Global Economy & Markets, Weekly Roundup 02/09/24
Markets focus on this week’s US labor market report, following a dovish shift by the Federal reserve in August
Investors' focus has shifted from inflation to growth concerns, following the weaker-than-expected July US labor market report (August 2nd) and Powell comments that the balance of the risks to Fed two mandates (price stability, full employment) has changed.
On the one hand, inflation has resumed its downward trend back to the target of 2%. On the other hand, the unemployment rate has increased by 90 basis points from the cycle low of 3.4% in the past fifteen months, suggesting a weakening labor market.
As a result, the forthcoming labor market report (due on September 6th) will be top of mind for investors, with financial markets already expecting aggressive interest rate cuts by the Fed in the next twelve months. Consensus analysts expect nonfarm payroll gains of 165k from 114k in July and the U-3 unemployment rate to recede slightly to 4.2% from 4.3%.
Euro area inflation continued to soften in August. The headline CPI index decelerated to 2.2% yoy -- a three-year low -- due to energy inflation retreating sharply amid favorable base effects. That development corroborates the view for another rate cut by the ECB on September 12th following the one back in June. Services inflation, however, was stronger-than-expected, rising by 20 bps to 4.2% yoy and justifying ECB’s caution in removing interest rate restriction aggressively.
Equity markets have shown substantial resilience following the rapid unwinding of leveraged trades (the so called “yen carry trade”) in early August and the associated spike in equity and FX volatility. The S&P500 has recouped all the “yen carry trade” induced losses as the Fed signaled that lower interest rates are on the horizon. In addition, positive macro releases in the course of August have lessened recession concerns.
Moreover, corporate results were better than anticipated, as 79% of S&500 companies have exceeded analyst EPS estimates, above the 10-year average of 74%. Overall, S&500 EPS growth rate was +11.4% yoy in Q2:2024 versus +9% yoy expected at the beginning of the earnings season.
Reading between the lines of the stock market performance though, “Defensive” sectors (Staples, Healthcare, Utilities) and Real Estate have led the way with gains of circa +5% in August (S&P500: +2.3%), with small caps underperforming by a wide margin (-1.6%). Market volatility has receded, albeit is expected to remain above H1 low levels ahead of important central bank decisions and the US Presidential Election (November 5th).
Indeed, the debate between Trump and Harris on September 10th will be vital, with Harris poll bounce post Biden’s withdrawal starting to fade. The two candidates, according to poll averages, are going neck-to-neck in seven states critical to the US Presidential Election (AZ, NC, NV, MI, GA, PA, WI with 93 out of 538 electoral votes), whereas betting markets favor Trump by a margin of 3 pps.
Political and economic uncertainty in France, as well as in Germany where the AfD came in first or close second in regional Elections (Thuringia, Saxony) has negatively affected euro area equities, with the CAC40 index remaining circa -5% below its pre–European Elections levels (S&P500: +6%, Eurostoxx: -2% since June 7th).
Investors' focus has shifted from inflation to growth concerns, following the weaker-than-expected July US labor market report (August 2nd) and Powell comments that the balance of the risks to Fed two mandates (price stability, full employment) has changed.
On the one hand, inflation has resumed its downward trend back to the target of 2%. On the other hand, the unemployment rate has increased by 90 basis points from the cycle low of 3.4% in the past fifteen months, suggesting a weakening labor market.
As a result, the forthcoming labor market report (due on September 6th) will be top of mind for investors, with financial markets already expecting aggressive interest rate cuts by the Fed in the next twelve months. Consensus analysts expect nonfarm payroll gains of 165k from 114k in July and the U-3 unemployment rate to recede slightly to 4.2% from 4.3%.
Euro area inflation continued to soften in August. The headline CPI index decelerated to 2.2% yoy -- a three-year low -- due to energy inflation retreating sharply amid favorable base effects. That development corroborates the view for another rate cut by the ECB on September 12th following the one back in June. Services inflation, however, was stronger-than-expected, rising by 20 bps to 4.2% yoy and justifying ECB’s caution in removing interest rate restriction aggressively.
Equity markets have shown substantial resilience following the rapid unwinding of leveraged trades (the so called “yen carry trade”) in early August and the associated spike in equity and FX volatility. The S&P500 has recouped all the “yen carry trade” induced losses as the Fed signaled that lower interest rates are on the horizon. In addition, positive macro releases in the course of August have lessened recession concerns.
Moreover, corporate results were better than anticipated, as 79% of S&500 companies have exceeded analyst EPS estimates, above the 10-year average of 74%. Overall, S&500 EPS growth rate was +11.4% yoy in Q2:2024 versus +9% yoy expected at the beginning of the earnings season.
Reading between the lines of the stock market performance though, “Defensive” sectors (Staples, Healthcare, Utilities) and Real Estate have led the way with gains of circa +5% in August (S&P500: +2.3%), with small caps underperforming by a wide margin (-1.6%). Market volatility has receded, albeit is expected to remain above H1 low levels ahead of important central bank decisions and the US Presidential Election (November 5th).
Indeed, the debate between Trump and Harris on September 10th will be vital, with Harris poll bounce post Biden’s withdrawal starting to fade. The two candidates, according to poll averages, are going neck-to-neck in seven states critical to the US Presidential Election (AZ, NC, NV, MI, GA, PA, WI with 93 out of 538 electoral votes), whereas betting markets favor Trump by a margin of 3 pps.
Political and economic uncertainty in France, as well as in Germany where the AfD came in first or close second in regional Elections (Thuringia, Saxony) has negatively affected euro area equities, with the CAC40 index remaining circa -5% below its pre–European Elections levels (S&P500: +6%, Eurostoxx: -2% since June 7th).