Monthly Market Outlook

The Jackson Hole symposium once again produced a key signal for the Federal Reserve’s monetary policy. Markets finally received a clear message from Powell that interest rates are expected to decrease in September. Stock markets recovered after corrections in the second half of July and early August. Now, all eyes will be on the U.S. jobs report and the pace of the Fed’s rate cuts.?

Macro View?

The Federal Reserve is heading toward key decisions as data shows the economy is nearing a dangerous path. The latest data once again indicates that inflation is approaching the 2% target, but there is still a way to go. However, the gap between the federal funds rate and inflation has widened significantly in recent months. So far, the U.S. economy has remained strong despite high inflation and elevated interest rates. The main reason for this resilience is strong household consumption, which has kept the economy active. However, this is beginning to take a toll on households.?

Over the past two years, the average monthly personal income gain was 0.4%, while the average personal spending increase was 0.5%. This gap has been filled by savings. As households tapped into their savings to maintain consumption, the savings rate fell to dangerous levels, while credit card debt piled up. Some of the increase in credit card debt can be attributed to changes in shopping habits (online shopping) post-COVID-19, but the accumulation of debt is still concerning. While this situation is dangerous, it is not yet severe enough to cause significant harm to the economy—provided there is no trigger that sparks a major shift. However, that trigger could potentially come from the job market.?

Sahm Rule: Whenever the three-month average of the unemployment rate rises by 0.50 percentage points relative to the three-month average of the previous 12 months, the U.S. has entered a recession.?

The Sahm Rule is currently at 0.53, surpassing the critical 0.50 threshold. The chart below illustrates the last three recessions, showing both the unemployment rate and the federal funds rate. Near the end of the rate-hiking cycle, the unemployment rate typically dips before starting to rise. This has already occurred. Following this, the unemployment rate tends to accelerate upward as the Federal Reserve urgently begins a rate-cutting cycle, coinciding with the U.S. entering a recession. The classic scenario might repeat itself, at least according to the Sahm Rule.?

To sum up, there is a risk that unemployment could rise further, while households have already depleted their savings and accumulated increased credit card debt. In light of this, the upcoming employment report will be crucial for the Federal Reserve in determining the severity of rate cuts. There are two key factors to consider ahead of the report. The first is the expiration of pandemic-era aid for local governments, which may lead to layoffs, particularly of education workers. The second is the temporary layoffs due to Hurricane Beryl. How many of these layoffs are truly temporary and how many workers will return to their jobs will significantly impact the nonfarm payroll data.?

The next question for traders is how steep the Federal Reserve’s rate-cutting path will be. So far, markets are pricing in a 25 basis point cut over the next eight meetings, with rates expected to reach 3.50% by July next year. The first cut is anticipated to be 25 basis points as well, though markets currently see a 25% chance of a 50 basis point cut from the Federal Reserve. We believe this is a reasonable market expectation. However, if the next employment report disappoints significantly, expectations for a 50 basis point rate cut could resurface, intensifying fears of a hard landing. In the short term, this might negatively affect stock markets, and if the Federal Reserve also disappoints, markets could remain under pressure for the next few weeks following the report. However, over the medium term, falling rates are likely to support stock market gains.?

The PMI data shows that economic activity around the globe is growing, but there are important factors to consider before interpreting this data.?

China is trying to sustain its massive manufacturing economy by loosening monetary policy and buying homes to ease pressure on the real estate sector. However, its Manufacturing PMI has been below 50 for four consecutive months. Additionally, the U.S., EU, Canada, and other countries have increased pressure on China’s EV industry.?

Despite strong PMI readings, the ISM Manufacturing Index in the U.S. is at just 46.8, and although the ISM Services Index remains above 50, it has been in a downtrend for months. While growth is expected to continue, the latest FOMC minutes reveal that Federal Reserve staff have revised down their growth forecast for the second half of the year.?

In the Eurozone, the composite PMI has recovered, driven by services over the past 12 months. However, the Manufacturing PMI has been below 50 for more than two years, indicating that manufacturing activity has been contracting for an extended period. The current reading of 45.6 is significantly below the growth threshold of 50. The prolonged weakness in manufacturing could have serious implications for companies and increases the risk of a hard landing for the EU. Although the composite PMI rose to 51.2 from 50.2 in August, this was largely influenced by the Paris Olympics, and the effect is likely to be temporary.?

Japan and the UK appear more stable at the moment. The reduced political turmoil in the UK might contribute to positive sentiment for the economy. As for Japan, the rate hike and the value of the yen will continue to keep traders busy.?

The Eurozone faces a challenging period ahead. Weak manufacturing, particularly in Germany, is having a significant impact and is increasing pressure on the current political landscape of the German government. Meanwhile, after Macron’s surprise call for elections, French politics remain in turmoil, with the country still without an official prime minister.?

While the EU contends with political instability, inflation is gradually returning to the 2% target. However, the persistence of core inflation continues to make the European Central Bank’s (ECB) job more difficult. Markets are anticipating two or three more rate cuts from the ECB before the end of the year.?

