Outlook for the Week by OnEquity

[OnEquity]

Outlook for the Week of August 12-16
Key points to watch out for:

• Market turmoil has abated, however, will the US CPI be altered again?
• Decisive week for sterling: UK CPI, GDP, and retail sales.
• RBNZ moves closer to a rate cut, but will it happen this week?
• Japanese GDP, Aussie employment, and Chinese data are also in focus.

Concerns About the U.S. Economy Are in the Spotlight

Panic over the U.S. economy being on the brink of a recession has mostly subsided, although markets remain uneasy. Investors see a real risk that the Fed's delay will inevitably lead to a recession. Stubborn inflation is the main reason the Fed has remained so cautious, although inflation pressures finally appear to be easing in a more sustainable way.

This week's CPI report is likely to highlight this trend, and in the absence of significant news, the data may not be sufficient to allay slowdown fears, as attention has shifted to economic growth. If the inflation numbers surprise, whether up or down, the ripple effect will likely be felt in the market.

The CPI Will Most Likely Maintain a Downward Trajectory

Headline CPI is expected to come in at 2.9% y-o-y in July, down slightly from 3.0% previously. However, the month-on-month figure is expected to accelerate from -0.1% to 0.2%. Core CPI is also expected to remain steady on a yearly basis at 3.3% but to increase from 0.1% to 0.2% month-on-month.

A significant upside surprise would be the worst outcome for the markets, as it would mean the Fed might not have the option to cut rates quickly, even if the economy shows signs of weakening.

On the other hand, a much lower-than-expected outcome would increase forecasts for the Fed to cut rates by 50 basis points in September, which would motivate investors.

A Busy Agenda in the United States

CPI figures will be released on Wednesday, August 14, preceded by producer prices on Tuesday, August 13, while on Thursday, August 15, the focus will shift to retail sales. After flat growth in June, retail sales are expected to have increased by 0.3% m-o-m in July, which could help calm fears of recession.

Notable on Friday, August 16, will be the University of Michigan's survey of consumer sentiment, particularly inflation estimates for the next five years. On Thursday, August 15, manufacturing indicators from the New York and Philadelphia Federal Reserve will be released, as will July industrial production, while on Friday, August 16, building permits and housing starts are expected to draw attention.

If the upcoming data gives the green light for an aggressive rate cut, the US dollar could come under pressure again, as it has only marginally recovered from the previous week's losses.

Pound Retreats in Expectation of UK Data

Sterling has lost nearly all the ground it gained in July, and this month it has performed worse than all other currencies except the dollar. While this weakness is partly due to the Bank of England's rate cut, the unrest in British cities has also weighed on the pound, as it coincided with a time when investors had dismissed political risks for the UK.

This week's focus, however, is on the economy, starting with the labor market report on Tuesday, August 13. A cooler labor market has helped wage growth moderate to 5.7% y/y, but policymakers at the Bank of England ideally want to see a further decline before considering additional rate cuts.

July CPI figures will be released on Wednesday, August 14, and could be crucial in shaping expectations for a rate cut at the BoE's September meeting, as the chances of a second 25 basis point reduction currently stand around 30%. Headline inflation remained unchanged at 2.0% in June, right on target set by the bank. Although it probably rose in July to 2.3% y/y, supporting the rationale behind the aggressive cut at the August meeting.

Investors will keep an eye on services CPI, which, like wages, remains elevated. On Thursday, August 15, the UK will release preliminary Q2 GDP figures. The economy is estimated to have grown by 0.7% quarter-on-quarter in the second quarter, the same pace that was seen in the first quarter. On Friday, August 16, retail sales for July will be released.

While the likelihood of another rate cut in September is low, a weak set of data could nevertheless increase market expectations, which would be a further setback for sterling.

Will the RBNZ Join the Rate Cut Club?

The Reserve Bank of New Zealand meets on Wednesday, August 14, to make its latest monetary policy decision. Economists do not expect any surprises, although there is growing agreement among traders that the RBNZ will add a 25 basis point interest rate cut. The easing outlook began to gain traction after last week's meeting, where policymakers were optimistic about inflation returning to the target range of 1% to 3% in the second half of 2024, later supported by the Q3 CPI report, which indicated a drop in inflation to around 3.3%.

