Week #31 — Market Update for July 29 – August 2, 2024

Executive Summary

U.S. Stock Market: The US stock market ended the week with a sell-off as recession risks rose due to weak manufacturing and softening employment data. This fueled speculation that the Federal Reserve might aggressively cut interest rates to prevent an economic stall. Meanwhile, the Nasdaq Composite entered correction territory, dropping more than 10% since July 11, 2024, when better-than-expected inflation data arrived. This decline was driven mainly by tech giants, with NVDA and TSLA plummeting over 20% during this period, and the Magnificent 7's total market cap falling by 13%.

BofA strategist Michael Hartnett warns that historically, since 1970, rate cuts in response to downturns have proved negative for stocks and positive for bonds, adding to the concerns of a looming hard landing.

Cryptocurrencies: Bitcoin fell below $62,000 on Friday amid rising risk aversion and Genesis' distribution of digital assets post-bankruptcy restructuring. Dan Dolev of Mizuho Securities noted that Bitcoin is not seen as the safe haven many anticipated, as higher unemployment could force liquidation of digital assets. Genesis disbursed about $4 billion in digital assets and dollars, including $1.4 billion in Bitcoin and $520 million in Ether. Concerns over market saturation have risen due to the distribution of tokens by the Mt. Gox bankruptcy trustee and the German government's sale of seized crypto.

Global Stock Markets: Globally, stock markets have shifted to a 'risk-off' mode. The Japanese market experienced another week of strong sell-offs as the strengthening yen threatens to erode the earnings of exporters who have driven the nation's equities higher for much of this year.

Economic Data: The global manufacturing sector faced a challenging start to the second half of 2024, with July marking the weakest growth rate in seven months. The J.P. Morgan Global Manufacturing PMI fell to 49.7 in July from 50.8 in June, indicating contraction for the first time this year. This suggests a halt in the manufacturing recovery seen earlier in the year. The downturn was driven by declining new order intakes and output, with inventories and supply chains also contributing to weaker performance.

Earnings Season: So far, 376 companies in the S&P 500 have reported Q2 2024 earnings, with 78.7% exceeding expectations. Next week, 78 more companies will report their results.

Monetary Policy: Market expectations for a rate cut in September are at 100%, with a 73% chance of a “supersized” move, up from 12% a week ago. Projections for 2024's monetary easing increased to 99 basis points from 55, implying at least one jumbo-size (50 b.p.) cut over the three remaining meetings this year.

Bond Market: The U.S. Treasury yield curve moved downward, with 10-year bond yields falling by 40 basis points to 3.80% and 30-year bond yields declining by 34 basis points to 4.11%.

For comprehensive insights and a deeper understanding, readers are encouraged to refer to the full article.

US Stock Market

The US stock market ended the week with a sell-off as recession risks rose after weak manufacturing and softening employment data, which fueled speculation that the Federal Reserve will start aggressively cutting interest rates to keep the economy from stalling. Meanwhile, the Nasdaq Composite entered correction territory, stepping back by more than 10% since 7/11/24 (the day better-than-expected inflation data arrived), driven mainly by tech giants—in particular, NVDA and TSLA plummeting by more than 20% over that period, while the Magnificent 7 total market cap lost 13%.

In a widening chorus of those alarmed about a looming hard landing, BofA strategist Michael Hartnett warns that historically, since 1970, cuts in response to a downturn have proved negative for stocks and positive for bonds.

Bitcoin fell below $62,000 on Friday amid rising risk aversion in financial markets and Genesis' distribution of digital assets to creditors post-bankruptcy restructuring. Dan Dolev from Mizuho Securities noted that Bitcoin is not viewed as a safe haven as some anticipated, as higher unemployment could lead to the forced liquidation of digital assets. Meanwhile, Genesis began disbursing roughly $4 billion in digital assets and dollars to creditors as part of its Chapter 11 plan, moving about $1.4 billion in Bitcoin and $520 million in Ether, according to Arkham, a blockchain analysis firm. Concerns over market saturation have increased due to the simultaneous distribution of tokens by the Mt. Gox bankruptcy trustee and the sale of seized crypto by the German government.

In terms of sector performance, five out of eleven sectors showed positive dynamics, at least three of which seem to be a recessionary trade—Consumer Staples, Healthcare, and Utilities.

The Fear & Greed Index, which measures market sentiment, slumped to 27 from 45 a week ago, swiftly approaching the “extreme fear" zone.

The SPY ETF, which tracks the S&P 500 Index, has recently experienced a sharp sell-off, breaking below the 50-day SMA and now testing the 100-day SMA. The recent bearish candlestick suggests strong selling pressure and a potential shift in market sentiment. The RSI has fallen to 38.69, nearing oversold levels, which might indicate a potential rebound or consolidation. Investors should watch for support at the 100-day SMA and observe any signs of stabilization before considering bullish positions.

