Important Inflation Updates to Finish the Month

August 27th, 2024

RECAPPING LAST WEEK

U.S. equities rose and interest rates fell after Federal Reserve Chair Powell stated, “the time has come for policy to adjust”, the most direct signal yet that the FOMC intends to start cutting rates soon. The Russell 2000 index jumped 3.5%, while the S&P500 and Nasdaq Composite gained 1.4%. Energy was the only S&P500 sector to finish negative, pressured by lower crude oil prices.

U.S. Treasury yields eased across the curve after Powell also remarked in his Jackson Hole keynote that confidence has grown for inflation moving towards the Fed’s 2% goal. However, he also issued a note of caution on U.S. labor markets, indicating that the Fed’s focus has shifted to ensure the economy stays near full employment. Several data points released last week suggested that the jobs market may not be as strong as previous reports had indicated. The U.S. Labor Department, as part of its annual benchmark revisions to the non-farm payroll numbers, reported that actual job growth was nearly 30% lower in the 12-month period through March 2024. This was the largest revision since 2009, although it still represented more than two million jobs created.

 Additionally, a New York Fed survey showed a drop in employment along with a surge in those looking for work. However, a combination of a gradual (rather than sharp) economic slowdown and looser monetary policy may indicate a longer economic cycle and a more supportive environment for risk assets. In other news, U.S. business activity fell slightly in August but remained firmly in expansion territory, according to the S&P Global flash PMI index. Average prices charged for goods and services rose at a slower rate as businesses reported customers pushing back against high prices.

Retail giant Target saw its shares soar after reporting better-than-forecast earnings and revenue numbers, but the company struck a cautious tone on its outlook. New and existing home sales rose in July as buyers took advantage of falling mortgage rates. Overseas, the yen gained ground after Bank of Japan Governor Ueda signaled a path to future rate hikes if prices continue to climb. Japan’s core CPI rose 2.7% YoY, an uptick from the prior month. Canada’s annual inflation rate cooled to 2.5%, keeping a September interest rate cut on track. The country’s top two railroads locked out more than 9,000 workers on Thursday, triggering a potential rail stoppage that could damage North American supply chains. However, the Canadian government stepped in to reduce tensions, and a back-to-work order may be forthcoming soon. Finally, business activity in Europe and the UK showed surprising strength this month, although the former continued to be somewhat hampered by Germany’s manufacturing downturn.

THE WEEK AHEAD

The final week of August features important inflation updates from around the globe. In the U.S., the focus will be on Friday’s core PCE price index, which is expected to continue its steady but only slight year-over-year decline in growth. The Fed has indicated inflation risks are far more balanced today, and as a result, the FOMC sharpens its focus on employment.

Still, any upside surprises to PCE would be unwelcome. Elsewhere, no changes are expected for the second estimate of Q2 GDP on Thursday. There is significant anticipation for Nvidia’s second quarter earnings report, scheduled for release after market close on Wednesday. The company’s stock price has staged an impressive comeback from its early-August plunge. The rest of the U.S. economic calendar includes consumer confidence, durable goods orders, trade balance figures, and pending home sales.

On the international agenda, consumer price checks are due from Europe, Australia, and Japan. Germany and the EU release CPI reports on Thursday and Friday, respectively, and disinflationary trends are expected to persist. Finally, China’s manufacturing and services PMI will be reported Friday evening.

(source: Schwab)

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