The RBNZ's survey of inflation expectations, which pointed to the lowest estimates in more than three years, helped bolster the case for a more accommodative policy.

Subsequently, investors have increased their bets in favor of an August cut to nearly 80%, so if the RBNZ decides to proceed with one, the New Zealand dollar is unlikely to face significant losses unless policymakers signal that more cuts are on the way.

Can the Australian Dollar Extend Its Recovery?

As the RBNZ looks poised to start cutting rates later this year, possibly as early as the August meeting, the RBA is increasingly becoming the exception. Governor Michelle Bullock has rejected market expectations of a rate cut in the near term, although investors continue to see a reasonable chance of a cut before December.

However, the RBA's hard-line stance is helping the Aussie dollar's attempt to recover against the U.S. dollar, but this week's data releases pose a downside risk. On Tuesday, August 13, the wage price index for the second quarter will be released, and on Thursday, August 15, the July employment report will be released. In addition to domestic indicators, Australian traders will also be watching the latest monthly data from China. On Thursday, August 15, July data will be released for industrial production, retail sales, and fixed asset investment. Any disappointment, particularly in retail sales, would heighten concerns that China's economy may be stuck in the slow lane, which could negatively impact the Australian dollar.

Yen Bulls Set Their Sights on Second Quarter GDP

Japan's second-quarter GDP figures will be released on Thursday, August 15. The data will be crucial for the Bank of Japan, where there is ongoing debate about whether the economy is strong enough to support higher interest rates. Corporate goods prices will be released on Tuesday, August 13, and machinery orders on Friday, August 16. The Japanese yen's rise appears to be taking a breather after last month's impressive gains. However, a figure higher than the expected 0.5% quarter-on-quarter could reignite bullish sentiment.

 

[OnEquity]

Outlook for the Week of August 19-23
Key points to watch out for:

• Recession fears subside as investors focus on Jackson Hole
• Eurozone and UK PMIs to influence ECB and BoE forecasts
• Canadian inflation could support BoC's third straight rate cut
• Japan's national CPI is also on the calendar

Jackson Hole Will Test the Fed's Most Pessimistic Bets

After the unwarranted panic caused by the weaker-than-expected July NFP report, investors have taken a calmer stance, re-analyzing their aggressive Fed rate cut bets as incoming data indicate that the U.S. economy is not performing as poorly as initially thought.

Two weeks ago, investors were expecting rate cuts of up to 125 basis points by the end of the year, though they have since slightly revised this estimate. They now expect rates to fall by about 100 basis points, which remains a considerably pessimistic outlook, implying a reduction at each of the remaining decisions in 2024, including a 50 basis point cut.

The possibility of a double cut at the next meeting in September currently stands at around 25%, and this action is almost completely discounted for December. With this in mind, investors are looking ahead to the Fed's Jackson Hole Economic Symposium, to be held from August 22-24.

The theme will be the reassessment of the effectiveness and transmission of monetary policy, suggesting that investors will hear extensive commentary, not only from Fed Chairman Jerome Powell and his colleagues but also from other leading central bankers.

With inflation hovering around 3%, it will be interesting to see if Powell and other Fed members remain confident in the downward trajectory of price pressures. If they do, how they plan to move forward will be crucial. Even if Powell indicates that a September rate cut remains possible, it is unlikely to satisfy those anticipating hints of a double rate cut, meaning Treasury yields and the U.S. dollar could continue to rise.

Equity traders may be particularly eager to hear Powell's views on the U.S. economy, especially after the recent turmoil. Further assurances that recession risks are high could push Wall Street higher, even if expectations for lower borrowing costs are scaled back.

The minutes of the latest Fed meeting will be released on Wednesday, August 21, but investors are likely to focus more closely on the Jackson Hole symposium for more current information and signals. Preliminary August S&P Global PMIs will be released on Thursday, August 22, and may also attract attention as investors remain anxious about the state of the world's largest economy.