The earnings season is nearing its end. According to Refinitiv, 376 companies in the S&P 500 Index have reported earnings for Q2 2024 to date, accounting for a total of 75% of companies (up 34 percentage points over the week). Of these companies, 78.7% have exceeded analysts' expectations, slightly up from 78.6% the previous week. This current rate is higher than the long-term average of 66.8% and in line with the four-quarter average of 79.0%.

However, earnings growth projections for the quarter have once again been revised upward. The S&P 500 companies are now forecasted to see a year-on-year growth of 12.9%, and excluding the Energy sector, a growth of 13.9%. This contrasts with last week's projections of 12.1% and 13.1%, respectively.

During the week of August 5, 78 companies from the S&P 500 Index are scheduled to present their financial results. Among all stocks, the most eagerly awaited earnings reports include:

Global Markets

Global stock markets have turned to 'risk-off’ mode, with the Japanese market standing out from the rest with another week of strong sell-offs as the strengthening yen threatens to erode the earnings of exporters who drove the nation’s equities higher for much of this year.

The ACWX ETF, representing the MSCI All Country World Index excluding the USA, has finally broken below the 100-day SMA. Similarly to the SPY ETF, with the RSI nearing oversold levels at 37.71, there could be potential for a rebound or consolidation. However, investors should watch for support at the 200-day SMA and observe any signs of stabilization before considering bullish positions.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

·????? The global manufacturing sector faced a challenging start to the second half of 2024, with July marking the weakest growth rate in the past seven months. The J.P.Morgan Global Manufacturing PMI dropped to 49.7 in July from 50.8 in June, indicating a contraction for the first time this year. This decline suggests a halt in the manufacturing recovery that had been gaining momentum in the first half of the year, representing the sector's best performance in two years. The downturn was driven by declining new order intakes and output, with the sub-indices related to inventories and supply chains also contributing to the weaker expansion.

Manufacturing output nearly stalled in July, contrasting sharply with the robust gains recorded in the previous two months. The global output growth, which had been growing at a 2% annual rate during the second quarter, now shows signs of stagnation. This was particularly evident in major economies such as the US and China, where output growth slowed significantly. In contrast, India led the global expansion, followed by Thailand, while the UK experienced its strongest manufacturing expansion in 29 months. However, Europe, especially the eurozone, continued to struggle, with countries like Germany, France, and Italy facing output declines.

New orders for goods fell for the first time since January, with global exports declining for the second consecutive month. Shipping delays, notably from diversions in the Red Sea, have exacerbated these challenges. The number of manufacturers citing shipping delays as a reason for decreased new export orders is nearly five times the long-run average, illustrating the significant impact on global trade and economic growth at the start of the third quarter.

US

·????? Federal Reserve Chair Jerome Powell indicated that the Federal Reserve may cut interest rates as early as September if the U.S. economy continues to follow its current trajectory. This potential rate cut marks a significant shift in the Fed's monetary policy after a prolonged period of tightening to combat inflation. The Federal Open Market Committee decided to maintain the federal funds rate at its current range of 5.25%-5.50%, the highest in over two decades. However, the Fed's recent statements reflect a more balanced view on inflation and employment risks, suggesting a shift toward easing monetary policy.

Powell emphasized that any decision to cut rates will be based on economic data rather than political considerations, especially given the upcoming U.S. presidential election in November. The Fed's focus remains on achieving its dual mandate of maximum employment and stable prices.

The possibility of a rate cut in September is supported by a majority of economists, with over 80% of those surveyed by Reuters predicting a 25-basis-point reduction at the September 17-18 meeting. This aligns with Powell's comments that the Fed is prepared to reduce rates if inflation continues to ease and the labor market remains stable. A rate cut in September would follow the Fed's recent language shift, highlighting that risks to employment and inflation are now more balanced, moving away from a sole focus on inflation risks.

·????? Kamala Harris has made significant strides in the battleground states ahead of the November election, erasing Donald Trump's lead, according to a recent Bloomberg News/Morning Consult poll. Harris garnered 48% support compared to Trump’s 47% in key swing states, indicating a statistical tie but a notable improvement over President Joe Biden's previous performance. This shift is largely fueled by enthusiasm among young, Black, and Hispanic voters, with nearly half of Black and Hispanic respondents indicating they are now more likely to vote. Harris' appeal among these demographics presents a challenge for Trump's campaign, which had aimed to court these voter groups.

Harris' rise has sparked optimism within the Democratic base, particularly in swing states like Arizona, Nevada, and Georgia, where her candidacy has energized voters. However, she faces challenges in managing issues such as the economy and immigration, where Trump maintains a slight advantage. Harris has made inroads in voter trust regarding economic management, reducing Trump’s lead on this issue to eight percentage points from fourteen. On inflation, a critical concern for voters, Harris has narrowed the gap to five points from thirteen against Trump.

