All eyes on Jackson Hole
August 19th, 2024
RECAPPING LAST WEEK
Better than expected U.S. inflation and retail sales data decreased near- and long-term recession risks, propelling equity indices to a strong performance week. The Nasdaq Composite index jumped more than 5%, while the S&P500 and Russell 2000 rose 4% and 3%, respectively. S&P500 sector breadth was solidly bullish as technology leapt more than 7% and consumer discretionary rose 4%.
Crude oil prices fell nearly 2% after OPEC cut its growth forecast for 2024 on flagging demand from China. U.S. Treasury yields ended the week lower after a benign CPI report helped maintain investors’ expectations for a Federal Reserve rate-cutting cycle to begin next month. Consumer prices rose 0.2% MoM and 2.9% YoY in July, meeting expectations, while producer prices gained less than forecast. One-year inflation expectations held steady at 2.9% according to the consumer sentiment and New York Fed surveys, while the three-year outlook fell sharply to 2.3%. Meanwhile, consumer spending held up better than expected, with retail sales rising 1% last month.
Additionally, consumer bellwether Walmart reported strong earnings and raised its outlook. Jobless claims dropped to 227k, calming labor market concerns. Manufacturing remained a weak spot in the increasingly services-dominated U.S. economy. Industrial production fell in July due to a larger- than-expected impact from Hurricane Beryl. Manufacturing fell into contraction for the first time since January in the Philadelphia Fed region. New home construction fell to the lowest level since April 2020, while retailer Home Depot said customers were spending less on home improvement projects due to high interest rates. Lumber prices have plunged from 2021’s record highs, settling near all-time lows.
Overseas, China’s retail sales saw a seasonal uptick, but industrial production
and fixed-asset investment numbers missed the mark. More calls for fiscal stimulus and interest rate cuts are likely as bank lending tumbled to 15-year lows in July. China also warned bond investors that the government will not tolerate speculative activity that threatens market disruption. Japan’s Q2 GDP exceeded expectations, rising 0.8% after falling 0.6% in Q1. The country’s producer prices rose 3.0% YoY, the sixth straight month of acceleration. In the UK, CPI rose to 2.2% in July, with services inflation falling to 5.2% from 5.7%. Steady but not-too-hot GDP growth and consumer spending, along with a stable labor market with wage gains in check, fueled optimism that the Bank of England will continue cutting rates.
THE WEEK AHEAD
This week’s signature event will be the annual Economic Policy Symposium, held in Jackson Hole from Thursday through Saturday. It is attended by central bankers, finance ministers, and economists from around the world. Many market observers expect Fed Chair Powell’s Friday keynote to set the table for a rate cut at the September 18 FOMC meeting. With inflation risks broadly balanced, the size of the cut may solely depend on the August jobs report, which will be released on September 6.
Fed funds futures currently imply four 25bps cuts by January. The minutes from the Fed’s August meeting will arrive on Wednesday but may be less informative than Powell’s expected remarks at Jackson Hole. The rest of the U.S. economic calendar includes August’s flash manufacturing and services PMIs, along with new and existing home sales. The flash PMI results will also be scrutinized on the international side, particularly in Germany, which has seen rapidly declining manufacturing activity this year. Inflation updates are scheduled for Canada on Tuesday and Japan on Thursday.
Finally, turning to China, the central bank may feel it’s too soon to make further adjustments later tonight, after last month’s surprise rate drop. While the country’s economy remains sluggish, its depreciating currency may augur against additional supportive monetary policy moves.
(Source: Schwab Advisors)