PMIs Are Also at the Forefront of Investors' Attention

On Thursday, August 22, preliminary PMI indices for both the Eurozone and the UK will also be released. Regarding the Eurozone, the ECB decided to keep interest rates unchanged at its last meeting. Although President Lagarde did not commit to any cuts in September, she expressed pessimism about the growth outlook in the region.

This led investors to almost fully price in another 25 basis point cut in September, and a series of downbeat PMIs could confirm this outlook. Market participants are also likely to be keenly interested in the minutes of the latest ECB decision, which will be released later in the day, to find clues on how policymakers plan to proceed.

In the UK, the Bank of England cut interest rates on August 1, though it indicated it will be cautious about further rate cuts. Data last week showed the unemployment rate fell to 4.2% from 4.4%, and headline inflation picked up to 2.2% year-on-year from 2.0%, despite the core rate falling to 3.3% from 3.5%.

The data confirmed the Bank of England's view, though there remains about a 30% chance that policymakers will opt for another rate cut on September 19. For this likelihood to increase, the PMIs may need to show a significant deterioration in business activity.

Will CPI Data Halt the Canadian Dollar's Recovery?

Canada's CPI figures will be released on Tuesday, August 20, followed by retail sales data on Friday, August 23. The Bank of Canada has cut interest rates by 25 basis points at each of its most recent decisions, leaving the door open for further action.

Investors expect the Bank to continue cutting rates in each of the remaining decisions this year, and a further slowdown in inflation could lend additional credibility to that expectation, potentially weighing on the Canadian dollar.

Currently, the oil-linked currency is primarily supported by the rebound in oil prices, driven by supply concerns due to rising tensions in the Middle East and the easing of demand-side concerns as fears of an economic recession subside. Consequently, since a moderate trend is already priced in by the Bank of Canada, it is unlikely that a further slowdown in inflation will significantly alter current expectations.

Japan's CPI Inflation Also in Focus

Finally, on Friday, August 23, during the Asian session, Japan will release its July CPI figures. According to Tokyo data, it is highly likely that headline inflation slowed, while underlying prices continued to accelerate. If this trend is reflected in the figures, the likelihood of the Bank of Japan raising rates again in the final months of the year could increase.

However, even if this leads to a stronger yen, the recent easing of investor appetite makes it unlikely that the Japanese currency will experience a similar rally to that seen in recent weeks.

Interest rates in Japan remain very low relative to other major central banks, providing some market participants with the opportunity to use the yen as a funding currency while increasing their exposure to risk.

 

[OnEquity]

Outlook for the Week of August 26-30
Key points to watch out for:

• PCE inflation to focus the Fed’s attention this week
• Eurozone inflation data will prove decisive for ECB rate cut expectations
• Australian and Tokyo CPI and Canadian GDP on tap for the week

Will the ECP’s Moderate Inflation Expectations Fall Short?​

The European Central Bank’s moderate inflation expectations might not be met, raising concerns among investors. As the Federal Reserve prepares for its long-awaited moderate turn, markets are anticipating the first rate cut of this cycle at the September 17-18 meeting. However, the Fed remains data-dependent, and the updated dot plot accompanying the September decision means that the rate path is far from set in stone. The more hawkish members of the FOMC continue to assess upside risks to inflation. Should the Fed cut rates by as much as 100 basis points, as the markets predict, new data will need to surprise to the downside significantly.

Consequently, the Personal Income and Expenditures report on Friday, August 30, which includes consumer figures and the Personal Consumption Expenditures (PCE) price index, will attract significant attention. The underlying PCE price index remained steady at 2.6% year-on-year in June and is expected to continue this trend in July. While the overall PCE figure is also predicted to hold at 2.5% year-on-year, personal consumption is believed to have increased by a healthy 0.5% month-on-month in July.

This increase might not alleviate recession fears but could dampen hopes for an aggressive rate cut. Meanwhile, the estimated 0.2% month-on-month increase in personal income could help counter concerns that U.S. consumers are close to splurging again. The U.S. dollar is on track for its fifth consecutive weekly loss against a basket of currencies, making it vulnerable to a rally if the report is more bullish than expected.