Harris' candidacy has also revitalized Democratic fundraising efforts. In July, she raised a record $310 million, more than double Trump’s $138.7 million for the same period. This substantial haul, including contributions from grassroots donors and high-profile supporters, has given Harris a financial edge with $377 million in cash on hand compared to Trump’s $327 million. The surge in donations reflects strong support from diverse coalition groups and prominent donors, positioning Harris with significant resources for the upcoming election.

Despite Harris' initial momentum, the race remains highly competitive, with key states like Pennsylvania still favoring Trump. The poll indicates Harris' positive impact on voter enthusiasm and turnout, particularly among demographics critical for a Democratic victory. However, the ongoing issues of economic management and immigration continue to be pivotal areas where Harris needs to gain more voter trust.

·????? US job openings exceeded forecasts in June, reaching 8.18 million, despite predictions of a labor market slowdown. This figure, along with a revised higher reading for May, suggests resilience in the labor market. The vacancies per unemployed worker ratio held at 1.2, matching pre-pandemic levels, though hiring has decreased to its lowest rate since the pandemic began, notably in leisure, hospitality, and professional services sectors. Layoffs dropped to a two-year low, and the quits rate, indicating voluntary job departures, remained at 2.1%, suggesting reduced confidence among workers in finding new employment opportunities.

Additionally, private payrolls saw a modest increase of 122,000 jobs in July, the smallest rise since the start of the year, with wage growth slowing for both job changers and those who stayed, according to the ADP Research Institute. Job changers experienced a 7.2% year-over-year pay increase, down from 7.7% in June, while those who stayed saw a 4.8% gain. These figures align with a gradual slowdown in hiring and rising joblessness, reflected in increased unemployment benefit applications.

US hiring slowed significantly in July, with nonfarm payrolls rising by only 114,000, one of the weakest post-pandemic increases. The unemployment rate climbed unexpectedly for the fourth consecutive month to 4.3%, the highest in nearly three years. This uptick is attributed to more people losing or leaving their jobs, though the labor force participation rate also rose as previously inactive workers re-entered the workforce. Hurricane Beryl may have impacted the data, as weather-related work disruptions surged, affecting hours worked and potentially wage growth.

·????? In the second quarter of 2024, U.S. labor costs and productivity figures indicated a cooling of inflationary pressures and a moderation of the labor market, potentially affecting Federal Reserve monetary policy. The Employment Cost Index, a key measure of wages and benefits closely monitored by the Fed, increased by 0.9% in the April-to-June period. This was below the anticipated 1% rise and a significant drop from the year's earlier increase, representing the smallest annual advance of 4.1% since 2021. This moderation reflects a broader slowdown across private industries, notably in sectors like construction, wholesale trade, and information.

The Bureau of Labor Statistics' report highlighted that wages and salaries for civilian workers rose by 0.9%, marking the smallest advance in three years. Compared to a year ago, wages increased by 4.2%, the least since 2021. In the goods-producing sectors, worker pay climbed only 0.2%, the smallest gain since 2009, with construction wages experiencing the most significant decline on record. Conversely, service workers in the private sector saw a 1% rise in wages from the previous quarter, contributing to ongoing inflationary monitoring by the Fed, especially in core services excluding housing.

The U.S. worker productivity data also showed promising signs of diminishing inflationary pressures. Productivity, defined as nonfarm business employee output per hour, grew at a 2.3% annualized rate in the second quarter, following a slight increase earlier in the year. Unit labor costs, representing what businesses pay employees to produce one unit of output, rose by just 0.9% in the same period, down from a 3.8% increase at the beginning of the year. The year-over-year productivity rate increased by 2.7% in the second quarter, with unit labor costs up by only 0.5%, marking the smallest gain since before the pandemic.

·????? In July, U.S. manufacturing activity reached an eight-month low, with the Institute for Supply Management (ISM) manufacturing PMI dropping to 46.8 from June's 48.5, indicating a contraction in the sector, which makes up 10.3% of the economy. The decline was driven by a slump in new orders and output, with the new orders sub-index falling to 47.4 from 49.3, and the production sub-index sliding to 45.9 from 48.5. Despite subdued orders, input prices increased due to soaring freight rates, with the measure of prices paid by manufacturers rising to 52.9 from 52.1. The employment sub-index slumped by to 43.4, down by 5.9 from June’s 49.3.

Similarly, the S&P Global US Manufacturing PMI fell to 49.6 in July from 51.6 in June, marking the first contraction in seven months. New business decreased solidly, marking the fastest decline in 2024, with firms reporting a general slowdown in market demand. Despite the drop in new orders, manufacturing production continued to rise at a marginal pace, the slowest in six months. The decline in new orders allowed firms to work through outstanding business, leading to a solid rate of depletion in backlogs. Inventory levels increased as firms anticipated future demand improvements, with post-production inventories rising at the fastest pace since November 2022.

