Ahead of the game: 19 August 2024

Equity markets rally: Global strength helps ASX 200 recover

US equity markets rebounded this week as stronger-than-expected initial claims and retail sales data eased fears of a recession.

Locally, the ASX 200 rebounded to reclaim all of last week's losses and more, supported by tailwinds from Wall Street and as jobs data showed the labour market remains in good shape.

The week that was: highlights

• US headline producer price index (PPI) rose by 2.2% year-over-year (YoY) in July, easing from 2.7% in June. Core PPI rose by 2.4% YoY in July from 3% prior
• US headline inflation rose by 0.2% month-over-month (MoM), which saw the annual rate of inflation remain at 3.0% YoY
• US core inflation rose by 0.2% MoM, allowing the annual rate of core inflation to ease to 3.2% YoY from 3.3% prior
• US headline retail sales rose by 1% in July, easily topping the anticipated 0.3% increase. The all-important retail control group rose by 0.3%, beating the 0.1% expected
• US weekly jobless claims fell by 7,000 to 227,000, their lowest since early July
• In the UK, the unemployment rate in June fell to 4.2% from 4.4%
• UK headline inflation edged up 2.2% YoY in July from 2% in June. Core inflation eased to 3.3% YoY from 3.5%
• UK second quarter (Q2) gross domestic product (GDP) expanded by 0.6%, following a 0.7% rise in the first quarter (Q1)
• Japan's Q2 GDP expanded by 0.8%, above market forecasts of 0.5%
• The Reserve Bank of New Zealand (RBNZ) cut interest rates by 25 basis points to 5.25%
• In Australia, the Westpac Consumer Confidence Index increased by 2.8% in August to 85
• The Australian economy added 58,200 jobs in July, stronger than the 20,000 gain the market had expected. The unemployment rate increased to 4.2% in July from 4.1% last month, the highest since November 2021, as the participation rate surged to a record high of 67.1%
• Crude oil is trading flattish this week at $76.85
• Gold gained 1.11% this week to $2,458
• Wall Street's gauge of fear, the Volatility Index (VIX), fell to 15.22 from 20.36 the prior week

Key dates for the week ahead

Australia & New Zealand

• AU: Reserve Bank of Australia (RBA) Meeting Minutes (Tuesday, 20 August at 11.30am AEST)

China & Japan

• CN: Loan Prime Rate 1yr and 5yr (Tuesday, 20 August at 11.15am AEST)
• JP: Inflation (Friday, 23 August at 9.30am AEST)

United States

• US: Federal Open Market Committee (FOMC) minutes (Thursday, 22 August at 4am AEST)
• US: S&P Global Flash Purchasing Managers' Index (PMI) (Thursday, 22 August at 11.45pm AEST)
• US: Jackson Hole Symposium (Thursday, 22 August - 24 August AEST)

Europe & United Kingdom

• EA: Hamburg Commercial Bank (HCOB) Composite Flash PMI (Thursday, 22 August at 6.00pm AEST)
• UK: S&P Composite Flash PMI (Thursday, 22 August at 6.30pm AEST)

Key events for the week ahead

• AU

RBA meeting minutes

Tuesday, 20 August at 11.30am AEST

At its August board meeting, the RBA kept its official cash rate on hold at 4.35%, as widely expected. In the accompanying statement, the RBA sounded hawkish and noted that while inflation is easing, it is still well above the midpoint of the RBA's 2-3% target range. Adding to the cautionary note, the RBA highlighted that quarterly underlying inflation has been above the midpoint of the target for 11 consecutive quarters and "has fallen very little over the past year".

The RBA retained the sentence that the board wasn't "ruling anything in or out." It also retained the sentence at the end of the statement that "the Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome".

Since the recent board meeting, RBA Governor Michele Bullock has maintained a hawkish tone. Speaking to a parliamentary panel this week, she stated it would be "premature to be thinking about rate cuts". We expect that the RBA meeting minutes will echo this hawkish sentiment. However, the rates market paints a different picture. It anticipates a rate cut as the RBA's next move, with 21 basis points (bp) of rate cuts priced in by year-end and three full rate cuts expected by July.

RBA cash rate chart

• US

FOMC meeting minutes

Thursday, 22 August at 4.00am AEST

At its last meeting in July, FOMC kept the Federal Reserve (Fed) Funds interest rate unchanged at 5.25%-5.50%, as widely expected.

In the accompanying statement, the Fed indicated that inflation was making further progress towards the Fed’s 2% target and noted that “the Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance.”

During the press conference, Fed Chair Jerome Powell flagged a possible rate cut, stating, “a reduction in our policy rate could be on the table” if inflation continues to fall.

The minutes are expected to have a dovish tone, reinforcing expectations for a Fed rate cut in September. The rates market has already priced in a full 25 bp rate cut by September, with a cumulative 94 bp of Fed rate cuts anticipated by year-end.

Fed funds rate chart

• EA

HCOB composite flash PMI

Thursday, 22 August at 6.00pm AEST

In July, the Euro Area’s HCOB composite PMI eased for the second straight month to 50.2, down from the previous 50.9. This comes as manufacturing activities remained in contractionary territory at 45.8, while services activities ticked lower to 51.9 from 52.8 prior, which points to a broad-based weakening of economic conditions. Notably, business activity and employment growth were close to a stall.

Markets are widely expecting the European Central Bank (ECB) to cut rates by 25 bp to 3.5% in the September meeting, amid slowing services inflation and a deteriorating growth outlook. A weaker showing in the upcoming PMI read will likely anchor the case for more aggressive rate easing ahead, with greater urgency for back-to-back cuts to support the economy.

Eurozone composite PMI chart

• US

Jackson Hole Symposium

Thursday, 22 -24 August

The Jackson Hole Symposium is expected to provide greater clarity on the global economic trajectory and the outlook for monetary policies across various central banks. Eyes will be on Fed Chair Jerome Powell’s speech next Friday, which is anticipated to lay the groundwork for a September rate cut. However, with this already fully priced by markets, the focus will instead be on the depth of the rate cut in September and beyond.

Recent economic data has shown that US inflation is moving closer to the Fed’s 2% target, while strong US consumer spending continues to mitigate hard landing risks. This may not warrant overly aggressive easing for now, which could see the Fed Chair downplay a 50 basis point (bp) September move but retain a data-dependent stance for subsequent meetings. With attention on labour conditions as well, Powell might prefer to wait for more cues from next month’s job report before committing to a larger cut.

• JP

Inflation

Friday, 23 August at 9.30am AEST

In June, Japan’s headline inflation held steady at 2.8%, while core inflation ticked higher to 2.6% from 2.5% previously. A rebound in services sector prices, coupled with stronger wage growth and concerns around the weak Japanese yen, has justified the 15 bp rate hike at the July meeting.

Policymakers indicated that the likelihood of achieving ‘sustainable and stable 2% inflation’ is increasing, and that they may keep raising rates if the economy and prices align with projections. The latest quarterly economic report forecasts lower inflation this fiscal year at 2.5%, down from 2.8%, but a higher inflation forecast for the next fiscal year at 2.1%, up from 1.9%.

A further rise in the inflation rate, particularly in the core component, will likely support the case for an additional rate hike towards the end of this year. However, given the recent market volatility, any upcoming steps will likely be taken cautiously by policymakers to avoid overreaction in global markets.

JP inflation rate chart

• US

Q2 2024 earnings

The US Q2 2024 earnings season continues, with earnings reports scheduled from companies including Target, Snowflake, Peloton, and Baidu.

US earnings date chart