Treasury Auction and Nvidia Results in the Spotlight​

Before the PCE data, July durable goods orders will be released on Monday, August 26, followed by August consumer confidence on Tuesday, August 27. The second estimate of second-quarter GDP growth will be released on Thursday, August 29, and the Chicago PMI on Friday, August 30. This week’s Treasury auctions may also spur volatility in the fixed-income market as trading volumes recover from the summer lull. Equity markets will closely analyze Nvidia’s latest results, set to be released on Wednesday, August 28.

Last Eurozone CPI Report Ahead of Next ECB Meeting​

This month, the euro has surged against the U.S. dollar, surpassing the $1.11 level, a figure not seen since December. Despite strong expectations that the European Central Bank will lower interest rates again in September, there remains a small but significant risk that ECB policymakers may not be convinced to implement another cut. The preliminary August CPI forecast on Friday, August 30, will be crucial for determining if further easing will be approved in September.

Eurozone headline inflation is expected to moderate from 2.6% year-on-year in July to 2.3% in August, bringing it closer to the ECB’s 2% target. The core inflation rate is expected to fall slightly to 2.8% year-on-year. Any disappointment in these inflation figures could further strengthen the euro against the U.S. dollar, although market consensus on a rate cut in September is unlikely to change.

Tokyo CPI Will Be Decisive for the Bank of Japan​

The yen, or more specifically the Bank of Japan, is partly responsible for the dollar’s recent woes. The realization that Japan’s years of ultra-loose monetary policy are ending resonated with investors after the BoJ simultaneously raised rates and announced a gradual halving of its asset purchases at its July meeting. There is a considerable chance that the BoJ will raise rates for a third time by the end of 2024.

Governor Ueda has hinted at further rate hikes if the economy and inflation remain on track, despite concerns about current market instability. The Tokyo CPI data on Friday, August 30, will be key, as it is viewed as a precursor to the national figures released later in the day. Other indicators, such as preliminary July industrial production, retail sales, and the unemployment rate, will also be released on August 30.

The Reserve Bank of Australia Awaits Further Developments on Inflation​

In Australia, inflation will be a major focus this week. Monthly data, to be released on Wednesday, August 28, will be closely watched amid concerns that inflation might continue to stagnate. After rising in previous months, the annual CPI rate fell to 3.8% in June. However, policymakers at the Reserve Bank of Australia want to see further declines before considering abandoning their tightening stance.

If no progress is made in July, it is likely that the RBA will continue to unwind rates this year, which would be positive news for the Australian dollar, which has gained nearly 3% against the U.S. dollar in August. However, second-quarter construction data due on Wednesday, August 28, and capital spending data due on Thursday, August 29, could pose some downside risks if they fall short of estimates.

Will Canada’s CPI Be Relevant to BoC Rate Cut Bets?​

The Bank of Canada is among the central banks leading the rate-cut race. Investors have priced in a more than 90% likelihood of another 25 basis point cut in September, as Canadian inflation has aligned with estimates. However, stronger-than-expected economic growth could prompt policymakers to skip a meeting, turning attention to second-quarter GDP figures on Friday, August 30. A day earlier, on Thursday, August 29, June wage growth figures may also impact the Canadian dollar.

 

[OnEquity]

Outlook for the Week of September 2 – 6
Key points to watch out for:

• Traders see a 50 basis point Fed cut in September as feasible.
• Fed gives higher priority to employment data, NFP is awaited.
• Bank of Canada rate decision, third rate cut in a row is fully priced in.
• Australian investors watch out for GDP figures.

Expectations for a Likely Fed Rate Cut Remain High​

For yet another week, investors are eagerly awaiting the NFP results to get a sense of the size and pace of the Fed’s next rate cuts. The weaker-than-expected July figures generated market turbulence, instilling fears about the possibility of a U.S. economic recession and prompting investors to estimate the Fed’s rate cuts by the end of the year at around 125 basis points.

However, data following the jobs report eased investors’ concerns, prompting them to reduce their bets. That said, Fed Chairman Jerome Powell’s dovish speech in Jackson Hole did not prompt them to change their bearish view considerably. Investors continue to expect interest rates to end the year around 100 basis points below current levels, with a 35% probability of a 50 basis point reduction at the next scheduled meeting on September 18.