·????? In July, US consumer confidence saw a slight increase, driven by improved expectations for the economy and labor market, although views on current conditions remained less optimistic. According to the Conference Board, the confidence gauge rose to 100.3 from a downwardly revised 97.8 in June, exceeding the median estimate of 99.7 from economists surveyed by Bloomberg. This improvement was primarily fueled by a rise in the expectations index, which climbed to 78.2, marking its highest level since January. The proportion of consumers anticipating better business conditions reached its largest share since the start of the year.

·????? In May, US home prices saw a 5.9% increase from a year earlier, reflecting ongoing competition among buyers amid a limited supply of properties. According to data from S&P CoreLogic Case-Shiller, this growth, while slightly slower than April's 6.4% gain, indicates persistent upward pressure on prices despite affordability concerns.

In June, pending US existing-home sales rose for the first time in three months as buyers sought to relocate or upgrade their homes despite elevated prices and borrowing costs. The National Association of Realtors' index of contract signings increased by 4.8% to 74.3, surpassing economists' expectations. This increase is notable, considering the index was coming off a record low dating back to 2001. While mortgage rates have recently declined, more homeowners are listing their properties, leading to a potential increase in sales activity. According to NAR Chief Economist Lawrence Yun, the rise in housing inventory is beginning to result in more contract signings, and the added supply should continue to boost the market in the coming months. This trend is expected to improve housing affordability, which is currently near its worst level in about 40 years.

The average rate for a 30-year fixed mortgage dropped to 6.73% from 6.78% the previous week, marking the lowest level in six months, according to Freddie Mac. This decline in rates from over 7% earlier this year has sparked renewed demand from homebuyers following a challenging period for the sales market. Freddie Mac's chief economist, Sam Khater, noted that expectations of a Federal Reserve rate cut and signs of cooling inflation are positive indicators for the market, though consumer confidence remains a concern due to ongoing affordability challenges.

·????? The Biden administration is preparing to introduce a new rule in August that will extend the U.S. government's authority to block exports of semiconductor manufacturing equipment to certain Chinese chipmakers, according to unnamed Reuters’ sources. This rule, part of the Foreign Direct Product rule expansion, aims to restrict shipments to about half a dozen Chinese semiconductor fabrication plants at the forefront of China's advanced chipmaking efforts. However, exports from key ally nations like Japan, the Netherlands, and South Korea will be exempted from the rule, limiting its impact. As a result, major chip equipment manufacturers like ASML and Tokyo Electron will remain unaffected, causing their shares to rise following the news. The rule will primarily affect countries such as Israel, Taiwan, Singapore, and Malaysia, potentially disrupting their semiconductor equipment exports to China. The U.S. Department of Commerce stated that they continuously assess the threat environment to update export controls to protect U.S. national security and technological ecosystems.

·????? The New York Fed Staff Nowcast model sharply downgraded its U.S. GDP growth forecast for Q3 2024 to 2.11% from 2.70% a week ago after negative surprises from ISM manufacturing and nonfarm payroll employment data. Meanwhile, the Atlanta Fed's GDPNow revised its estimate downward to 2.5% from 2.8% and has not incorporated the latest employment data yet.

Europe

·????? The euro-area economy exceeded expectations in the second quarter, growing by 0.3%, maintaining the same pace as the first quarter and surpassing the anticipated 0.2% growth forecast by economists.

This growth was driven by stronger-than-expected performances from France and Spain, as well as continued growth in Italy, which compensated for a 0.1% contraction in Germany. Ireland, often influential in the region's economic statistics due to its status as a tax base for multinationals, reported the highest growth within the eurozone, with a GDP increase of 1.2%.

Germany's economic decline was attributed to decreased investment in equipment and buildings, reflecting broader economic challenges. According to Klaus Wohlrabe of the Ifo institute, Germany's economy is "stuck in crisis," and there is little optimism for the third quarter.

In contrast, France's GDP grew by 0.3%, supported by exports and a slight rise in investment, with consumer spending remaining stable. Despite recent political uncertainty following President Emmanuel Macron's election announcement on June 9, Finance Minister Bruno Le Maire expressed confidence in the country's durable economic performance.

Spain recorded a robust 0.8% GDP growth, bolstered by strong domestic demand and net trade. Spain's economy has consistently outperformed other euro-area countries, aided by strong employment figures. However, political uncertainty looms as the government struggles to pass a budget for 2024, facing challenges after losing a key fiscal vote.

Italy's growth matched economists' forecasts, with services contributing positively to the economy while industry and net trade hindered further expansion. The Bank of Italy projects the country's economy to grow by 0.9% this year, although the government remains optimistic about achieving a 1% growth rate.

