Weekly Market Outlook – Get ready for a relatively quiet week on the economic front, with the spotlight shining on the business surveys and the highly anticipated Fed’s annual economic symposium. Brace yourself, as Chairman Powell’s signals about interest rates could determine the fate of the almighty dollar! With US yields on the cusp of a breakout, this event will be one you don’t want to miss!
Economic Data Highlights Scheduled For August 21 Week:
The economic focus in the week of August 21 takes a backseat to the annual Jackson Hole Symposium from August 24-26. This year’s theme is “Structural Shifts in the Global Economy.” While academic in tone, the event gathers policymakers, offering insights into their policy leanings.
Key attention will be on US central bankers’ remarks about Federal Reserve monetary policy. Powell’s “Economic Outlook” speech at 10:05 ET on Friday is crucial. Markets seek signals on upcoming FOMC interest rate decisions. The immediate question is a potential rate hike in the September 19-20 meeting. Additionally, observers will analyze inflation, employment outlooks, and whether the Fed’s tightening cycle is concluding.
Upcoming economic data might feel outdated due to recent mortgage rate increases. Home sales data for June won’t reflect these changes. Existing home sales (Tuesday) and new single-family home sales (Wednesday) are impacted. Limited housing inventory squeezes the market, with buyers seeking new homes due to the scarcity of existing options. New homes now constitute about a third of sales compared to the historical one-fifth.
Homes with mortgage rates under 6 percent favor renovation over giving up affordable loans, delaying sales. The 30-year fixed rate mortgage stands at around 7 percent, a 20-year high. Some buyers opt for adjustable-rate mortgages, anticipating refinancing at lower rates. This sets the stage for a wave of refinancing when rates drop sufficiently to secure fixed rates below the original ARM rate.
* - Important
Monday, August 21:
- NZD: Trade Balance
- GBP: Rightmove HPI m/m
- CNY: 1-y Loan Prime Rate*
- CNY: 5-y Loan Prime Rate*
- CAD: NHPI m/m
Tuesday, August 22:
- JPY: BOJ Core CPI y/y*
- CHF: Trade Balance
- ALL: BRICS Summit – Day 1*
- USD: Existing Home Sales*
- USD: Richmond Manufacturing Index*
- AUD: CB Leading Index m/m
Wednesday, August 23:
- USD: FOMC Member Goolsbee Speaks
- USD: FOMC Member Bowman Speaks
- USD: FOMC Member Goolsbee Speaks
- NZD: Retail Sales q/q*
- AUD: Flash Manufacturing PMI
- AUD: Flash Services PMI
- NZD: Flash Manufacturing PMI
- EUR: Flash Manufacturing PMI*
- EUR: Flash Services PMI*
- ALL: BRICS Summit – Day 2*
- GBP: Flash Manufacturing PMI*
- GBP: Flash Services PMI*
- CAD: Core Retail Sales m/m*
- CAD: Retail Sales m/m*
- USD: Flash Manufacturing PMI*
- USD: Flash Services PMI*
- EUR: Consumer Confidence
- USD: New Home Sales*
- USD: Crude Oil Inventories
Thursday, August 24:
- ALL: BRICS Summit – Day 3*
- CAD: Corporate Profits q/q
- USD: Unemployment Claims*
- USD: Core Durable Goods Orders m/m*
- USD: Durable Goods Orders m/m*
- USD: FOMC Member Harker Speaks*
- ALL: Jackson Hole Symposium – Day 1*
Friday, August 25:
- JPY: Tokyo Core CPI y/y*
- EUR: German IFO Business Climate*
- USD: FOMC Member Harker Speaks*
- USD: FOMC Member Harker Speaks*
- USD: Revised UoM Consumer Sentiment*
- USD: Fed Chair Powell Speaks*
- ALL: Jackson Hole Symposium – Day 2*
Saturday, August 26:
- EUR: ECB President Lagarde Speaks*
- GBP: GfK Consumer Confidence
- ALL: Jackson Hole Symposium – Day 3*
Don’t miss out on important updates, upcoming events, significant announcements, or important data releases with the Global Economic Calendar!
United States/USA: How Cautious will Powell be?
Once a year, FOMC officials gather at their summer retreat in Jackson Hole, Wyoming for an academic symposium on monetary policy and economic trends. Fed leaders have historically used this event to signal major strategy shifts. Last year, Chairman Powell used this platform to announce the beginning of a tightening cycle, resulting in a powerful rally in US yields and impacting the dollar and stocks.
However, the landscape has changed, with moderated inflation but concerns regarding core inflation and the tight labor market. Economic data shows robust growth, particularly in the housing market. Despite progress on the inflation front, it is likely still premature for the Fed chief to celebrate victory. His message is expected to be flexible, with the possibility of maintaining rates or raising them again if inflation persists.
The event starts on Thursday, with the Fed chief usually speaking on Friday. Powell’s comments will have a significant impact on US yields and the dollar, amid a favorable outlook for the US economy compared to Europe and China. Technical factors also support a stronger dollar.
Last week, the Dollar Index rose above the 200-day moving average (~103.25) for the first time this year. It's approaching the (61.8%) retracement of the decline from the year's high in early March (~105.90), around 103.50. Next target: late May highs (~104.40-104.70). After a five-week rally, the longest since May 2022, momentum indicators are stretched. Momentum traders may tighten stops on long positions. A break of the 102.80 area could start forcing them out.
Eurozone/EURO: Europe’s flash PMI highlights!
In the upcoming week, we’ll be looking out for the preliminary August PMI as well as the results of the IFO August survey in Germany. Despite the ongoing economic challenges, officials don’t seem too keen on providing additional support through fiscal or monetary measures.
