday: Australia’s building approvals figure for June, their retail sales rate for June, France’s preliminary GDP rate for Q2, Switzerland’s KOF Indicator figure for July, the Czech Republic’s GDP rate for Q2, Germany’s and the Eurozone’s preliminary GDP rates for Q2, Eurozone’s economic sentiment figure, Germany’s preliminary HICP rate and the US consumer confidence figure all for July and US JOLTS Job openings figure for June. 

 

Wednesday: Japan’s preliminary industrial output rate for June, China’s NBS manufacturing PMI for July, Australia’s CPI rate for Q2, France’s and the Eurozone’s preliminary HICP rates, and the US ADP employment figure all for July and Canada’s final GDP rate for May. 

 

Thursday: Australia’s trade balance figure for June, followed by China’s Caixin manufacturing PMI figure and the UK’s nationwide house prices rate both for July, the US weekly initial jobless claims figure, and Canada’s manufacturing PMI figure in combination with the US ISM Manufacturing PMI figure both for July. 

 

Friday: Australia’s PPI rate for Q2, Switzerland’s CPI rate for July, and the event of the week which is the US employment data for July and the US Factory orders rate for June brings the week to a close.

 

Wall Street

The U.S. economy defied expectations in the second quarter, expanding at a 2.8% annualized pace. Additionally, we saw enough softening in inflation and signs of stress to warrant a rate cut in September. These numbers suggest that the current downturn cannot last long unless we see any opposite or disappointing signals from this week's FOMC meeting.

 

For Wall Street, this week everything will revolve around the Fed meeting, although we should not forget about the earnings reports as well. On the earnings front, eyes will be on reports from giants such as McDonald’s (MCD) on Monday, Microsoft (MSFT), AMD (AMD), Caterpillar (CAT), Starbucks (SBUX), and PayPal (PYPL) on Tuesday, Meta Platforms (META), Mastercard (MA), and Qualcomm (QCOM) on Wednesday, Apple (AAPL), Amazon.com (AMZN), Intel (INTC), and Booking (BKNG) on Thursday, and finally Exxon Mobil (XOM) and Chevron (CVX) on Friday.

 

On Tuesday this week, the FOMC's two-day meeting will start, and we will have the statement and Fed Chair Powell's press conference on Wednesday. So far this month, we have had mixed economic data. While GDP is increasing and inflation is falling toward the Fed's target range, manufacturing PMI figures in contraction territory do not have optimistic signals. Additionally, the durable goods orders rate for June dropped significantly to -6.6%. With these numbers and data, a rate cut in September becomes more likely. Still, for this week's meeting, we expect no change in the decision but will be looking for any clear signal on a September rate cut and one more possible rate cut in the November or December meeting.

 

With this data and estimates, the general sentiment for stock markets will not be negative. Not only can it slow down the bears, but some gains are also a possible scenario. From a technical point of view, we can see 5,350 as the next target, but before that, side movement between 5,440 and 5,520 is the most expected scenario.

  

US Dollar

After two weeks of weakness, the US dollar held relatively stronger against its rivals. Besides all the economic data and mixed numbers, election tension and uncertainty were additional reasons for increased demand for cash compared to investment in risky assets. The failed assassination attempt on Trump, Biden's withdrawal from the election campaign, and the unexpected replacement of Kamala Harris in his place increased market risk, making it harder to predict an easy win for Trump.

 

After Wednesday's Fed meeting, Friday's labor market data will likely move the markets. Given that no surprises are expected in Wednesday's meeting, the US dollar will have no incentive to grow. The currency market will mostly wait for Friday's meeting to gauge the next Fed move, as Fed speakers have recently emphasized labor market conditions.

 

While the upside surprise to payrolls in the June employment report masked a more troubling message about the jobs market, the 4.1% unemployment rate made it clear that optimism should be tempered. Especially after last week's data that confirmed personal income increased only 0.2% last month.

 

We are not overly pessimistic about the data. We expect a 185K increase in July payrolls. However, this is less than the historical average and shows that the job market is deteriorating. With an estimated 0.3% rise in average hourly earnings, we can say that wage pressures have also cooled. Annual average hourly earnings growth is expected to fall to a more than three-year low of 3.7%. The unemployment rate is likely to remain unchanged at 4.1%, which can be a warning of an economic recession.

 

While these expected numbers or missing the estimate can increase the chance of a rate cut and pressure the US Dollar Index, it also signals weaker US economic conditions, which can maintain long-term pressure on the USD and reduce this index below the 104 mark.

