Quick Look:
- Tepid U.S. Data: Weak economic data stokes fears; markets anticipate a 50 bps rate cut by the Fed in September.
- Eurozone Weakness: Germany’s economy contracts by 0.1%; the manufacturing sector shows persistent contraction.
- Fed’s Balanced Approach: Fed keeps rates steady; hints at potential rate cut in September if trends persist.
- Global Central Banks: BoJ raises rates by 15 bps; BoE reduces by 25 bps; mixed global economic signals.
This past week, the financial landscape witnessed a whirlwind of activity as tepid U.S. data stoked fears about the country’s economic health. Amidst this backdrop, market players are increasingly betting on a 50 basis points (bps) rate cut by the Federal Reserve (Fed) in September. The EUR/USD currency pair, after touching a fresh three-week low of 1.0776 on Thursday, managed to finish the week strongly, climbing above the 1.0900 threshold. The Fed’s speculation of aggressive interest rate cuts and lacklustre U.S. economic indicators significantly influenced market sentiments.
Trouble In The Eurozone
Mid-week, the Euro had an opportunity to rally; however, local economic data undermined its strength. Macroeconomic figures pointed to softer growth extending into the third quarter. The final Hamburg Commercial Bank (HCOB) Manufacturing PMI stood at 45.8 in July, mirroring June’s reading. This indicated a persistent contraction in the manufacturing sector, with reductions in new orders leading to accelerated declines in output and employment.
According to preliminary estimates, Germany’s economy contracted by 0.1% in the second quarter. This contraction contrasted with a modest 0.3% expansion in the EU economy, slightly surpassing the 0.2% growth anticipated by market participants. The preliminary estimates of the July Harmonized Index of Consumer Prices (HICP) showed a rise in Germany’s annual index to 2.6%, higher than the previous 2.5% and the expected 2.4%. In the Eurozone, the core annual HICP increased to 2.9%, exceeding market expectations.
Federal Reserve Paves The Way For A September Cut
The Federal Reserve, as expected, kept the federal funds rate steady at 5.25%-5.5% during its July policy meeting. The Fed’s statement included notable changes, attracting investors’ attention. Policymakers acknowledged moderated job gains and described inflation as “somewhat elevated.” The statement also highlighted a balanced approach to the risks associated with their dual mandate, marking a shift from the previous focus on inflation risks.
During his speech, Fed Chairman Jerome Powell indicated that a rate cut in September is under consideration, particularly if macroeconomic trends persist. However, he emphasized that no definitive decisions on future monetary policy have been made, reiterating a data-dependent approach. This led financial markets to price at least two rate cuts before the end of the year, with growing expectations of three cuts in 2024.
Central Banks In The Eye Of The Storm
Despite the initial weakness of the U.S. Dollar (USD), it quickly recovered, extending gains against major currencies as market sentiments turned risk-averse. The Bank of Japan (BoJ) and the Bank of England (BoE) announced their monetary policy decisions, with the BoJ hiking interest rates by 15 bps and the BoE reducing its benchmark rate by 25 bps. While these decisions were primarily anticipated, only the BoJ is expected to maintain its current policy, leading to a sell-off in local stocks and increased demand for the safe-haven USD.
Tepid earnings reports further weighed on stock markets, boosting demand for the USD. The mixed reactions to central bank announcements and lacklustre U.S. data underscore the global economic uncertainty shaping market dynamics.
Concerns About U.S. Economic Health
U.S. stock markets took a hit following the release of the ISM Manufacturing PMI on Thursday, which fell to 46.8 in July from 48.5 the previous month, missing the forecast of 48.8. The Prices Paid sub-index also increased to 52.9, higher than the expected 51.8, indicating rising input costs.
Employment-related data also supported the case for rate cuts. The ADP report showed the private sector added 122,000 new jobs in July, below the expected 150,000. Initial Jobless Claims unexpectedly rose to 249,000, surpassing expectations. The Challenger Job Cuts report revealed a significant drop in job cuts while hiring hit its lowest point in over a decade. Nonfarm Productivity rose by 2.3% in the second quarter, with Unit Labor Cost increasing by only 0.9%, much lower than the previous 3.8%.
The July Nonfarm Payrolls (NFP) report further highlighted economic concerns, with only 114,000 new jobs added, missing the expected 175,000. The Unemployment Rate rose to 4.3%, and Average Hourly Earnings fell to 3.6%, easing inflationary pressures. Factory Orders declined by 3.3% month-on-month in June, further adding to the economic woes.
By week’s end, speculative interest in a substantial 50 bps rate cut by the Fed in September surged, with the probability of three cuts before year-end increasing. Before the NFP release, the likelihood of a 50 bps cut in September was at 30%, skyrocketing to around 90% afterwards.
Next In The Macroeconomic Front
The upcoming week promises a slew of economic indicators, though financial markets are expected to be primarily driven by sentiment and speculation regarding the Fed’s future actions. On Monday, the U.S. will release the July ISM Services PMI, expected to improve to 51.0 from June’s 48.8. The HCOB and S&P Global also publish the final Services and Composite PMIs estimates for major economies.
Germany will report June Factory Orders and Industrial Production figures, while the final calculation of July inflation data will be released by the end of the week. The Eurozone will also provide June Retail Sales and August Sentix Investor Confidence figures.
While these data points may have limited immediate impact on their respective currencies, they will serve as crucial barometers of economic health on both sides of the Atlantic, setting the stage for the next round of market movements.
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