Geopolitical risks continue to have a significant impact on markets. Iran has yet to respond to Israel’s attack on Iranian soil. As markets are increasingly discounting the likelihood of a response, if it does occur, its impact could be more substantial because of that. Meanwhile, Israel has launched an operation in the West Bank, and the northern border with Hezbollah remains highly active.?

The Ukraine-Russia war has taken a new turn. Ukraine has entered Russian territory and is advancing toward Kursk, while Russia is making gains in Ukraine. Additionally, drone attacks on Russian energy infrastructure have intensified. The latest news includes a Ukrainian attack on a Moscow oil refinery and four other targets, including thermal power plants. Tensions are escalating on the Ukraine-Russia front.?

Central Bank Meeting Calendar?

Technical View?

The U.S. 10-year government bond yield remains in a downtrend, but the 3.75% support level has held so far. Unless there is a major surprise from either the Federal Reserve or the jobs report, September might end mostly flat, with the yield staying above this support level.?

Brent traders are contending with a busy news flow. First, production problems in Libya and then production cuts in Iraq increased upward pressure on prices. However, this pressure has been eased by concerns over a weakening global economy and the possibility of an upcoming production increase from OPEC. Additionally, Russia is facing issues with Ukraine’s drone strikes on refineries and depots. In the end, demand concerns are likely to keep prices capped for now. If the $75-$76.50 support zone fails, further downward moves could begin.?

Precious metals rose in response to anticipated rate cuts. Gold surged nearly 4%, while silver’s gains were capped by pressures from the weak manufacturing sector. Platinum fell 3.5%, while Palladium experienced a strong upward reaction move.?

After moving in a nearly flat trend for five months, gold has entered a trend with a steeper incline. Recently, the $2,525 resistance level has capped its upward movement. The bullion is now waiting for a catalyst to either push it toward the lower or upper boundary of the channel. Such a catalyst could come from an increase in geopolitical tension, such as a response from Iran, or a significant surprise in economic data, like the jobs report. One factor to consider is the relationship between the stock market and gold prices. If recession fears escalate too quickly and the stock market experiences a rapid, multi-day decline, gold might follow suit due to margin calls. Therefore, traders should be cautious regarding the impact of a potential 50-basis-point rate cut or an unexpectedly weak jobs report.?

Silver has returned to $26 and subsequently moved towards $30. These two levels are likely to remain key points to watch in September. Additionally, silver has shown a negative divergence from gold over the past two months. The gap between their prices may narrow.?

The dollar index continued its decline in August, driven by expectations of rate cuts. In the final days of the month, it made an upward move, but so far this has been limited. The 99.50-101 zone has been a demand zone since early 2022 and may provide support for the dollar, though this will depend on upcoming data and Fed forecasts. The immediate resistance is at 101.80, followed by 103. For downward moves, 99.50 is the key support level to watch before a potential panic sell-off.

Stock markets around the globe recovered after the initial panic reaction to the surge in unemployment. The MSCI World Index performed better than all major U.S. markets in August, and the reaction of the DAX was also relatively subdued. There are three key factors that could trigger significant downward reactions in the markets. One was the earnings report from Nvidia, which has now been resolved. Going forward, the jobs report and the FOMC meeting will be the primary focus in September.?

The massive move by the VIX following the S&P 500 selloff was over as quickly as it began. While some tension remains in the market, it appears that the worst may be behind us for now. If fears of a hard landing subside, the upward momentum in stocks, which has been ongoing for the past two years, might extend further with anticipated rate cuts from the Fed. The 18 level on the VIX is the key threshold to watch for any signs of another potential selloff.?

The S&P 500 recovered from the shock selloff quite quickly. The 5.150 support level proved effective. Unless new news or data triggers further market panic, the next target will be the previous high of 5.725. If the index breaks out, the next targets for upward movement are 8.878 and 5.057. On the downside, key support levels to watch in September are 5.520, 5.435, and 5.350.?

In August, the weak dollar index was the main topic in forex markets. The Japanese yen was one of the strongest currencies, benefiting from changes in Japanese policy. The Australian dollar enjoyed a hawkish Reserve Bank of Australia, high wage growth, and strong inflation data. The Swiss franc saw a 3.5% rally against the dollar and served well as a safe haven. Despite a 1.85% rally, the euro was one of the weakest currencies, affected by a weaker economy and expectations of rate cuts from the European Central Bank.?

EURUSD jumped to 1.12 but was unable to break through. The 1.12 to 1.13 zone will be crucial in the long term because the trend since 2008 is within this area. Unless 1.13 is broken, the upward momentum may begin to slow or even halt in September. The 1.10 level is the key support to watch for a potential further downward move.?

USDJPY ended the uptrend channel that began in early 2023. After the break and retest, the price is hovering near the 50% retracement level. The 143 to 145 zone is now the primary support area, while the 150 to 152 zone is likely to be the main resistance area. For clearer direction, these zones should be monitored. However, with the trend having failed and the fundamental outlook changing, any attempts that cannot break the 150 to 152 zone could present selling opportunities over the medium term.?

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