 

From a technical point of view, the next target is 103.60 in the short and mid-term, but with a lower slope and speed. Both RSI and OBV confirm the overall downward trend.

 

Pound and BoE Meeting

Cable not only ended last week lower against the USD but also weakened against the JPY and EUR, signaling wider weakness.

 

The UK Core CPI rates remained unchanged at 3.5% and the headline CPI at 2.0%, aligning with the bank’s 2% inflation target. Services inflation held steady at 5.7% year-over-year in June. On the other hand, wage growth slowed moderately in the three months to May, including regular pay for private sector workers. While this indicates that inflation is somewhat under control, concerns about the stubbornness of Core CPI rates to ease may increase pressure on the BoE to hold or adopt a more hawkish tone in the bank’s accompanying statement.

 

Additionally, we can refer to the purchasing managers' index. The UK’s preliminary manufacturing PMI figure for July came in higher than expected at 51.8, implying an expansion in the manufacturing sector of the UK economy, in line with the service sector. Still, there are other worries, such as the CBI industrial orders figure for July, which suggests caution. On the other hand, May GDP rose 0.4% month-over-month, more than expected, keeping the economy on track for another solid quarter of growth in Q2.

 

Despite split views among market participants and the BoE's MPC members, we believe there is a higher chance of a 25 bps rate cut than staying on hold. Given that, we expect the UK central bank to cut rates to 5.00% in Thursday's meeting. This would imply a less hawkish policy, which could maintain pressure on Sterling against its rivals.

 

From a technical point of view, GBPUSD remains bullish, with a key pivot at 1.28. Holding above this key pivot point can keep the bulls in play while breaching below it can give control of the chart to the bears.

 

Gold and Continuing Risks

Should market worries intensify further in the coming days, we expect to see increased demand for gold as a safe-haven asset. Additionally, we anticipate some weakness in the USD value, and the negative correlation between the USD and gold price can support the bulls in the XAUUSD chart.

 

Moreover, the decline in US yields over the past week could continue this week, positively affecting gold prices. However, if the USD strengthens over the coming week, we may see gold’s price retreat to lower levels.

 

Generally, geopolitical tensions remain high, risks in stock markets persist, and bears have fewer opportunities than bulls. The short-term strengthening of the dollar seems somewhat optimistic, all of which points to increased demand for gold. Furthermore, reports indicate that central banks like the PBoC have started buying more gold again, which can further increase gold demand.

 

From a technical point of view, XAUUSD remains bullish, with key support at 2,350 and a strong pivot at 2,300.

  

Oil and Fears of Lower Demand

Oil prices fell last week and ended lower on global demand fears, as Chinese data, along with weaker-than-expected manufacturing PMIs from European economies, added to demand concerns. For the week, Brent was trading down more than 1%, while WTI fell by over 3%.

 

Data released last week showed that China's total fuel oil imports dropped 11% in the first half of 2024. With more analysts revising down their economic growth forecasts for China, concerns about wider demand in China are more visible now. We all know that if Chinese demand decreases, oil prices will likely follow, as China is the largest importer of crude oil globally.

 

Additionally, as we enter the last month of summer and the annual vacation season, demand for gasoline may decrease as the US driving season ends.

 

On the other hand, Baker Hughes' count of US oil drilling rigs, an early indicator of future output, increased by five to 482 this week and by three in July, raising the number of rigs for the first month since March. This indicates more supply. More supply and less demand can put pressure on oil prices.

 

From a technical point of view, WTI remains bearish, with a key pivot at $77. If breached, $72 could be the next target. On the flip side, recovery and holding above $78 could set $80 as its weekly target.

  

Politicized Bitcoin!

Amid the crowds at the election rally, two candidates will be speaking at the Bitcoin 2024 conference this weekend. Trump and R. Kennedy Jr. are both scheduled to speak at the conference, while Kamala Harris, who was also expected to speak there, declined the opportunity just a few days ago.

 

While these speeches can attract more attention to the cryptocurrency market, the uncertainty over the election and financial markets increases the demand for this digital asset. Trump's running mate, JD Vance, a self-proclaimed BTC holder, has been a strong proponent of the crypto industry in the Senate and one of Gary Gensler's most vocal critics in recent years. This can be interpreted as one of the reasons for the recent growth of Bitcoin, and with Bitcoin gaining strength, Trump's victory could further support the price trend.

 

While all eyes are on the Bitcoin 2024 conference, from a technical point of view, the bulls control the charts, moving forward with $72,000 as the next target.