·????? The euro-area inflation rate unexpectedly rose in July, challenging expectations for a steady decrease and raising concerns for the European Central Bank (ECB) as it considers future interest rate cuts. Consumer prices across the region increased by 2.6% compared to the previous year, up from 2.5% in June, which was the anticipated figure by analysts. Core inflation, which excludes volatile elements such as food and energy, remained unchanged at 2.9% for the third consecutive month, despite predictions for a slight slowdown. According to Bloomberg Economics, services inflation remained at a high rate, though it showed a minor decline. This persistence in underlying price increases could prompt the ECB's Governing Council to exercise caution when considering the timing of additional rate reductions. Bloomberg Economics' Nowcast anticipates a deceleration to 2.2% in August, reflecting a potential ease in price pressures moving forward.

In Germany, inflation rose to 2.6% in July, marking an increase from June’s 2.5%. This acceleration in Germany, the euro area's largest economy, adds to the ECB's concerns as it navigates interest rate decisions. The slight increase was attributed to reduced easing of energy costs and a rise in food prices, while services costs remained steady. Although Germany’s statistics office does not provide a core inflation measure, state-level data suggests a decrease to 3.1% from 3.3%.

France's inflation also climbed to 2.6% in July, up from 2.5% in June, yet it fell short of the 2.8% anticipated by economists. This change was largely influenced by increased energy costs following a hike in gas tariffs, although food prices saw a decline. Services inflation, a key focus for the ECB as it reflects momentum in core prices, slowed to 2.5% from 2.9%, marking its slowest rate in over two years. Bloomberg Economics noted that while a rise in headline inflation was expected, the overall downward trend in inflation is projected to persist through the year, albeit with potential temporary increases due to events like the upcoming Olympic Games.

In contrast, Spain experienced a significant decrease in inflation, dropping to 2.9% in July, driven primarily by reduced energy and food prices. This decline surpassed expectations, providing a counterpoint to the inflationary pressures seen in other major euro-area economies.

Concurrently, market indicators reflect a growing confidence in the ECB's ability to manage inflation in the long term. The five-year, five-year forward inflation swap rate, a measure of future inflation expectations, experienced its largest monthly decline this year, decreasing by 10 basis points. This metric now points to an average inflation rate of 2.20% over the next ten years, the slowest pace in over 18 months, and a significant drop from the 2.67% peak observed last August amid surging gas prices. The decline suggests that investors trust the ECB to keep inflation in check, with the one-year forward inflation swap rate recently closing below the ECB's 2% target for the first time since early February.

·????? The eurozone’s manufacturing sector faced significant challenges at the start of the third quarter, with worsening conditions characterized by a steeper reduction in new orders, leading to accelerated contractions in output and employment. The HCOB Eurozone Manufacturing PMI, compiled by S&P Global, remained at 45.8 in July, indicating a marked deterioration in the health of the euro area’s goods-producing economy. This reading signals ongoing contraction, with most of the eight monitored eurozone nations experiencing declines compared to June.

Germany (43.2) and France (44.0), the eurozone's largest economies, recorded their lowest PMI figures in three and six months, respectively. Other strong performers like Greece (53.2) and Spain (51.0) also saw a loss of growth momentum. Italy (47.4) and Ireland (50.1) were the only countries with a slight PMI increase. Overall, the eurozone saw a continued factory order downturn, with July marking the quickest pace of contraction in three months. New orders from export markets, including intra-eurozone trade, further declined, weighing on demand.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that the eurozone's manufacturing recovery expectations for the second half of the year are diminishing. Rising input prices without the ability to pass them onto consumers indicate potential trouble for investment and growth, as businesses may start to cut costs. While rising input prices could contribute to inflation, falling profit margins might offset inflationary pressures. Demand remains weak, with incoming orders declining for the 27th consecutive month, showing no signs of improvement. The data suggest that the eurozone's manufacturing sector may face continued challenges in the coming months, with the likelihood of GDP growth forecasts being lowered from the previous estimate of 0.8%.

·????? The Bank of England decided to cut interest rates for the first time since early 2020, voting 5-4 to reduce the benchmark rate by a quarter-point to 5%. Governor Andrew Bailey's casting vote was crucial in this decision, which was met with opposition from four members of the nine-member Monetary Policy Committee. The move signals a cautious approach to easing monetary policy after a year of high borrowing costs in the UK. The decision was described as "finely balanced" for those supporting the cut, reflecting underlying concerns about inflation and economic growth.

Governor Bailey emphasized that the Bank of England will adopt a meeting-to-meeting approach, reacting to economic data as it evolves, without committing to a specific path for future rate changes. While inflationary pressures have eased enough to allow for a rate cut, Bailey stressed the need for caution, warning against cutting rates too quickly or too much. The bank's forecasts indicate a steeper path of rate cuts over the next three years than investors anticipated, with market assumptions suggesting rates could fall to 4.1% in 2025 and 3.5% in three years' time. These projections align with inflation targets of 1.7% after two years and 1.5% after three years, below the 2% target.

