Recent data releases have placed a cloud over the robustness of the US economy. Following unexpected downturns in job openings and consumer confidence on Tuesday, Wednesday further witnessed disappointing numbers from the ADP employment report and a slight downward adjustment in Q2 GDP growth.
Dollar Dips as Soft US Economic Indicators Pile Up
Private sector employment for August, as reported by ADP, showed a below-expected rise by 177k. This has intensified anticipations that the upcoming nonfarm payrolls report might also miss its mark. However, immediate attention shifts to the core PCE price index, a key metric for the Federal Reserve's inflation goals.
USD Declines Amid Growing Indications of US Economic Stagnation; Core PCE on the Radar
In parallel, the Euro witnessed fluctuations following inconsistent CPI numbers, while stocks benefited from dwindling expectations of a Fed rate hike, coupled with stimulating measures from China. Despite the somewhat murky data this week, upcoming reports could paint a different picture. The core PCE price index is projected to inch up from 4.1% to 4.2% y/y for July. If realized, it suggests the path to achieving 2% inflation may be protracted, supporting the 'higher for longer' narrative. Additionally, forecasted figures for personal income and spending might reveal a 0.7% m/m spike in July, hinting at increased consumer expenditure.
Stock Markets Reap Benefits from Subpar Economic Data
The possibility of one more rate hike by the Fed in the aftermath of Powell's Jackson Hole address was initially at 65%. Yet, this likelihood has dwindled, with investors now estimating a tad below 50% chance of a rate increase in November. This abrupt sentiment shift has stymied both the US dollar and Treasury yield rallies. Just last week, the dollar touched 12-week peaks against major currencies, only to approach two-week lows subsequently.
Conversely, Wall Street displayed optimism. This sentiment stems from hopes of a Fed rate hold in September, potentially leading to rate reductions by May next year. Nevertheless, pending economic releases will play a pivotal role in shaping investor sentiment. Currently, buoyancy prevails, as both European stocks and US futures trend upwards.
China's Economic Landscape: Mixed Signals
Asia's equity markets presented a mixed bag. Lingering apprehensions concerning China's economic trajectory weighed down shares from China and Hong Kong. This was in spite of Beijing's intensifying support for its beleaguered real estate sector, including relaxed mortgage prerequisites in major cities and anticipated mortgage rate cuts from state-owned banks. Yet, these measures were eclipsed by China's premier property developer, Country Garden, warning of potential defaults following a $6.7 billion loss.
While recent PMI data underlines the continued contraction in manufacturing and a tapering in services, silver linings are present. The manufacturing downturn seems to be slowing, hinting at an imminent revival. Nevertheless, assets influenced by China's economic health, like the Australian dollar, might experience pressure. However, recent positive Q2 capital expenditure data from Australia lent some support.
Euro Fluctuates Amid Mixed CPI Data
The Euro retreated, offsetting its recent ascent, as hotter-than-expected preliminary CPI figures for August were perceived as a short-lived hindrance in battling inflation. Despite expectations of a decline to 5.1%, headline inflation remained static at 5.3% y/y for August. This unexpected rise, aligned with Germany's alarming flash estimates, augmented the chances of a European Central Bank rate hike in September, bolstering the Euro. Yet, the market's nerves were somewhat calmed by a surprising decrease in CPI that excludes food and energy costs, signaling that Eurozone inflation might be on a downtrend soon. The Euro, at the time of reporting, was trading 0.5% lower, dipping below $1.09.
