Equities Rise as US Soft Landing Hopes Rekindled

For the week ending 16 August 2024.

As of midday on Friday, global equities were substantially higher on the week on signs that US inflation continues to recede while growth remains moderate. The yield on the US 10-year Treasury note eased slightly from a week-ago to 3.89%, while the price of a barrel of West Texas Intermediate crude oil is little changed at $76.45. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 16 from 21 a week ago as market anxiety ebbed.

MACRO NEWS

What’s old is new again

Two weeks after softer-than-expected US employment data sent markets into a tailspin, a string of soothing US economic releases have revived hopes that the US Federal Reserve might achieve a soft landing. This week’s inflation data suggest that the disinflationary trend of recent months remains intact, with US consumer prices rising 0.2% month over month and 2.9% year over year, the first reading below 3% since early 2021. Core inflation rose 0.2% on the month and 3.2% on the year. While the data are improved, shelter price gains remain stubbornly high. Solid July retail sales figures on Thursday (+1% month over month) heightened the sense that last month’s employment data were likely a weather-related one-off rather than a sign of an impending economic tumble. On the employment front, Thursday’s mild initial jobless claims reading was soothing, falling to 227,000 after peaking at 250,000 at the end of July. Odds of a 50 basis point cut by the Fed at its September meeting fell to 25% from near 100% on the morning of 5 August. Investors still expect between three and four quarter-point cuts before the end of 2024.

IRA, CHIPS Act projects slow to unfold

Some 40% of the biggest US manufacturing investments announced in the first year of US President Joe Biden’s flagship industrial and climate policies have been delayed or paused, according to a Financial Times investigation. Companies said deteriorating market conditions, slowing demand and lack of policy certainty in a high-stakes election year have caused them to change their plans. According to the paper, $84 billion worth of projects have experienced a slowdown.

Low income consumers feeling stressed

US consumers are increasingly concerned about falling behind on their bills, with delinquency expectations rising to the highest level since the onset of the pandemic. The average likelihood that consumers would miss a minimum debt payment in the next three months rose to 13.3%, the highest level since April 2020, according to a Federal Reserve Bank of New York survey released Monday. That stress increased the most for people earning less than $50,000 a year and for those with a high school degree or less.

QUICK HITS

Fed Chair Jerome Powell will deliver his annual speech on the state of the US economy at the central banking forum in Jackson Hole, Wyoming on Friday, August 23.

July was one of the largest deleveraging episodes in the past 10 years for hedge-fund clients of Goldman Sachs’s prime brokerage, the bank said.

More than $66 billion has flowed into fixed income funds since the start of July, according to EPFR.

Fitch Ratings downgraded Israel’s credit rating to A from A+.

Amid slowing economic growth and declining inflation, the Reserve Bank of New Zealand cut its official cash rate 0.25% to 5.25% on Wednesday.

Negotiated wages in Germany are expected to rise 5.6% in 2024 according to WSI, a trade union think tank, the largest annual gain since its records began in 2000.

Japanese Prime Minister Fumio Kishida announced this week that he will not stand in the Liberal Democratic Party’s leadership election in September and will step down as PM. Kishida has suffered from low approval ratings in the wake of a 2023 political fundraising scandal.

Ukrainian President Volodymyr Zelensky said that his country is achieving its strategic goal by having forces advance deeply into Russia’s Kursk region.

Japan’s economy expanded at a much-firmer-than expected annualized 3.1% rate in the second quarter.

US Vice President Kamala Harris is expected to propose the first-ever federal ban on what she calls corporate price gouging in the food industry in an economic policy speech scheduled for Friday. Harris is also expected to put forward tax credits for first time home buyers and tax incentives geared toward boosting housing supply.

China economic activity data was in line with expectations in July, but residential property sales fell nearly 26% from a year ago.  Additionally, bank loans contracted for the first time in nearly two decades in July, falling the equivalent of about $10.7 billion from the month before.

OPEC+ expects the global demand for oil to grow more slowly in 2024 than earlier projected. It now expects a demand increase of 2.11 million barrels a day, down from 2.25 million barrels.

The Pentagon sent more US forces to the Middle East this week, including an aircraft carrier and a missile submarine.

Inflation in the United Kingdom fell 0.2% month over month and rose 2.2% year over year in July, a slight uptick from June. Services inflation rose at a slower pace, rising 5.2% in July, down from 5.7% in June. The nation’s unemployment rate fell to 4.2% from 4.4%, while retail sales rose 0.7% month over month in July, bouncing back after a cool, wet June. The Bank of England is expected to continue gradually cutting interest rates.

As of Friday’s close, Japan’s Nikkei 225 has recouped more than half of the decline that began in mid-July after posting its biggest weekly advance in more than four years.

US corporate bond spreads continue to retrace their early August widening as recession fears ebb. The options-adjusted spread on the Bloomberg Corporate Bond Index fell back to 96 bps at Thursday’s close from a wide of 1.11% on August 5.

Reserve Bank of Australia Governor Michele Bullock on Friday dismissed the prospect of a near-term rate cut.

THE WEEK AHEAD

Eurozone and Canadian inflation data will be released Tuesday. On Wednesday, minutes of the July meeting of the Federal Open Market Committee will be published. On Thursday, flash purchasing mangers’ indices for August will be released. Also on Thursday, the Federal Reserve Bank of Kansas City’s Jackson Hole Economic Policy Symposium begins. Fed chair Jerome Powell speaks at Jackson Hole Friday morning. 

EARNINGS NEWS

With about 93% of the constituents of the S&P 500 Index having reported for Q2 2024, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 11% compared with the same quarter a year ago, according to data from FactSet. This was faster than the 6% pace set in Q1. Sales growth is up 5.2% year over year.