Ahead of the game: 16 September 2024

Inflation data and tech resurgence spark market rally

US equity markets rebounded this week, supported by market-friendly inflation data and the tech trade returning to favour. The market rally was also bolstered by a news report indicating that the Federal Open Market Committee (FOMC) is still considering delivering a supersized 50 basis points (bp) interest rate cut next week.

Closer to home, the ASX 200 gained, buoyed by tailwinds from Wall Street and a rebound in the heavyweight Materials and Energy sectors.

The week that was: highlights

• US headline consumer price index (CPI) increased by 0.2% in August, bringing the annual rate down to 2.5% from 2.9%
• However, US core CPI rose by 0.3% in August, exceeding economists' expectations of a 0.2% increase
• US core producer price index (PPI) rose by 0.3% in August. However, the components that feed into personal consumption expenditures (PCE) inflation, including airfares, financials, and healthcare, were softer than expected
• US weekly initial jobless claims increased by 2000 to 23,000, in line with expectations
• China’s annual inflation rate increased to 0.6% in August from 0.5% in July, the highest since February
• China's balance of trade surged to $ 91.02 billion in August from $ 67.81 billion for the same period a year ago
• Within the China trade balance details, exports jumped 8.7% year-on-year to a 23-month high. However, imports rose just 0.5%, below the 2% expected, as Chinese households remained cautious
• In the UK, the unemployment rate fell to 4.1% in July from 4.2%
• Staying in the UK, gross domestic product (GDP) in July flatlined at 0% month-on-month (MoM)
• Australian consumer sentiment fell by 0.5% in September to 84.6 after tepid GDP growth sparked fears about job losses
• Australian business confidence dived to -4 in August, the lowest figure since November 2022
• Brent crude oil gained 2.5% this week to $69.36 on reports that Hurricane Francine forced the shutdown of around 670,000 barrels a day in the Gulf of Mexico
• Gold surged 2.56% to $2,562, a fresh record high
• Wall Street's gauge of fear, the Volatility index (VIX), eased to 17.08 from 22.37

Key dates for the week ahead

Australia & New Zealand

• NZ: New Zealand GDP (Thursday, 19 September at 8.45am AEST)

• AU: Australian Employment Report (Thursday, 19 September at 11.30am AEST)

China & Japan

• JP: CPI (Friday, 20 September at 9.30am AEST)
• CN: Loan Prime Rate 1-year and 5-year (Friday, 20 September at 11.15am AEST)
• JP: Bank of Japan (BoJ) Interest Rate Decision (Friday, 20 September at 2.00pm AEST)

United States

• US: Retail Sales (Tuesday, 17 September at 10.30pm AEST)
• US: FOMC Interest Rate Meeting (Thursday, 19 September at 4.00am AEST)

Europe & United Kingdom

• UK: Inflation (Thursday, 19 September at 4.00pm AEST)
• UK: Bank of England (BoE) Interest Rate Meeting (Wednesday, 11 September at 9.00pm AEST)
• UK: Retail Sales (Friday, 20 September at 4.00pm AEST)

Key events for the week ahead

• US

FOMC interest rate meeting

Thursday, 19 September at 4.00am AEST

In its July meeting, the FOMC kept rates unchanged at 5.25%–5.50%, as widely expected. Following a series of cooler inflation data, Chair Powell struck a more dovish tone. He indicated that the Federal Reserve’s (Fed) confidence level is increasing, inflation is returning to target, and laid the groundwork for a potential September rate cut.

Concerns are shifting from inflation to the cooling labour market, and the debate ahead of next week’s meeting revolves around how significant the Fed’s first rate cut will be. Following firmer core CPI data this week, the rates market appeared comfortable with a 25 bp rate cut.

However, the debate took another twist after a news report on Thursday night suggested that Fed members were still undecided about cutting rates by 25 bp or 50 bp.

Reflecting this uncertainty, the rates market is pricing in 35 bp of rate cuts for September and 115 bp of cumulative rate cuts by year-end. Keep an eye on the Fed’s Summary of Economic Projections (SEP), which may indicate a shift to three 25 bp rate cuts this year instead of one. Chair Powell is also expected to signal that the size and magnitude of additional rate cuts will depend on incoming data.

Fed Funds interest rate chart

• AU

Employment report

Thursday, 19 September at 11.30am AEST

In July, the Australian economy added 58,200 jobs, well above the market’s expectation of 25,000. However, the unemployment rate rose slightly to 4.20%, up from 4.10%, marking its highest level since November 2021. This rise came as the participation rate surged to a record 67.10%, up from 66.90%.

The July report confirmed that while the labour market remains tight, the cooling process is slower than expected. The record-high participation rate means the Reserve Bank of Australia (RBA) has more time to assess the data before making any rate changes.

For August, the market expects 25,000 new jobs and the unemployment rate to hold steady at 4.20%. As we approach the release of this data, the Australian interest rate market is pricing in a 20 bp RBA rate cut before the end of the year, with a total of 82 bp of cuts expected by May 2025.

chart

• UK

BoE interest rate meeting

Thursday, 19 September at 9.00pm AEST

In July, the BoE narrowly voted 5-4 to reduce its bank rate by 25 bps to 5%. Following this, UK inflation rose slightly to 2.2% in July, up from 2% in June, though it came in just below the expected 2.3%.

The BoE’s statement indicated less urgency for further rate cuts, noting that monetary policy must "remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.”

Looking ahead, the BoE is expected to keep rates steady at 5% in the upcoming meeting, with an 80% probability. However, market consensus suggests a 25 bp cut in November and another in December, depending on lower inflation or a significant downturn in the labour market. Policymakers' guidance will be closely watched, and if they stick to the current stance of keeping rates restrictive, it could dampen expectations for near-term rate cuts.

BoE policy rate chart

• JP

CPI and BoJ interest rate decision

Friday, 20 September at 2.00pm AEST

The BoJ is expected to hold rates at 0.25%, after raising its short-term policy target by 15 bp in July. A consecutive hike would likely be seen as too aggressive, especially given criticism that the BoJ's hawkish stance contributed to global market turbulence in early August.

That said, stronger-than-expected inflation and wage growth in Japan over the past month have given the BoJ confidence in a wage-price cycle that could keep inflation above 2%, paving the way for more policy tightening.

Markets are anticipating a 10 bp rate hike in December. The upcoming inflation data will be critical in determining whether this expectation holds. Core inflation is forecast to edge up to 2.8% from 2.7%, marking the 29th straight month of inflation above the target. A higher-than-expected inflation print could fuel more hawkish bets, accelerating the timeline for a rate hike.

JP inflation rate chart