August ended on a positive note. Friday’s data showed that the US PCE and the core PCE index stagnated near the levels printed a month earlier instead of a small uptick. Personal spending rose more than expected – and more than income, but the US saving rate fell to 2.9% – the lowest since 2022. Combined with a strong growth number and slowing easing pressures printed a day before, the latest US economic data was good enough to keep the soft-landing dream going, while reinforcing the Federal Reserve (Fed) rate cut bets for September, and at each of the remaining three meetings for this year.
As such, the Dow Jones index advanced to a fresh record last week, the S&P500 closed a touch below a record high, while Nasdaq 100 fell after Nvidia’s blowout results failed to surprise investors who became too used to fireworks and preferred focusing on potential problems instead of the shiny results and as shiny forecasts. Besides that, the prospect of looser monetary policy benefit to cyclical stocks and that’s also causing a rotation from tech to non-tech pockets of the market and leave the tech-heavy Nasdaq behind its major peers, and behind the European stocks as well.
The European Stoxx 600 index rallied to a fresh ATH on Friday, as well, after the latest inflation update from the Eurozone showed further progress toward the European Central Bank’s (ECB) 2% policy target and reinforced the expectations of rate cuts. The EURUSD retreated below the 1.1050 mark and has room for a further slide below the 1.10 psychological level if the Fed and ECB expectations continue to adjust in a way to give less weight to the Fed doves – who expect the Fed to cut its rates at all three of the remaining meetings of the year with a potential 50bp rate cut in one of them, and more weight to the ECB doves, who expect the ECB to cut rates two more times this year, by 25bp in September and in December.
Why not more? Because, although the inflation figures point toward the right direction, the services inflation still accelerated last month, and some known names at the ECB, including Isabel Schnabel or Joachim Nagel, believe that the rate cuts shouldn’t happen too quickly to make sure that inflation returns and stays near the 2% target. And besides the services inflation, the ongoing war in Ukraine and tense relations with Russia remain major worries on the old continent, which sees its natural gas prices increase into fall.
The same worries regarding energy are not true for America, mind you. The nat gas prices there have eased from the summer peak and remain around the $2 mark, while crude oil prices continue to remain under the pressure of higher supply from OPEC+ starting from October and sluggish Chinese growth. US crude fell by more than 3% last Friday, and another 1% this morning in Asia after the official PMI data showed a fourth consecutive month decline in Chinese manufacturing – despite the government’s efforts to boost activity. This morning Caixin data came in better-than-expected, but the CSI 300 index is down by around 1.20% at the time of writing. Almost all gains from Friday, which were based on news that the country considers a $5.4 trillion of mortgages to lower the borrowing costs for millions of families and boost consumption, are gone.
The week ahead
Attention shifts to the all-important US jobs data this week – the last one before the Fed is due to start cutting its rates in September. The job openings data is due Wednesday, ADP on Thursday and NFP, wages and unemployment figures on Friday.
According to the market pricing, a total of 100bp cut is still on the table and the expectations for the upcoming figures are soft. Analysts expect fewer job openings, around 136K print from the ADP report, and around 164K for the NFP. The monthly wages growth may have increased a bit however, and the unemployment rate may have decreased from 4.3% to 4.2%. Sufficiently soft data is good for the Fed cut expectations and risk appetite, but a too soft data and jumbo cut expectations are not supportive of risk appetite. There is a very fine line between optimism due to the expectation of rate cuts and chaos due to expectation of rapid rate cuts on thinking that the Fed may have missed its call at the end of the tightening cycle, as it had missed the turn at the start of it.
Regarding this week’s data, could possibly see stronger-than-expected figures for August, which could further tame the jumbo cut expectations for the Fed and favour the scenario where the Fed would cut its rates by 25bp for the three remaining meetings this year. A sufficiently strong data could even boost the expectation that the Fed will cut only 2 times this year, by a total of 50bp. I believe that there is a greater chance for a hawkish revision in Fed expectations than a dovish one. As such, the US dollar index – which rebounded last week – has room to extend gains this week, if the jobs data looks strong enough.
