Weekly Markets Outlook – ECB Rates, China-US Presidential Debate in Focus

VaselineSeptember 7, 2024

0 5 minutes read

Weekly Markets Outlook – ECB Rates, China-US Presidential Debate in Focus

American Culture - Capitalism and Government — Douglas Rissing

By Zain Vawda

As the week draws to a close, US jobs data failed to provide clarity on whether the US Federal Reserve will cut by 25 or 50 bps at its September 18 meeting. Although the number of jobs created missed estimates, there were enough in the report to keep markets on edge for a little while longer.

In August, non-farm payrolls rose by 142,000, which was below the 165,000 expected. Moreover, the last two months saw a reduction of 86,000 from their initial estimates. This downward revision pattern is ongoing and ignores recent benchmark revisions that indicated the Bureau of Labor Statistics overestimated wage growth by an average of 78,000 per month for the year leading up to March 2024. For example, June’s job gain was first reported as 206,000, then adjusted to 179,000, and is now only 118,000. Likewise, the one in July the numbers fell from 114,000 to 89,000.

It looks like the apparent weakness in the labor market may finally be showing. With that in mind, a 50 bps discount may be out of the question. My view is particularly not with the improvement we’ve seen in the unemployment rate, which improved to 4.2% from last month’s surprise print of 4.3%.

Another point that may concern the Federal Reserve, and cited by ING Think Research, is the widening gap between full-time and part-time employment. According to ING, this fits with the idea that the U.S. is mostly adding part-time, full-time jobs and losing full-time, high-paying jobs primarily through attrition — not replacing retiring workers or resign.

Every recession starts like this, unfortunately. The easiest way to cut costs is not to replace workers, but if everyone does that, then the economy slows down and companies start making actual cuts down the line.

In terms of performance this week, US stocks continued their September blues as historical seasonality suggested. Wall Street’s leading indexes were all in the red for the week, with the Nasdaq down about 5.6%, the S&P down 4% and the DJIA down about 2.84%.

The decline is reflected in flows into US equity funds, which posted their biggest weekly flow in the 12 weeks to September 4. This is in line with growing concern about the health of the global economy. Investors shed a net $11.37 billion from U.S. equity funds during the week, according to LSEG data. This was also the fourth weekly stream in five weeks.

Markets Weekly Outlook - ECB rates, China and US presidential debate in focus — Source: LSG Workspace

Oil prices also suffered from worries around the economy. Word that OPEC+ would delay production increases that were scheduled to begin in October was not enough to save sales. This leaves oil in a precarious position heading into the new week as it looks set to end the week around 8% lower.

Gold failed to break its all-time high despite recession concerns and some of that could be due to interest rate cuts already priced in by market participants. US Dollar Index (DXY) saw a similar reaction and strengthened following the release of jobs data to end the week at a high.

The market reaction was similar to fluctuations in rate cut expectations. Initially, 65% of participants anticipated a 50 basis point drop immediately after the data was released. However, as the trading session progressed, expectations were adjusted significantly. The latest price now suggests a 75% probability of a 25 basis point decline.

Next week: ECB to cut rates, Trump-Harris debate

The week ahead is not expected to be as chaotic as last week, especially from a data point of view. The US is enjoying a reprieve on the data front as the US election comes into focus with the presidential debate between Kamala Harris and Donald Trump. The debate itself should not have a huge impact on the markets, barring some significant surprises.

Asia Pacific Markets

In Asia, next week’s focus is on Chinese data, which has been a point of contention lately. The data deterioration was one of the signs that the global economy is slowing, particularly from a demand perspective.

China is set to release its trade, inflation and credit data next week. We expect trade growth to continue to decline in August, with exports up around 5% year-on-year and imports up around 3%. It is important to keep an eye on car exports, which have been under pressure and are likely to slow further. If car exports go from helping to hurting, it could weaken China’s overall export performance. Inflation is expected to rise slightly in August.

Europe + UK + USA

In Europe and the US, it’s another heavy week of data, but more from the UK and the Eurozone.

The European Central Bank (ECB) meeting is the biggest event, with the ECB expected to cut another 25 basis points. Current inflation is approaching 2% and long-term forecasts are stable at around 2%, giving the ECB good reason to relax tight monetary policies. Combine this with the struggles facing the German economy and it would seem like a no-brainer.

The UK focus will be on jobs data next week. Last month there was a sudden and unusual drop in UK unemployment from 1.5 million to 1.2 million in just one month. Since the unemployment rate is calculated as a moving average, we may see it fall further, possibly reaching 4.0% from a recent high of 4.4%. This could happen even if the number of unemployed rises again in the latest monthly figures. However, the data is unlikely to have any lasting impact on rate expectations as it relates to the Bank of England.

US highlights, with the exception of the presidential debate, will come in the form of US CPI and PPI data. The data that markets have been glued to for the past 24 months suddenly no longer holds the same sway. Barring any crazy numbers, this shouldn’t impact rate cut expectations that much, labor data now holds the key. However, short-term volatility and fluctuations should be expected.

Chart of the week

This week the focus is on the US dollar index, which continues to be intriguing and surprising. The main question that comes to mind is how much of the expected rate cuts are already reflected in the value of the dollar. After the release of Friday’s data, the dollar initially fell but then rose sharply, suggesting that many of the rate cut expectations may already be on the cards.

DXY continues to find support around the 100.50 handle and keeping a retest of the 100.00 psychological mark at bay for now. The weekly and daily candle send mixed signals though. The weekly candle is set to close like a hangman, while the daily candle is about to close with a hammer candlestick, suggesting a bigger move on Monday. The only positive thing around the weekly candle is that a candle hanging on the support is not a high conviction print as it is best when it occurs following a significant rally in a resistance zone.

Many upside obstacles remain, with initial resistance at 101.80 and 102.16 before the 103.00 handle comes into focus.

A move back to the downside should now navigate support at 101.17 before the 100.50 level. The psychological 100.00 remains untested and remains a massive barrier if the bulls want to take over.

US Dollar Index (DXY) Daily Chart – August 30, 2024