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The Week in Global Markets
Financial markets summary:
– EUROPE: Expectations for rate cuts in the Eurozone and the US contributed to stock market gains this week, with both pan-European and major country indices advancing week-on-week. Positive news about August’s business activity likely also helped improve market sentiment. The real disappointment came again from Germany where the recovery seems to be faltering once more. German 10y yields edged down, while the euro appreciated against the USD and depreciated against the pound and the Swiss franc. At the same time, UK output growth seems to be gaining further momentum according to preliminary PMI data.
– UNITED STATES: US stock market sentiment got a boost this week from the Fed policy meeting minutes, which revealed that a vast majority of members viewed a September cut as “likely appropriate”. At the same time, several had even thought of the case of a July cut given growing confidence in the recent disinflation and the labor market coming into better balance. Fed Chair Powell seemed to leave room for the possibility that rates could be cut by 50bp (instead of just 25bp). However, there was some retreat in markets after the Kansas City Fed President commented less dovishly on the strength of the labor market. The S&P 500, the Dow and the Nasdaq all advanced with broad-based gains. There was a major downward revision of annual job growth estimates by 818k, the biggest since 2009, which led to a drop in bond yields.
– ASIA-PACIFIC: Japanese stocks edged slightly higher this week, with the Nikkei 225 moving up about 0.8% and the TOPIX index rising 0.2%. Core inflation picked up pace again in July and BoJ governor Ueda stated again that the central bank would keep normalizing its monetary policy in a stable manner as it turns more confident in achieving its 2% inflation target. He reaffirmed that, while Japan’s stock market had recovered from its drop a few weeks ago, markets were still unstable, and the BoJ would continue to monitor the situation with a high level of urgency, watching for sharp yen moves that could affect its inflation forecasts. Major Chinese stock indices fell as the country’s central bank kept its benchmark lending rates unchanged for now but economists still expect that once the Fed starts cutting rates, the PBoC would likely follow suit and loosen its policy stance.
– BITCOIN: Bitcoin’s price in USD recovered this week, rising to just over the $64k mark. AMB Crypto reports that, despite the positive setup for BTC, the recent decline in August slashed addresses with profits by about 9%; overall, BTC users with unrealized profits were 84%, according to a VanEck report. Technically speaking, Bitcoin’s higher timeframe chart was bullish after mounting above the short-term supply area at $63k and reclaiming the 200-day Simple Moving Average.
policy rate overview
For the second time in 2024, the Swedish Riksbank cut its policy rate by 25bp, from 3.75% to 3.50%. The central bank is considering 3 more rate reductions in the rest of the year, as growth remains subdued and inflation is relatively low. The key reason for the Riksbank’s more dovish outlook seems to be the weak preliminary GDP data for Q2 which showed the economy contracting by 0.8%. Compared to many other economies, Sweden is more sensitive to interest rate movements because it is particularly reliant on international trade and has a high level of household debt.
highlights from Germany
More disappointment in economic activity
The August Flash PMI results show that Germany is still struggling to get out of the slump. New orders keep collapsing, manufacturing output contracts more, companies are cutting even more staff and slashing inventories and foreign demand drops pointing to a bleak outlook. And services are taking a hit as well – as the PMI report highlights, “the struggles in manufacturing are starting to spill over into the otherwise steady services sector; for the third month in a row, services activity growth has slowed down. New business is barely growing, and backlogs declined once again. The export side of services, including tourism, isn’t offering much support either, shrinking at an even faster rate than in July. The anticipated recovery in the second half of the year is failing to take shape. (…) It appears that uncertainty around economic policy has put a damper on consumer spending, while the global manufacturing upswing turned sour before German companies could feel the boost. Instead, the odds of a second straight quarter of negative growth have gone up, meaning we might be back to talking about a recession in Germany soon.”
