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.