Employment Data Begin to Take Center Stage​

In Jackson Hole, Powell pointed out that “the time has come to tighten policy,” and regarding the timing of rate cuts, “it will depend on the data coming in.” He likewise placed special emphasis on the labor market, mentioning that they “would not look for or welcome further cooling of labor market conditions.” This makes the Non-Farm Payrolls on Friday, September 6, even more relevant, because signs of further cooling could convince traders that the Fed might begin its easing cycle with a bold 50 basis point cut. This could push Treasury yields lower and put further pressure on the U.S. currency.

Right now, the question hanging in the air is: How will Wall Street react? Could the tepid report put recession fears back on the table, or will equity investors rejoice at the estimate of even lower borrowing costs? The answer could be found in the ISM manufacturing and non-manufacturing PMI results for August, which will be released on Tuesday, September 3, and Thursday, September 5, respectively.

The Atlanta Fed’s GDPNow model forecasts respectable real GDP growth of 2.0% for the third quarter, and if the ISM prints point to improving activity, investors may maintain their confidence in the world’s largest economy, thereby increasing their risk exposure. Market participants can get some information on the state of the labor market ahead of Friday’s September 6 NFP.

On Tuesday, September 3, the July JOLTS job openings will be released, while on Thursday, September 5, the ADP employment report will be released. Thursday’s agenda also comes with data on nonfarm productivity and unit labor costs for the second quarter.

Bank of Canada Prepares for a Third Straight Rate Cut​

In Canada, the Bank of Canada is expected to announce its interest rate decision on Tuesday, September 3, and Canada’s overnight index swaps (OIS) indicate that a third rate cut followed by a fourth rate hike is almost assured. There is even about a 15% chance of a more substantial 50 basis point cut. At its July meeting, the Bank of Canada announced its second cut in a row, leaving the door open for further action at subsequent meetings.

Since then, monthly GDP data showed that the economy slowed in May compared to April and approached stagnation in June. The employment report showed higher job losses in July compared to June, and increasingly relevant, inflation continued its downward trajectory.

The data justifies the estimate that the Bank will cut rates again at this meeting, which also suggests that policymakers will maintain a very accommodative stance. In such an event, the Canadian dollar could slide, but given that rate cuts have already been anticipated for each of the remaining meetings this year, it is unlikely that overall estimates for USD/CAD will change. Because of its risk-sensitive nature, the CAD has been enjoying recent inflows as risk appetite continues to be elevated in the face of aggressive Fed rate cut bets, and if U.S. data corroborates that idea, the prevailing downtrend in the USD/CAD may remain intact. Canadian employment data will be released on Friday, September 6, at the same time as the U.S. data.

Will the Australian GDP Figures Slow the Recovery of the Australian Dollar?​

Australian traders will also be concerned this week as, apart from changes in overall market sentiment, they will have to digest Australia’s Q2 GDP data on Wednesday, September 4, as well as China’s Caixin services and manufacturing PMI data on both Monday, September 2, and Wednesday, September 4. During their last meeting, the Reserve Bank of Australia’s policymakers decided to keep interest rates unchanged at 4.10%, adding that they remain willing to tighten policy further, as inflation, although declining, remains high. However, the market does not expect further rate hikes. On the contrary, traders are almost entirely expecting a 25 basis point cut by the end of the year, and the poor data could confirm this view.

If so, the Australian dollar could lose some of its recent aggressive gains, although the fact that the Reserve Bank of Australia’s expectations are much less dovish compared to those of other major central banks, coupled with increased risk appetite, is likely to keep any associated GDP losses limited and short-lived.

 

[OnEquity]

Outlook for the Week of September 9–13
Key points to watch out for:

• ECB expected to ease monetary policy again, but will it be “hawkish tapering” again?
• U.S. CPI to be the last inflation update ahead of September FOMC
• U.K. starts releasing monthly employment and GDP data

European Central Bank to Cut Rates for a Second Time​

The European Central Bank’s carefully choreographed cycle of rate cuts got off to an awkward start in June following late-breaking data. Seeking credibility, policymakers had no choice but to proceed with the 25 basis point rate cut, even though it was a hawkish move. Fortunately for businesses struggling in Europe, the case for further monetary easing has strengthened since the last meeting in July, when rates were kept unchanged. Headline inflation fell to 2.2% year-on-year in August, and the recovery in eurozone growth has been relatively sluggish.

