Ahead of the game: 12 August 2024

US equity indices and ASX 200 endure a volatile week

US equity indices endured a volatile week as soft US labour market data sparked fears of an imminent US recession amid an aggressive unwinding of long positions in the Nikkei and short positions in the Japanese yen.

A similar story for the ASX 200; however, its woes were compounded by Reserve Bank of Australia (RBA) Governor Michele Bullock, who warned on Thursday that the RBA stands ready to raise rates to combat persistently high inflation, following up the hawkish messaging from Tuesday's RBA Board meeting.

Market scepticism towards the RBA's rate hike

The Australian interest rates market is far from convinced that the RBA will follow through on its hawkish jawboning, with a 25 basis point (bp) rate cut almost fully priced before year-end. Nonetheless, the RBA's hawkish bias does disadvantage the local stock market compared to its global counterparts, where central banks are either poised to ease or have already begun cutting rates.

The week that was: highlights

• US ISM Services Purchasing Managers' Index (PMI) rose to 51.4 from 48.8 prior
• Initial jobless claims fell 17,000 to 233,000 (consensus 240,000), soothing concerns over a looming economic slowdown
• In Europe, retail sales fell by -0.3% month-on-month (MoM) in June from +0.1% prior
• In China, the Caixin Services PMI rose to 52.1 in July from 51.2 in June
• The Reserve Bank of Australia (RBA) kept rates on hold at 4.35% and sounded hawkish
• Crude oil surged 3.54% this week to $76.10, supported by stronger-than-expected initial jobless claims, which eased fears around a US recession and ongoing geopolitical tensions in the Middle East
• Gold fell -0.78% this week to $2423, following a rebound in US yields and the US dollar
• Wall Street's gauge of fear, the Volatility Index (VIX), surged to 65.73 after the Nikkei dived 15% on Monday before easing back to 23.78.

Key dates for the week ahead

Australia & New Zealand

• AU: Westpac Consumer Confidence (Tuesday, 13 August at 10.30am AEST)
• NZ: Reserve Bank of New Zealand (RBNZ) interest rate decision (Wednesday, 14 August at 12.00pm AEST)
• AU: Employment (Thursday, 15 August at 11.30am AEST)
• NZ: New Zealand Business PMI (Friday, 16 August at 8.30am AEST)

China & Japan

• CN: New Yuan Loans (Monday, 12 August at no set time AEST)
• JP: Q2 Gross Domestic Product (GDP) Preliminary (Thursday, 15 August at 9.50am AEST)
• CN: Retail Sales, Industrial Production (IP), Fixed Asset Investment (FAI) (Thursday, 15 August at 12.00pm AEST)
• JP: Reuters Tankan Index (Friday, 16 August at 9.00am AEST)

United States

• US: Producer Price Index (PPI) (Tuesday, 13 August at 10.30pm AEST)
• US: Consumer Price Index (CPI) (Wednesday, 14 August at 10.30pm AEST)
• US: Retail Sales (Thursday, 15 August at 10.30pm AEST)
• US: IP (Thursday, 15 August at 11.15pm AEST)
• US: Michigan Consumer Sentiment (Saturday, 17 August at 12.00am AEST)

Europe & United Kingdom

• UK: Unemployment Rate (Tuesday, 13 August at 4.00pm AEST)
• GE: Zentrum für Europäische Wirtschaftsforschung (ZEW) Economic Sentiment Index (Tuesday, 13 August at 7.00pm AEST)
• UK: Inflation (Wednesday, 14 August at 7.00pm AEST)
• UK: GDP Q2 (Thursday, 15 August at 7.00pm AEST)
• UK: Retail Sales (Friday, 16 August at 4.00pm AEST)

Key events for the week ahead

• UK

Inflation

Wednesday, 14 August at 7.00pm AEST

In June, headline inflation edged up by 0.1%, keeping the annual rate steady at 2%, the same as in May and at levels last seen in mid-2021. The monthly rate of core inflation rose by 0.2%, the lowest in five months, resulting in the annual rate of core inflation remaining at 3.5% in June, its lowest level since 2021.

The tepid inflation data allowed the Bank of England to lower its benchmark rate by 25 basis points (bp) to 5% at its meeting in early August. The bank's decision to cut rates was on a 5/4 vote and described as "finely balanced."

