If you were on holiday in the first half of August, you would have returned to find global equities almost unchanged from the end of July (+0.4% for the MSCI AC World index month-to-month data, as of 16 August). Meanwhile, colleagues who worked through that period could well be ready for a break, having lived through Black Monday on 5 August.
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An impressive equity rally
The week starting 12 August saw a more positive mood as US data reassured investors on inflation and economic activity. After falling sharply at the beginning of August global equities have recovered. The rebound was broad-based.
In the US, the weekly rise in the S&P 500 index was 3.9%, while the tech-heavy Nasdaq Composite gained 5.3%. The fall in implied volatility – seen as a measure of investor nervousness – was dramatic (see Exhibit 1).
US economy – Forward momentum continues
The latest non-farm payrolls report had rekindled recession concerns in the markets, but since then investors have focused on activity indicators. These have been reassuring.
For the second week in a row since the unexpected rise in the unemployment rate to 4.3% in July, initial jobless claims came in at the lowest level since early July (see Exhibit 2). Such data does not suggest a weak labour market where companies are carrying out massive layoffs.
Consumption data for July has also reassured investors: retail sales exceeded market expectations for the second consecutive month.
After 2.3% annualised growth in the second quarter, private consumption momentum at the start of the third quarter has remained solid. News of strong earnings and revenues for the second quarter at Walmart also reassured, as did the confidence level of small businesses.
Finally, producer and consumer price indices confirmed a slowdown in inflation. Year-on-year headline inflation came in at 2.9% and core inflation at 3.2% in July, both at their lowest since the spring of 2021.
The preliminary University of Michigan estimate of consumer confidence provided a good summary of this ‘perfect’ week. Consumers’ 1-year and 5-year inflation expectations have stabilised and the confidence index beat market expectations (though it has remained close to the one-year low hit in July).
In short, US growth appears resilient, and inflation is slowing.
What could the US Federal Reserve tell us?
This week sees the release of the minutesof the Federal Reserve and European Central Bank (ECB) monetary policy meetings in July as well as news from the Jackson Hole central bankers’ symposium. The theme at Jackson Hole is ‘Reassessing the effectiveness and transmission of monetary policy’; this mirrors current debates in the financial community.
Fed Chair Jerome Powell is due to present the economic outlook and provide guidance on the upcoming decisions at the Fed’s next policy meeting on 18 September. He is likely to avoid any solid pre-commitments, but may elaborate on key topics.
After the July meeting, the Fed noted that ‘in recent months, there has been some further progress toward the 2% inflation objective’. Powell emphasised that ‘the second quarter inflation readings added to confidence [that inflation is heading to 2%] and more good data would further strengthen that confidence’.
A few days earlier, addressing Congress, he had admitted that ‘reducing policy restraint too late or too little could unduly weaken economic activity and employment’. More recently, several policymakers have made statements suggesting it is time to loosen policy.
September key rate cuts – A done deal?
At the start of August, futures markets reflected almost five 25bp cuts. These expectations have receded to 93bp of cumulative cuts, or fewer than four cuts in the three remaining policy meetings in 2024. The probability of a 50bp cut in September is now only around 30%, while in early August some observers imagined an emergency cut before the next policy meeting.
At Jackson Hole, Powell may try to convince investors that a 25bp cut is more appropriate as part of a ‘measured approach because we don’t know where our destination is going to be’, as the president of the Minneapolis Fed said in a recent interview.
Market expectations for another ECB policy easing have also ebbed. They now point to two to three rate cuts by the end of the year.
Expectations for more cuts from the Fed than the ECB help explain the fall in the US dollar. The euro has risen to above 1.10 to the dollar, its highest level this year.
