Western markets are very much in holiday mode now as investors and traders tend to head to the beach in August. But do not be fooled into thinking nothing will happen. In fact, August is notorious for experiencing big moves because any major global macro event is met with reduced liquidity which leads to exaggerated moves.
Post non-farm payroll week, global data releases tend to die down this week, with little major data releases expected.
Review of last week’s key action
FTSE unchanged DOW -42 -0.12% S&P +33 +1.35% NASDQ +339 +2.76% DAX +178 +1.32% NIKKEI +374 +1.35% Hang Seng +175 +0.88%
US markets had only a modest advance following the previous week’s stellar moves. Non-farm employment change reminded the markets that the US economy is not cooling that quickly and certainly does not behave like an economy in a technical recession.
The non-farm data was stronger on every front. A whopping 528K new jobs. Average hourly earnings higher than expected and building on the previous month’s gains. And the actual unemployment rate fell a touch to 3.5% which is the lowest since just before the pandemic.
The market reaction was swift, with the S&P500 falling one hundred points in reaction. However, the markets all rebounded to trade modestly lower on the day, despite forward interest rate contracts predicting on balance another 0.75% hike which would be the third in a row. Equity markets however do not believe that these rates will push the economy into a recession.
Talking of recession, the Bank of England painted a particularly gloomy picture about economic prospects in the UK. Rates going to between 3% to 4% by year end, inflation hitting 13.3% by Q1, and a recession lasting five quarters, making this winter looking tough for many lower income households as energy prices ratchet up again in October.
These predictions look overly gloomy as the Bank of England does not have a great record in forecasting energy prices which are at the core of their forecasts. If Liz truss becomes the new PM, then I suspect she will take immediate action on taxes which might just lift the mood. After all, most economists agree that talk of recession is enough to induce a slowdown in consumers’ spending habits.
The forecasts for interest rates suggest a year-end rate of about 3% which means a hike in interest rates of 1.25% over the next three meetings which is quite within the bounds of probability. This means of course higher mortgage rates for homeowners of which 40% of fixed deals will end this year, exposing those borrowers to higher interest payments.
Whatever the outcome of the next three MPC meetings, the energy price cap for consumers will go up in October, which will add further fuel to the inflation fire. The incoming new Prime Minister will have a task in alleviating the poverty inflicted on those poorer households with little financial wriggle-room. Both Tory leadership hopefuls seem intent on implementing an emergency budget soonest. Sunak is the one preferred by economists whilst Truss seems determined to borrow to fund tax cuts to bolster her Tory credentials although this extra borrowing could fan the inflation flames further.
EURUSD -0.46 -0.45% GBPUSD -1.03 -0.85% USDJPY +1.83 +1.37%.
The foreign exchange markets had a quiet week compared to the US dollar weakness from the previous week. The slight hardening in US interest rates following the strong non-farm employment data seems at odds with the reaction in the equity markets. Higher US interest rates will reinforce the strong US dollar argument.
Gold +8 +0.45% UK OIL -09.27 -8.9% US OIL -9.76 –9.92% Bitcoin -952 -3.98%
The pressure on Opec from Western governments resulted in a paltry increase in oil production by Saudi Arabia of 100,000 barrels per day. The news came out mid last week although it was more likely evidence of the global slowdown and the impact on Oil consumption that pushed Crude Oil to its lowest point since mid-February, before the Russian invasion of Ukraine.
The forecast by the Bank of England rattled international markets with the sobering effects of the spike in energy prices and the lasting effect on inflation.
Data / events for the week ahead
A particularly quiet week for news and data, the highlight being US inflation data.
No impactful data / events.
No impactful data / events.
US - CPI – Inflation data. Expect an easing in price pressures with commodity prices, including oil, all receding from very elevated levels in March. Month-on-Month reading expected at +0.2%, much lower than the 1.3% from last month whilst the year-on-year reading is expected to show a slowing in inflation to 8.8% from 9.1%.
The core reading will be interesting, which excludes food and energy. A rise in general inflation is something that could worry the Fed where inflation could start to be ingrained into business and consumer thinking.
Global equity markets, US Dollar, global bonds, and commodities all sensitive to this critical data.
US - PPI – Produce Price Index. This is effectively the cost of goods and services going into production. It’s like a leading indicator to future inflation. PPI is, like CPI data, expected to decline from last month.
UK - Monthly and quarterly GDP data. Very topical considering the Bank of England’s comments from last Thursday. Expect first reading of Q2 GDP to come in at -0.2%. Does the Bank of England know something we do not? Sterling particularly sensitive to a worse than expected number.
For more analysis, take a look at my Monday Market Insights video here.