The current economic situation may allow for downward revisions to the ECB’s quarterly inflation and GDP estimates, set to be released on the meeting day, Thursday, August 12. Meanwhile, ECB President Christine Lagarde is likely to reduce the emphasis on a data-dependent, meeting-by-meeting approach. She may confidently signal that further rate cuts are forthcoming. However, there is a downside: the rebound in the services CPI in August, reaching its highest level since October 2023, at 4.2% year-on-year. While this may not be enough to change the bank’s stance in September, Lagarde will likely remain somewhat cautious at the press conference.

If Lagarde signals a less aggressive rate cut path than investors expect, the euro could resume its upward trend after weakening against a stronger US dollar.

Will US CPI Support the Case for a 50 Basis Point Cut?​

The dollar has recently faced turbulence amid uncertainty over whether the Federal Reserve will lower rates by 25 or 50 basis points at its next meeting. The Fed’s long-awaited policy shift was announced in August at the annual central bankers’ symposium in Jackson Hole. Chairman Powell acknowledged emerging cracks in the labor market, thereby opening the door for a potential 50 basis point move in September. So far, comments have not supported the need for aggressive action, as the data has largely remained solid. The key question is to what extent the Fed will prioritize its employment mandate over price stability, given the ongoing risks of rising inflation.

The ISM’s price-paid indicators for manufacturing and services sectors rose in August, even as employment contracted in manufacturing and barely grew in services. The CPI report on Wednesday, August 11, will be the final piece of the puzzle ahead of the September decision, providing some clarity on what to expect. Overall CPI declined to 2.9% year-on-year in July and is expected to drop to 2.6% in August. However, the core index is anticipated to remain steady at 3.2%. If these figures are confirmed, the Federal Reserve will likely apply a moderate cut of around 25 basis points. A significant downside surprise would be required for a 50 basis point cut to become a real possibility.

Investors have priced in a roughly 40% chance of a 50 basis point cut, leaving little room for disappointment. The dollar could rise if the CPI data matches or exceeds estimates. Producer prices will be released on Thursday, August 12. The University of Michigan’s preliminary September consumer confidence survey, especially the one- and five-year inflation estimates, will also be significant on Friday, August 13.

The Pound Awaits British Data and the Bank of England’s Decision​

The Bank of England is expected to keep interest rates unchanged at its meeting on September 19. The UK economy recovered strongly in the first half of the year. With wage growth and services inflation still high, the Bank of England can afford a pause after its first rate cut of the August cycle. However, the decision could be tighter than expected, depending on the data released before the September meeting.

On Tuesday, August 10, the July employment report will be released, offering further insight into whether the UK labor market is stabilizing after significant job losses earlier this year. The unemployment rate fell by 0.2 percentage points to 4.2% in June. However, another significant drop may not be welcomed if wage growth becomes a concern for maintaining 2.0% inflation. An increase in wage contraction could heighten wage pressures, complicating the Bank of England’s fight against inflation. On Wednesday, August 11, the focus will shift to July GDP data, detailing the performance of the services and manufacturing sectors.

There is currently a 75% chance of no change in September. However, sterling could face significant pressure if this week’s releases disappoint, raising the chance of a 25 basis point cut to around 50%.

Focus Turns to Asia at the Start of the Week​

Amid ongoing concerns about China’s economic slowdown, CPI and PPI figures on Monday, August 9, followed by August trade figures on Tuesday, August 10, could impact risk-sensitive currencies like the Australian dollar. The last few months have seen a considerable rebound in exports, which may highlight short-term risk appetite in August, though it may not alleviate the general pessimism surrounding China’s economic outlook.

In Japan, the week will be data-heavy, focusing on the GDP revision on Monday, August 9. Second-quarter GDP growth is expected to be revised up from the initial estimate of 0.8% year-on-year. A higher-than-expected figure could raise estimates for another rate hike by the Bank of Japan in 2024, potentially bolstering the latest yen rally.