Global Economic Outlook | Week #34

Week Ahead:Monday: US Leading Economic Index

author: Ahura Chalaki

published:Aug 18, 2024 5:43

Reading Time:

9 minutes

category:weekly

Week Ahead:

Monday: US Leading Economic Index
Tuesday: PBoC interest rate decision, RBA meeting minutes, German inflation, EU inflation, CBRT interest rate decision, Canada CPI.
Wednesday: Japan's trade data, Canada's housing data, RMPI, and US FOMC meeting minutes.
Thursday: Service and Composite PMI from the Most Developed Economies, Jackson Hole Symposium, US Existing Home Sales.
Friday: New Zealand Retail Sales, Japan's CPI, Jackson Hole Symposium, US Building Permits, New Home Sales, Canada's Retail Sales, CFTC numbers.

Wall Street and USD

Review:

Last week was marked by significant volatility as the market speculated on the Fed's possible decisions for the September meeting. Initially, after the NFP data missed estimates and inflation aligned with FOMC expectations, the market began pricing in a 50 bps rate cut for September. However, as the week progressed and the data was fully digested, interest rate expectations returned to a balance similar to pre-NFP levels.

The U.S. economic calendar last week was filled with solid data that helped ease recession fears. Alongside slower inflation, small business optimism increased, and consumer spending remained steady. U.S. retail sales for July grew by 1.0% month-over-month, suggesting that the average consumer is still spending, supporting the economy and GDP growth. This improvement reinforced hopes for a soft landing scenario, pushing back recession concerns.

Additionally, the University of Michigan's consumer sentiment and inflation expectations provided further support for the USD and U.S. stock markets, with sentiment rising and inflation expectations falling to 2.9%.

Hopes for an economic soft landing once again powered U.S. stocks higher, as encouraging data helped alleviate recession worries following an earlier sell-off. The Cboe Volatility Index also returned to calmer levels after last week’s four-year highs, signaling reduced recession fears among investors and market participants.

Outlook

The upcoming week begins with the release of the U.S. Leading Economic Index (LEI) on Monday, a critical indicator that has been in negative territory since the Fed began raising interest rates in March 2022. The LEI, which aggregates several leading, coincident, and lagging indicators to reveal economic turning points, has consistently reflected economic weakness despite recent improvements in other areas. For July, expectations are for another weak reading, around -0.5%, reflecting ongoing challenges in the housing market and slight declines in manufacturing employment and wages.

Later in the week, the focus will shift to the housing market with the release of existing and new home sales data on Thursday and Friday. Higher mortgage rates have increased prices, and a softer job market combined with growing expectations for lower rates has impacted housing market activity. Existing home sales have declined for four consecutive months, and new home sales dipped 0.6% in June, continuing a downward trend.

However, with market anticipation of a potential Fed rate cut in September, mortgage rates may decrease, possibly encouraging buyers to return. We expect existing home sales to match June’s pace of 3.89 million units and new home sales to see a 2.9% increase, reaching a pace of 635,000 units.

Overall, the expected data this week is slightly positive, which could reduce the probability of a 50 bps rate cut, apply pressure on stock markets after last week’s growth, and support the relative strength of the U.S. dollar.

From a technical perspective, the US500 index is showing bullish tendencies after a two-week recovery, now sitting above 5,500. However, the potential for a correction exists, especially if it falls below this key pivot. Should this happen, the next support levels to watch are 5,440 and 5,350. On the other hand, if it holds above 5,500, there could be a push towards new highs, though this is less likely in the current scenario.