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Last week ended on an ugly note, really, as the jobs data from the US revealed throughout the week was weak, but maybe not weak enough to tilt the Federal Reserve (Fed) expectations toward a clear direction. Job openings fell more than expected, and Friday’s official data showed that hirings rebounded in August, though not as much as pencilled in by analysts. The US economy added a 142K new nonfarm jobs, last month’s ugly figure was further revised down by 25K jobs, but the wages grew faster than expected and the unemployment rate fell from 4.3% to 4.2%, as expected. As such, the data sure pointed that the Fed will cut in September, but the pricing of a 50bp cut fell to 29%, from around 40% before the release of the jobs data. The US 2-year yield tipped a toe below 3.60% but rebounded, the 10-year jumped to 3.74%, the 2 to 10-year portion of the curve is no longer inverted and the US dollar index is better bid since the data on expectation that the Fed will cut, but not in a hurry and probably not by big chunks.
In equities, the Dow Jones fell 1%, the S&P500 lost 1.73% on Friday, and recorded its worst week since March while Nasdaq 100 was the most hit, by an almost 2.70% drop in just one session. Roundhill’s Magnificent 7 ETF fell nearly 3.90% on Friday, and Broadcom – which announced better-than-expected earnings but a slightly lower than expected forecast paid the price of that unpleasant forecast with a 10% drop in its stock price. Rough. And oh, the USDJPY – where the unwinding of the carry trades tend to amplify the risk selloff – fell to the lowest levels since August and the pair is consolidating below the 143 level this morning.
Weak data from Asia
And if all this is not enough, the data released in the earliest hours of this week pointed that the Japanese economy recovered slower-than-expected but that the price pressures remained higher than expected in Q2, and that inflation in China came in below estimates as well, not helping to relieve the growing tensions about China and its sputtering economy. The Nikkei index is down by more than 0.60% at the time of writing and China’s CSI 300 is down by more than 1%.
US crude fell 1.75% on the back of the mixed US jobs data on Friday, closed last week below the $70pb psychological level and remained under pressure this morning on further bad news from China. Copper futures – which are considered a gauge of global economic health – consolidate below the 200-DMA.
Good news is, US futures are in the positive, hinting that we could see a small rebound after last week’s heavy selloff.
The Week Ahead
This week, attention will shift to the latest CPI update from the US – and the European Central Bank (ECB) meeting. But before all that, Apple will be revealing its latest iPhones, Airpods, Apple Watch and Apple Intelligence – a new and much anticipated AI toolkit – as soon as today. And AI investors are not in their best mood to see the glass half full.
Coming back to the economic matters, the US CPI data is due Wednesday, and is expected to show a further slowdown in the US headline inflation to 2.6% in August, from 2.9% printed a month earlier. A sufficiently soft data will keep the expectation of Fed cuts on the table, but won’t move mountains, unless we see a big surprise to the upside – in which case the Fed cut expectations could take a hit. As the Fed’s Waller said ‘the balance of risks has shifted toward the employment side of [their] dual market’.
For the ECB, the expectations are pretty clear. The ECB is expected to announce a 25bp cut when it meets this Thursday, but what will happen next is not clear. The Eurozone inflation has been slowing, along with growth. Released Friday, the GDP data pointed at a softer-than-expected growth in Q2 due to a prolonged weakness in the zone’s manufacturing sector, especially in Germany.
Meanwhile, the wages growth also eased – a good thing for the dovish ECB expectations. Frankly, given the level of dovish Fed expectations, the ECB doves have room to increase their own dovish bets. The EURUSD, near 1.1075, looks like it could give back some advance if the ECB officials give signs this week that the progress in the inflation battle has been satisfactory enough to ease more. But what makes the euro doves more cautious than the Fed’s is that the Fed has a dual mandate – they must care about the price pressures but also about the health of the economy and the jobs market. But the ECB has a single mandate, and that’s maintaining price stability. Therefore, the ECB may not let itself seduce by faster rate cuts if the European officials think that there is the slightest chance that inflation could pick up momentum in the next few months.