The Bank of England noted that UK inflation is expected to rise to 2.7% by the end of the year. However, underlying inflationary pressures remain high, particularly concerning wages and service prices. The central bank indicated that monetary policy would need to remain restrictive until inflation risks are adequately addressed. The decision to cut rates came despite stronger growth and more persistent inflation than expected, as indicated by business surveys showing declining wage and price pressures.

The vote split highlights the uncertainty in the policy decision. Alongside Governor Bailey, new Deputy Governor for Monetary Policy Clare Lombardelli, Deputy Governors Sarah Breeden and Dave Ramsden, and external member Swati Dhingra supported the rate cut. Chief Economist Huw Pill and external policymakers Jonathan Haskel, Megan Greene, and Catherine Mann preferred to maintain the current rate. This was the tightest vote since September 2023, and Haskel's last vote as a committee member.

·????? The UK manufacturing sector showed signs of recovery at the start of the second half of 2024, with increases in output and new orders, leading to the first rise in employment levels since September 2022. The growth was broad-based, covering consumer, intermediate, and investment goods industries. The S&P Global UK Manufacturing PMI climbed to a two-year high of 52.1 in July, up from 50.9 in June, indicating a continued expansion for the third consecutive month, marking the longest period of growth since mid-2022.

Rob Dobson, Director at S&P Global Market Intelligence, stated that UK manufacturing started the second half of 2024 on a solid footing, with production and new orders strengthening and staffing levels rising for the first time since September 2022. The economic revival and reduced political uncertainty boosted confidence to its highest level in two-and-a-half years, with 60% of companies expecting output to increase over the next 12 months. However, inflationary pressures remain a concern, with input costs rising significantly due to the Red Sea crisis and related freight issues. These inflationary pressures may cause policymakers to be cautious about easing monetary policy, as inflation appears to be shifting from services to manufacturing.

·????? UK house prices increased for the third consecutive month in July, indicating a stabilization in the market despite the highest borrowing costs in 16 years, according to Nationwide Building Society, one of the leading mortgage lenders. Nationwide reported a 0.3% rise in house prices for July, following a 0.2% increase in June, surpassing economists' expectations of a 0.1% rise.

Annual house prices have increased by 2.1%, marking the largest annual gain since December 2022, suggesting a market recovery after last year's slight decline. The average home price now stands at ￡226,334 ($290,560), just 2.8% below the record high of summer 2022. First-time buyers now allocate approximately 37% of their income to mortgage payments, up from about 28% before the pandemic, as per Nationwide's data.

Asia

·????? The Bank of Japan (BOJ) has raised its benchmark interest rate to approximately 0.25% from the previous range of 0 to 0.1% and announced plans to reduce its monthly bond purchases by half to around ￥3 trillion ($19.9 billion) by the first quarter of 2026. This decision highlights the BOJ's commitment to normalizing monetary policy after a long period of ultra-easy policy, which included the world's last negative interest rate until March. The move was largely unexpected, with only about 30% of analysts predicting a rate hike, but most acknowledged the possibility of such a move given the economic environment.

The BOJ's decision to increase the rate underscores Governor Kazuo Ueda's resolve to stay ahead of inflation trends and marks a significant policy shift. Ueda emphasized that any further hikes this year would depend on data and the impact of the current rate increase, as well as the previous hike in March. He mentioned that the BOJ does not view a 0.5% interest rate as a limit, indicating potential for future increases. Ueda also pointed out that a weak yen poses a risk for inflation, suggesting that early adjustments, even if small, are preferable.

The BOJ's bond purchase reduction plan is viewed as a step towards quantitative tightening after years of significant asset purchases that have left the bank holding over half of Japan's outstanding bonds. The initial pace of reduction is slightly slower than expected, but the overall plan is more aggressive than other market forecasts. Ueda stated that the BOJ expects its government bond holdings to decrease by 7% to 8% over the next two years.

Economists are adjusting their forecasts in response to Ueda's hawkish stance, with 68% of surveyed analysts now predicting the policy rate will rise to 0.5% by the end of the year. This is a significant shift from earlier predictions, reflecting a growing belief in the BOJ's determination to normalize policy. Analysts believe there is a strong chance for a rate hike in October, followed by additional increases, potentially reaching 1% in the future.

·????? Japan's labor market remained tight in June, with the unemployment rate edging down to 2.5% from 2.6%, surpassing expectations. The workforce increased by 370,000, led by gains among women, while the number of unemployed rose slightly by 20,000. This tight labor market is exerting upward pressure on wages, with companies facing competition to hire and retain workers. The labor ministry proposed a record 5% increase in the hourly minimum wage, indicating broad wage growth across various sectors. However, the job-to-applicant ratio decreased to 1.23, the lowest since March 2022, reflecting ongoing struggles for companies to fill positions.