This month, the market expects headline inflation to fall by -0.2% MoM, which would raise the annual rate to 2.3% year-on-year (YoY). However, no forecast is yet available for core inflation.

United Kingdom's core inflation chart

• US

Consumer price index

Wednesday, 14 August at 10.30pm AEST

In June, US headline inflation decreased by 0.1% MoM, against expectations of a 0.1% increase. This reduction brought the annual inflation rate down to 3.0% YoY, the lowest since June 2023, and below the anticipated 3.1%. The core inflation rate for June increased by 0.1%, leading to an annual rate of 3.3%, down from 3.4% the previous month and below the forecast of 3.4%.

For July, headline inflation is expected to rise by 0.2% MoM, with the annual rate holding steady at 3.0% YoY. Core inflation is also expected to increase by 0.2% MoM, with the annual core rate predicted to soften to 3.2% YoY.

Given the market's focus on growth and activity data due to concerns of a recession, we don’t expect inflation data to have a significant impact unless it surprises to the upside.

United States' CPI chart

• JP

Q2 preliminary GDP growth rate

Thursday, 15 August at 9.30am AEST

The recent decision by the Bank of Japan (BoJ) to raise rates by 0.25% has triggered a wave of sell-offs in global markets, as market participants took it as a cue for the highly-favoured carry trades in the Japanese yen to unwind.

With rate expectations leaning towards another rate hike from the BoJ by the end of this year, the upcoming GDP data will offer greater clarity around Japan’s economic strength and may influence the timing of the central bank’s next interest rate hike.

Expectations are for the preliminary estimate for Q2 GDP to come in at 2.1%, which would reverse the previous contraction of -2.0% in Q1. Focus may be on private consumption amid stronger wage growth, with any pick-up potentially anchoring the case for further hikes.

Japan’s GDP growth rate chart

• AU

Labour force report

Thursday, 15 August at 11.30pm AEST

In June, the Australian economy added 50,200 jobs, exceeding expectations of 20,000. The unemployment rate increased to 4.1% from 4.0% prior, following a rise in the participation rate to 66.9%, just 0.1 percentage points away from its record high of 67%.

Bjorn Jarvis, Australian Bureau of Statistics (ABS) head of labour statistics, said: "With employment rising by around 50,000 people and the number of unemployed growing by 10,000 people, the unemployment rate rose slightly to 4.1 per cent, and the participation rate rose to 66.9 per cent."

The June labour force report confirmed that the Australian labour market remains tight and is slowing gradually. At this early stage, the market expects the economy to add 25,000 jobs in July and for the unemployment rate to remain at 4.1%.

RBA Governor Michele Bullock warned on Thursday that the RBA stands ready to raise rates to combat persistently high inflation, following up the hawkish messaging from Tuesday's RBA Board meeting. The Australian interest rates market is far from convinced that the RBA will follow through on its hawkish jawboning, with a 25 bp rate cut almost fully priced before year-end.

Australia's unemployment rate chart

• CN

Retail sales, fixed asset investment, industrial production

Friday, 15 August at 12.00pm AEST

For June, China’s industrial production came in higher than expected at 5.3%, while fixed asset investment matched estimates of 3.9%. However, China’s retail sales underperformed, coming in at 2.0% versus the 3.3% expected. The big miss in retail sales continues to reflect sluggish domestic demand. Trade data and Purchasing Managers' Index (PMI) figures have been mixed as well, failing to provide assurances for a more sustained recovery just yet.

Overall, there are some doubts about whether China will be able to achieve its growth target of 5% in 2024, especially since China’s 2Q GDP dipped to 4.7%. Some catching up is clearly needed in the second half of the year, which may explain the People's Bank of China (PBoC)’s decision to lower both its one-year and five-year loan prime rates by 10 basis points last month.

Ahead, retail sales are expected to improve to 2.6% from the previous 2.0%. Industrial production may improve to 5.5% from the previous 5.3%, while fixed asset investment may stay unchanged at 3.9%.

China's retail sales chart

• US

Q2 2024 earnings

The US Q2 2024 earnings season continues, with earnings reports scheduled from companies such as Home Depot, Walmart, Cisco, and Alibaba.

United States' earnings dates