Key Events & Data to Watch This Week [12th August - 16th August 2024]

All Eyes on U.S. CPI Data as Markets Brace for Potential Fed Moves

This week, the markets are fully focused on the U.S. Consumer Price Index (CPI) data for July. According to market consensus expectations, U.S. inflation is expected to increase by 0.2% on a monthly basis in July, following a 0.1% decline in the previous month. Annual inflation is anticipated to remain steady at 3%.

Recent inflation data from the U.S. suggests that price pressures in the country are easing, which is expected to provide the Federal Reserve (Fed) with enough confidence to begin interest rate cuts in September, allowing for a greater focus on the cooling labor market.

The employment report released earlier this month showed that U.S. employers significantly slowed down their hiring, and the unemployment rate saw an increase above the Fed’s projections.

This has fueled concerns about a potential recession in the U.S. economy and has led to market pricing of a total 100 basis points interest rate cut this year (50 bps in September, and 25 bps each in November and December).

Last week, speculation of an emergency rate cut before the September meeting, driven by recession fears, significantly increased market volatility and placed considerable pressure on global markets.

The Cboe Volatility Index (VIX), which measures the magnitude of price movements in the market, surged to its highest levels since the pandemic earlier last week. Economists are warning that the CPI data to be released on Wednesday could again increase market volatility.

On the other hand, some Fed officials continue to issue cautious statements. Federal Reserve Governor Michelle Bowman said on Saturday that the progress made in inflation is encouraging, but inflation remains disturbingly above the Fed’s 2% target. Bowman indicated that she might not be ready to support a rate cut and would remain cautious.

A similar statement came from Kansas City Fed President Jeffrey Schmid last week. While traders are almost certain that the Fed will implement at least three rate cuts this year, some Fed officials seem determined to maintain their cautious stance.

Declining Treasury Yields Continue to Support Gold Prices

U.S. Treasury yields are slightly recovering after a significant drop caused by last week's concerns. The 2-year yields fell to as low as 3.87% before rising to 4.05% as concerns eased somewhat. Meanwhile, the 10-year yields have recovered from last week's levels of 3.78% to 3.94%. However, this recovery does not change the fact that yields have been in a downtrend since May.

The decline in Treasury yields supports non-yielding precious metals. GOLD continues to trade near the historically high levels recorded last month.

According to the World Gold Council's Gold Return Attribution Model, the main contributors to the rise in gold prices in July were the falling Treasury yields and the weakening USD. The continued downtrend in Treasury yields could remain one of the main factors supporting GOLD.

Japan's Economic Growth in Focus as Yen Appreciation Raises Concerns

Japan’s economy is experiencing turbulent times following the Bank of Japan's (BoJ) interest rate hike decision. The BoJ's rate hike has led to a significant unwinding of carry trade positions, increasing market volatility.

The Japanese stock market saw its steepest declines since 1987, driven by concerns that the sharp rise in the yen would negatively impact exporters.

In response, BoJ Deputy Governor Shinichi Uchida reversed Governor Ueda's signals for further rate hikes by stating that there would be no rate increase as long as market instability persists.

This statement helped calm the markets but also raised doubts among market participants about how much they could trust the BoJ’s communications, leading the yen to give back some of its recent gains against the USD.

The decline in the yen has slightly slowed the unwinding of carry trade positions. According to calculations by JPMorgan economists, three-quarters of carry trade positions have been closed. On the other hand, some economists predict that the unwinding will continue in the future and expect the yen to keep appreciating towards the 100.00 level against the U.S. dollar.

While the appreciation of the yen has the potential to ease currency-driven price pressures, it is also expected to pressure economic growth due to its potential negative impact on the export sector.

Japan's economy contracted by 0.5% in the first quarter of 2024, but the second-quarter growth data, which is set to be released this week, is expected to show a modest recovery. Market participants anticipate a 0.5% quarterly growth in the economy following the previous contraction, while the annual growth is expected to reach 2.1% after a prior decline of 1.8%.

Economists' previous forecasts suggested a stronger recovery for Japan's economy in the second half of the year. The main reasons behind this expectation were wage increases and the positive effects of a weak yen on exports. However, there are concerns that the recent rise in the yen could negatively impact exports, which may lead to downward revisions in growth expectations.

Key Chinese Data Releases Expected Amid Growing Economic Concerns

Thursday will be a significant day for Chinese data, with the release of July’s Industrial Production and Retail Sales figures.

Market participants expect Retail Sales to rise to 2.6%, following a 2% increase in June. However, the downward trend that has persisted since the beginning of the year is expected to continue.

On the Industrial Production side, markets anticipate that the growth rate will remain steady at 5.3%, the same as the previous figure. This figure indicates a pace that will lower the average growth rate since the beginning of the year.

Data coming out of China continues to fuel concerns about the Chinese economy. On Friday, China’s balance of payments report confirmed global investors' pessimism towards the Chinese economy.

The figures revealed that foreign investors withdrew a record amount of capital from China in the second quarter, with $15 billion in direct investment leaving the country during this period.

According to Bloomberg, if foreign investors continue to pull their investments from China in the second half of the year, this would mark the first net annual outflow since 1990.

Middle East Tensions Weigh on Market Sentiment Amid Iran-Israel Standoff

Tensions in the Middle East continue to undermine market risk appetite. Following last month’s assassination of a Hamas leader, Iran’s response to Israel is awaited. Over the weekend, statements from Tehran reiterated a firm resolve to respond to Israel.

Geopolitical risks have a direct impact on the oil market. With Iran responsible for approximately 4% of global oil production, escalating tensions between the two countries are heightening fears of potential disruptions in the region's oil supply.

In the short term, these geopolitical risks are a major driver of rising oil prices. However, concerns about the Chinese economy and the U.S. economic outlook may temper these increases.