Bundesbank confirms that challenges remain in the economic recovery
The August Bundesbank monthly report reiterates that the German economy continues to struggle with headwinds and weak industrial output will likely keep dampening economic performance for the time being. Industrial production and merchandise exports resumed their downward trend in Q2-24 despite stabilizing demand. Even though there are increases in incoming orders, the level is still low and the proportion of companies suffering from a lack of orders has risen again. Equipment investment noticeably slowed economic activity in Q2. As in previous quarters, high financing costs and economic uncertainty weighed on the investment activity of German companies. The price-adjusted domestic sales of capital goods producers also indicate noticeably weaker equipment investments. Their decline accelerated again in a seasonally adjusted comparison with the previous quarter and was broadly distributed across sectors. Consumer reluctance appears to be more persistent than assumed in forecasts, but it could pick up with the rise of disposable income. However, even though willingness to buy is improving, consumer uncertainty is still likely to dampen the recovery in private consumption – economic and political uncertainty is high and rose again at the start of the third quarter.
highlights from Europe
Economic activity rises faster
In August, the Flash PMI showed that business activity in the euro area’s private sector kept expanding. However, new orders declined again while employment remained flat. The rate of input cost inflation eased to an 8-month low, but companies raised their selling prices at the fastest pace since April. Output growth was driven mainly by the service sector, while manufacturing declined. There was positive growth in France, while in Germany activity declined again for the second month in a row. The outlook deteriorated as optimism declined and sentiment dropped to the lowest point so far for 2024.
Expectations for inflation mostly unchanged
The ECB Consumer Expectations Survey for July shows that median expectations for inflation over the next 12 months remained unchanged at 2.8%. expectations for inflation three years ahead edged up by 0.1 percentage points in July to 2.4%. Inflation perceptions and expectations remained relatively closely aligned across income groups. Consumer nominal income growth expectations decreased to 1.1%, from 1.4% in June. The decrease in income expectations was broad-based across age and income groups but more pronounced for the lowest 2 quintiles. Expectations for nominal spending growth over the next 12 months also decreased to 3.2%. Nominal spending expectations are at their lowest level since Feb-22. Economic growth expectations for the next 12 months turned more negative, standing at -1.0%, compared with -0.9% in June. Meanwhile, expectations for the unemployment rate 12 months ahead remained unchanged at 10.6%, their lowest level since the start of the series. Quarterly data showed that unemployed respondents reported a decrease in their expected probability of finding a job over the next 3 months. Consumers expect the price of their home to increase by 2.6% over the next 12 months, which was slightly lower than in June (2.7%). Households in the lowest income quintile continued to expect higher growth in house prices. Expectations for mortgage interest rates 12 months ahead remained stable at 4.8%. As in previous months, the lowest-income households expected the highest mortgage interest rates 12 months ahead (5.4%). The net percentage of households reporting a tightening (relative to those reporting an easing) in access to credit over the previous 12 months declined further, as did the net percentage of those expecting a tightening over the next 12 months
highlights from The United States
Still growing solidly
The August Flash PMI for the US shows that activity growth remained robust but the service sector expanded at a higher rate while the manufacturing sector contracted at the fastest rate in more than a year. Inflows of new orders into factories fell for a second successive month, dropping at the sharpest rate since December. However, both the service and manufacturing sectors recorded falling volumes of new export orders. Optimism about output in the year ahead increased but remained below the long-term average. Average prices charged for goods and services rose at the slowest rate since June 2020 barring only the recent dip seen in January. The rate of inflation is now only marginally above the average recorded in the decade before the pandemic.
The Conference Board Leading Economic Index signals no recession ahead
The LEI for the US fell by 0.6% in July 2024 to 100.4 and the 6-month annual growth rate no longer signals a recession. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread. These data continue to suggest headwinds in economic growth going forward. The Conference Board expects US real GDP growth to slow over the next few quarters as consumers and businesses continue cutting spending and investments. US real GDP is expected to expand at a pace of 0.6% annualized in Q3-24 and 1% annualized in Q4.
highlights from The United Kingdom
Activity keeps expanding materially
Flash August PMI figures indicated another robust expansion of UK private sector output, supported by a strong upturn in new order intakes. Employment growth accelerated on resilient demand conditions. Inflationary pressures moderated across the private sector in August, with input costs rising at the slowest pace since Jan 2021. This largely reflected a considerable easing in cost pressures within the service economy. In contrast, higher freight and raw material costs meant that input price inflation across the manufacturing sector remained stronger than seen in the first half of 2024. Positive sentiment towards the near-term business outlook was a factor helping to underpin a gradual acceleration in employment growth.
Consumer confidence did not change
The GfK Consumer Confidence indicator in the UK stayed at -13 in August, same as in July and not improving in line with expectations. Concerns about the economy continued to weigh on households but they are still feeling more confident than they have done for almost 3 years. Sentiment on the wider UK economy stayed negative, while the index on personal finances improved.
Author: Nikolay
Founder of MoneyCraft