Japan's industrial production fell by 3.6% in June compared to May, driven by declines in the automotive and production machinery sectors. This drop was slightly better than the expected 4.5% decrease but still highlights the challenges in the economy's recovery from earlier contractions. Year-on-year, output decreased by 7.3%, though there was a 2.9% increase in production over the three months ending in June. Retail sales showed a modest rise of 0.6% from May and a 3.7% increase year-on-year. The automotive sector, particularly impacted by scandals involving major car manufacturers like Toyota, contributed to the decline in production. Despite this, solid exports suggest robust global demand, offering some support for Japan's manufacturing output.

Business conditions in Japan's manufacturing sector deteriorated in July for the first time in three months, with the PMI falling from 50.0 in June to 49.1. This decline was driven by a contraction in production and a sharp decrease in new orders, the strongest rate since March. Demand remained subdued in both domestic and international markets. Firms managed to work through their backlog of orders, with the rate of depletion being the fastest in four months. Input cost pressures intensified, with costs rising at the steepest rate since April 2023, driven by higher prices for raw materials, labor, oil, and logistics. Despite this, output price inflation eased to a four-month low as firms sought to remain competitive. Employment levels increased for the fifth consecutive month, reflecting firms' efforts to manage capacity requirements. Business sentiment remained positive, with firms hopeful for a broad recovery in demand over the coming year.

·????? China's manufacturing sector experienced a continued contraction in July, marking a challenging period for the economy and undermining Beijing's efforts to maintain robust growth. The official manufacturing PMI was recorded at 49.4, consistent with economist predictions and slightly lower than June's 49.5, indicating a third consecutive month of decline. This measure has remained below the crucial 50-point threshold, which distinguishes between growth and contraction, for all but three months since April 2023. The non-manufacturing index, which measures activity in the construction and services sectors, also fell to 50.2, slightly below expectations, indicating a slowdown from June's performance.

In an analysis, Bloomberg Economics suggests that China's weak July PMI data points to a poor start to the third quarter, likely affecting GDP growth negatively, especially after a disappointing second quarter. The manufacturing sector's decline continues, and although the non-manufacturing index remains in positive territory, it primarily reflects government-backed construction activities rather than genuine market-driven growth. Zhao Qinghe, an analyst at the National Bureau of Statistics, noted that manufacturing activity was reduced partly due to typical seasonal production slowdowns in July, alongside inadequate market demand and adverse weather conditions such as extreme temperatures and flooding.

Additionally, the private Caixin manufacturing PMI showed an unexpected contraction for the first time in nine months, dropping to 49.8 in July from 51.8 in June, contrary to the anticipated 51.5. This private measure tends to focus on small and export-oriented firms, which may reflect weakening export momentum. The dip in the Caixin index suggests potential risks to China's previously strong export performance, signaling a possible slowdown in the country's export-driven economic activities.

The Caixin survey indicated that total new orders declined for the first time since July of the previous year, with growth in export orders slowing down. Wang Zhe, a senior economist at Caixin Insight Group, highlighted that the main issues remain insufficient domestic demand and weak market confidence.

·????? China's residential real estate market is facing significant challenges as the slump in new-home sales deepened in July, despite substantial government efforts to stabilize the sector. According to preliminary data from China Real Estate Information Corp., the value of new-home sales from the 100 largest real estate companies fell by 19.7% year-over-year to approximately 279 billion yuan ($38.6 billion). This decline accelerated from a 17% drop in June, with transactions decreasing by 36.4% from the previous month after notable increases in April and May. The rapid decline highlights the limitations of China’s recent measures to boost the property market, with Bloomberg Economics estimating that the central bank's $42 billion relending program can only facilitate local governments in purchasing about 0.8% of the country's 60 billion unsold homes.

Despite efforts to bolster buyer sentiment, confidence has been weakened by a lack of substantial support from the recent Communist Party meeting. In response to market conditions, several Chinese cities, including Zhengzhou, Shenyang, Lanzhou, and Ningde, have removed price guidance curbs, allowing developers to set transaction prices for new homes independently. This change reflects a broader attempt to align pricing with market demand.

Compounding the challenges, Chinese authorities have declined a proposal from the International Monetary Fund (IMF) to utilize central government funds to complete unfinished housing projects. The IMF suggested a "one-off" fiscal injection to either complete and deliver pre-sold properties or compensate homebuyers, estimating the cost at 5.5% of China’s GDP over four years, equivalent to almost $1 trillion based on last year’s GDP. However, China has opted against this approach, citing concerns over potential moral hazards and the expectation of future government bailouts.

Zhang Zhengxin, the IMF's executive director for China, emphasized that the government prefers to adhere to market-based principles for resolving the issue. The reluctance to provide direct fiscal support indicates the government's cautious stance on extending significant financial aid to the housing market, which has been a persistent drag on the economy. The IMF's assessment points to the severe challenges China faces in navigating a prolonged housing downturn without resorting to large-scale fiscal stimulus.

