Ahead of the game: August 28, 2023

US equity markets were cautious this week ahead of Fed Chair Powell's speech at the Jackson Hole Economic Symposium despite the quarter's most anticipated earnings report from Nvidia smashing expectations.

For the ASX 200, this week was all about another big week of company earnings reports and bringing some late respectability to the scoreboard for August, which at last week's low saw the ASX 200 down 4.40%. Before traders consider rushing to open long positions in the ASX 200, a reminder that the worst month of the year, September, is just around the corner.

• Nvidia posted impressive Q2 earnings with revenues of $13.51bn (vs. $11.1bn expected) and EPS of $2.70 (vs. $2.07 expected)
• US Composite Flash PMI for August dropped to 50.4 from 52, missing the 51.5 expectation
• UK Flash Composite PMI for August fell to 47.9 from 50.8, well below the 50.4 forecast
• EA Flash Composite PMI for August declined to 47 from 48.6, below the 48.5 prediction
• Chinese Central Bank's rate cuts fell short of expectations, impacting concerns over the economy
• S&P lowered credit ratings for several US regional banks due to higher funding costs and real estate exposure
• The US dollar index (DXY) reached an eleven-week high
• Gold attempted to end its five-week decline, trading above $1920
• Wall Street's fear gauge, the Volatility index (VIX), dropped by -0.46% to 17.21.

• AU: Retail Sales, Monday, August 28, 11:30 am AEST
• AU: RBA Bullock Speech, Tuesday, August 29, 5:40 pm AEST
• AU: Monthly CPI Indicator, Wednesday, August 30, 11:30 am AEST
• AU: Building Approvals, Wednesday, August 30, 11:30 am AEST
• NZ: ANZ Business Confidence, Thursday, August 31, 11:00 am AEST

• CN: NBS PMIs, Thursday, August 31 at 11:30 am AEST
• CN: Caixin Manufacturing PMI, Friday, September 01 at 11:45 am AEST

• US: US JOLTS Job Openings, Wednesday, August 30 at 12:00 am AEST
• US: Core PCE Price Index, Thursday, August 31 at 10:30 pm AEST
• US: Non-Farm Payrolls, Friday, September 01 at 10:30 pm AEST
• US: ISM Manufacturing PMI, Saturday, August 17 at 12:00 am AEST

• DE: Inflation, Tuesday, August 30 at 10:00 pm AEST
• EU: Inflation, Thursday, August 31 at 7:00 pm AEST

• AU

AU monthly CPI indicator

Wednesday, August 30 at 11:30 am AEST

In August, the Reserve Bank of Australia (RBA) kept its cash on hold at 4.10% for a second consecutive month. This decision based on similar reasons as in July - to assess the impact of a cumulative 400bp or rate hikes and evidence that a sustainable rebalancing between supply and demand is under way.

Q2 inflation numbers released in late July were softer than expected. The annual headline inflation rate eased to 6% vs. 6.2% expected. At the same time, the annual rate of core inflation (the Trimmed Mean) eased to 5.9% vs. 6.0%.

The RBA explained its decision by noting that, while inflation remains "still too high at 6 per cent", recent data is "consistent with inflation returning to the 2-3% target range over the forecast horizon" based on the provisor that productivity growth "picks up".

On Wednesday the latest inflation update with the monthly CPI indicator for July will be released.

The market is looking for the Monthly CPI indicator to fall to 5.2% year-on-year from 5.4% in June. An inline or softer-than-expected number will see the RBA stay on hold in September. Currently, there are just 5bp of rate hikes priced before year-end.

ABS monthly CPI indicator chart

• US

Core PCE price index

Thursday, August 31 at 10:30 pm AEST

Last month, the Personal Consumption Expenditure (PCE) price index increased by 3% year-on-year in June, the lowest reading since March 2021, falling from 3.8% the previous month. The Federal Reserve Bank’s (Fed’s) preferred measure of inflation, the Core PCE Price Index, which excludes food and energy, increased by 4.1% year-on-year in June, easing from 4.6% the previous month.

This month, the PCE Price Index is expected to increase to 3.3% from 3% prior. The Core PCE Price Index is expected to rise to 4.2% year-on-year from 4.1% prior.

Core PCE at 4.2% is still twice the Fed’s inflation target of 2% and one of the key reasons the rates market is pricing in the Fed Funds rate to stay above 5% during the first half of 2024.

Core PCE price index

• US

Non-farm payroll

Friday, September 1st at 10:30 pm AEST

The recent Federal Open Market Committee (FOMC) minutes failed to reflect the level of unity among policymakers to pause rates. The minutes stated: “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy.”

With US unemployment at 3.5% in July and job additions comparable to pre-Covid levels, there are concerns that any resilience in the labour market may drive the reacceleration in demand and make the case for high-for-longer rates. Therefore, a softer read from the upcoming job report may be sought to provide more flexibility for the Fed’s policies, particularly in the aspect of rate cuts if economic conditions were to take a turn for the worse.

The current consensus is for 168,000 job gains in August, a tad softer than 187,000 in July, while unemployment is expected to stay resilient at 3.5%. US wage growth is expected to moderate to 0.3% month-on-month from previous 0.4%, and 4.3% year-on-year from previous 4.4%. Any significant upside surprise will likely add to calls for a high-for-longer Fed rate outlook.

US non-farm payroll chart

• CN

NBS PMIs

Thursday, August 31 at 11:30 am AEST

The set of purchasing managers’ index (PMI) readings out of China next week is likely to stay subdued, with manufacturing activities to remain in contractionary territory for the fifth straight month (previous 49.3). Likewise, reopening momentum for its services sector may continue to taper, in line with its weakening trend since March this year.

Its non-manufacturing PMI has underperformed market expectations over the past four months, coming in at 51.5 in July, which could see it inch closer towards the key 50-level separating expansion and contraction territory next week.

Thus far, much is required for a concrete recovery in China as support from authorities has been underwhelming, sentiments around the property sector remains weak and still-sluggish global demand overhangs its exports. A low-for-longer growth outlook remains the story for now, with major banks dropping their forecasts for China’s gross domestic product (GDP) growth this year to below the 5% target.

China's NBS PMI chart