Interestingly, the swaps market is indicating just over a 50% chance of a rate hike next month. On the currency front, the euro hasn’t been able to sustain even the slightest upward movements. In fact, it hasn’t traded above the high of the previous session since August 10, and it recently hit new lows, reaching levels unseen since July 6, at around $1.0840.
While momentum indicators are showing signs of exhaustion following a five-week decline, the speculative positioning in the futures market suggests the risk of further liquidation. Chart support can be found in the $1.0790-$1.0800 range, followed by $1.0755. Given the diverging economic performance, we might expect a test of the late May low near $1.0635.
United Kingdom/GBP: BoE might be aggressive!
Last week’s data was quite interesting. We saw some new highs in average weekly labor earnings, and a slowdown in headline CPI, but the core rate remained unchanged. On top of that, July retail sales took a bigger hit than expected.
All these numbers made people think that the Bank of England might take a more aggressive stance. The market now puts the odds of a 50 bp interest rate hike at around 25%, which is quite a change from before. This shift in expectations also explains why the pound was the only G10 currency that managed to rise against the dollar. However, despite these developments, the pound is still stuck in a trading range between roughly $1.26 and $1.28.
We’ll have to keep an eye on how things progress, but it seems like the pound could lead the way up when the dollar’s rally starts to lose steam. Apart from all this economic news, the UK will also be reporting on its fiscal position, with the market expecting the budget deficit to widen this year compared to last year.
China/CNY: Chinese officials appear desperate.
Chinese officials managing the world’s second-largest economy seem increasingly desperate. Chinese officials have announced several initiatives to reduce dollar purchases and encourage dollar sales, cut mortgage rates, and deter equity sales. The policy divergence has led Chinese 10-year bonds to trade at a 170 bp discount to US Treasuries, the largest discount since 2007.
Chinese stocks are performing poorly and have given back all their recent gains. Foreign direct investment flows have significantly slowed. The 15 bp cut in the one-year Medium-Term Lending Facility suggests a cut in loan prime rates next week. While Beijing is not defending a specific exchange rate with the dollar, they are trying to push against a one-way market. The yuan has risen in only three out of 14 sessions this month.
Reports circulated that China wanted state-owned banks to sell dollars after the yuan had fallen for five consecutive sessions and was heading toward new lows for the year. This move by Beijing suggests a higher level of concern. Nonetheless, the yuan was sold the following day before the weekend, but the yen’s continued recovery against the dollar seemed to help lift the yuan as well.
Japan/JPY: Tokyo’s CPI in the spotlight!
Alongside the stronger-than-expected Q2 GDP, Japan also reported that the deflator accelerated to 3.4% from 2.0%. However, the growth in Japan wasn’t really driven by domestic demand, but rather by stronger exports, especially in hospitality services like tourism. This supports the BOJ’s argument that price pressures are not solely driven by demand.
Now, all eyes are on Tokyo’s CPI at the end of the week, which usually gives a good indication of the national figures. We expect Japanese inflation to start easing soon. Another thing to watch is the BOJ’s reaction. With global yields rising and Q2 GDP pushing Japanese yields higher, they are approaching levels where the BOJ has previously intervened in the bond market.
At the same time, the dollar is trading at levels that the BOJ stepped in to stabilize last year. We don’t believe that the BOJ is defending any specific level, but it’s worth noting that the dollar recently reached its highest level in nine months at around JPY146.55 on August 17, and found support ahead of the weekend near JPY145.00.
The eight-day rally has paused due to China increasing efforts to stabilize the yuan's decline and the slight pullback in the US 10-year yield from about 4.33% to almost 4.20%. While the momentum indicators are currently stretched, we think that a break of the JPY144.60 area is needed to indicate the end of this bull run.
Canada/CAD: Will the job surge lead to increased retail sales?
In June, Canada added nearly 110k full-time jobs, equivalent to more than a million in the US nonfarm payrolls. The focus now is whether this job surge translates to stronger retail sales. Canada’s retail sales saw a modest average increase of 0.2% in the first five months, but the data reveals volatility with three months showing swings of 1% or more.
The Canadian dollar extended its downtrend for the fifth consecutive week, reaching a two-month high near CAD1.3575. Momentum indicators suggest limited signs of a turnaround. The next important chart areas to watch are the Q2 highs (~CAD1.3650-70). The US dollar has remained above the five-day moving average (~CAD1.3520) this month, but a close below could indicate a possible stall in its run-up.
Australia/AUD: Flash PMI stands out in Aussie calendar!
The composite PMI fell below the 50 boom/bust level in July, remaining in contraction territory this month. The Aussie peaked at $0.6900 in June, dropped to about $0.6600, then rallied back to $0.6900 in mid-July. Since then, it has fallen by around 7.75% to new lows for the year.
The Aussie hit $0.6365 last week, with the potential double top measuring objective closer to $0.6300. Initial resistance may be seen around $0.6450-65. The five-week slide has stretched momentum indicators, despite the continued decline.
How Foreign Currencies Hedge Against Inflation?
Forex, one of the largest and most liquid financial markets globally, serves as an excellent tool for inflation hedging. Unlike other asset classes, the forex market behaves differently during economic crises. In times of economic slowdown or increased inflationary pressures, currencies of stronger economies gain value, while those of weaker economies tend to lose value.
Successful hedging against inflation requires investing in major economies’ currencies, providing better protection from exchange rate changes. The most effective inflation hedging currencies are from economies with strong net foreign asset positions. These currencies historically strengthen during times of “risk off.”