Fed Chair Jerome Powell recently highlighted that the latest inflation figures bolster confidence in achieving the country’s 2% inflation target. This dovish stance may suggest the likelihood of a rate cut in September.
This week, we found that retail sales in the US, excluding autos, increased by 0.4% in June, outperforming expectations. The Retail Sales Control Group, used for GDP estimations, surged by 0.9%, indicating robust consumer spending. This positive trend could lead to upward revisions in GDP growth estimates for the second quarter. Strong retail sales in the past have often translated to a more optimistic market outlook.
However, the US job market shows signs of softening as initial jobless claims rose to 243,000, surpassing the anticipated 225,000. A rising trend in jobless claims may hint at economic slowdown. This could pressure the Fed to consider further easing measures to support the labor market.
In the UK, June’s headline inflation was slightly higher than expected at 2%, with core inflation steady at 3.5% year-on-year. This persistent inflationary pressure may prompt the Bank of England to maintain or tighten monetary policy.
The European Central Bank has kept interest rates unchanged, with President Lagarde emphasising on a data-driven approach for future decisions.
China’s economic performance show a slowdown, with the second-quarter GDP growth at 4.7% year-on-year, below the 5.1% estimate. This marks the slowest growth rate since the first quarter of 2023. Housing prices continued to decline, falling by 4.5% year-on-year. The slowdown may lead to further stimulus measures by the Chinese government.
Japan is experiencing rising inflation, with core inflation reaching 2.6% year-on-year in June. The Bank of Japan may need to reconsider its accommodative stance if inflation continues to rise.
In Australia, the labor market added 50,200 jobs in June, but the unemployment rate increased to 4.1% as the participation rate rose to 66.9%.
Commodity prices are reflected in shifting investor sentiment. Crude oil prices dropped by 1.72% this week to $80.80 per barrel, ending a four-week winning streak. Gold prices increased by 1.39% to $2444, hitting a new record high of $2483.
Market sentiment, as measured by the VIX index, surged to 15.92 from 12.45, indicating heightened market uncertainty.
Looking ahead, we see several economic events that could influence market dynamics.
In Japan, the Jibun Flash PMIs on Wednesday, 24 July will provide insight into business growth. Recently, Japan’s services PMI fell to 49.4 in June from 53.8 in May, marking its first contraction since August 2022 due to reduced domestic demand from high prices, though international sales remained strong due to a weak yen.
Manufacturing PMI stayed flat at 50.0. The upcoming PMI data will be key to determining if new business growth will recover.
In Europe, the HCOB Flash PMIs, also released on Wednesday, will be closely watched following the ECB’s decision to maintain rates. June’s composite PMI dropped to 50.9 from 52.2, breaking a five-month upward trend. July’s forecast suggests a slight improvement to 51.2.
The market is currently pricing in a potential rate cut in September based on these readings.
In the US, the Q2 GDP Growth Rate released on Thursday, 25 July, will be a key indicator. The first quarter’s GDP growth was revised down to 1.4%, but an improvement to 1.8% is expected for the second quarter, driven by strong retail sales.
The Atlanta Fed estimates an even higher growth rate of 2.5%. A strong GDP reading could delay anticipated rate cuts by the Fed.
Finally, US Core PCE Inflation data is anticipated for Friday, 26 July. In May, core PCE inflation remained at 2.6% year-on-year, with a modest monthly rise of 0.1%. June’s expectations are for a 0.1% month-on-month increase in headline PCE, reducing the annual rate to 2.5%, and a 0.2% month-on-month rise in core PCE, maintaining the annual rate at 2.6%. These figures are critical for the Fed’s policy decisions.
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