The rejection of the IMF's proposal has been met with disappointment from some economists, such as Michelle Lam from Societe Generale SA, who argue that the government may eventually need to adjust its strategy and offer more robust policy support if the housing situation continues to worsen. This cautious approach comes amid broader concerns about the economic impact of the real estate slump, as China's economy grapples with subdued domestic consumption and weak market confidence. The situation underscores the delicate balance the Chinese government must maintain between stabilizing the housing market and avoiding the long-term risks associated with significant fiscal intervention.

·????? India's manufacturing sector maintained strong growth in July, demonstrating resilience despite slight decelerations in new orders and output compared to the previous month. Notably, the sector experienced one of the fastest expansions in international sales in over 13 years and continued robust job creation. However, this strong demand also exerted upward pressure on prices, leading to significant increases in both input costs and selling prices.

The seasonally adjusted HSBC India Manufacturing PMI registered a reading of 58.1 in July, only slightly below June's 58.3, indicating a substantial improvement in the sector's health. This figure remains above the long-term average, reflecting one of the highest levels recorded in recent years. Demand conditions across the manufacturing industry were buoyant, resulting in a notable upturn in new work intakes, even though the pace of sales growth slowed slightly from June. The growth rate was still sharp compared to historical data.

To protect their profit margins amidst rising costs, Indian manufacturers raised selling prices, marking the steepest increase in output charges since October 2013. This was driven by both higher raw material costs and increased labor costs, alongside strong demand. The rate of inflation in selling prices was the fastest in almost 11 years.

Pranjul Bhandari, Chief India Economist at HSBC, commented on the situation, noting that while there was a marginal slowdown in the pace of expansion in July, the robust levels of most components suggest this is not a cause for concern. The increase in new export orders was highlighted as a positive aspect, rising to the second-highest level since early 2011. However, Bhandari also pointed out that the continuous rise in the output price index, driven by input and labor cost pressures, might indicate further inflationary pressures in the economy.

Foreign Exchange Markets

The Dollar Index, which reflects the value of the US dollar against a basket of major currencies, lost 1.1%.

For the second week in a row, we witnessed a significant appreciation of the yen, boosted by an unexpected BOJ rate hike and rising expectations regarding the Fed's future actions.

Commodities and Energy Markets

In the commodities sector, most assets ended the week with mixed movements.

Oil prices have reached their lowest level in nearly seven months due to concerns about demand in the world's two largest economies, the US and China, overshadowing any heightened geopolitical risks. Brent crude, a major benchmark for oil prices, fell by 4.4%, marking the lowest settlement price since early January. This decline is linked to negative sentiment in the oil market, exacerbated by factory gauges in both the US and China indicating contractions this week, signaling weakness in the manufacturing sector.

The gold price briefly surpassed $2,500 for the first time in history, as rising safe-haven demand due to Middle East tensions and expectations of rate cuts by the U.S. Federal Reserve made the metal more appealing to investors.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (until January 2026) has shifted downward by an average of 52 basis points as weak manufacturing and softening employment data fueled speculation that the Federal Reserve will start aggressively cutting interest rates to keep the economy from stalling.

Consequently, the U.S. Treasury yield curve moved downward, with 10-year bond yields falling by 40 basis points to 3.80% and 30-year bond yields declining by 34 basis points to 4.11%.

Central Bank Insights

·????? The Bank of England's monetary policy stance remains cautious, as Chief Economist Huw Pill emphasized in a recent statement following the central bank's decision to cut interest rates by a quarter point to 5%. Despite the recent easing of policy, Pill warned against expecting further rate reductions in the near future, highlighting that the effort to control inflation is not yet complete.

Pill's caution is reflective of a divided Monetary Policy Committee (MPC), which voted 5-4 in favor of the rate cut. While the decision marks the first easing of policy since the pandemic, Pill, who voted against the reduction, argued that inflationary pressures persist in certain sectors of the UK economy. Specifically, he pointed to ongoing price pressures in the services sector and noted evidence of "second round" inflationary effects, where companies continue to increase prices, wages, and margins.

The Chief Economist's dissent contrasts with Governor Andrew Bailey, who cast the deciding vote in favor of the rate cut, siding with the majority of the MPC who believe that inflationary pressures are receding. However, Pill remains wary of the current economic dynamics, citing strong wage growth as a significant factor contributing to his decision. The UK labor market has experienced rising wages due to a shortage of workers, partially attributed to Brexit, which has led to increased competition for talent.

Pill also expressed concern about structural changes in the labor market, noting that rising inactivity and the departure of foreign workers are pushing wages higher, thereby sustaining inflationary pressures. The UK’s headline Consumer Prices Index has reached the Bank's 2% target for two consecutive months, but services inflation remains above expectations. The next MPC meeting on September 19 will have two more batches of inflation data to consider, potentially influencing future policy decisions.

Pill's remarks highlight the complexity of the current economic landscape, acknowledging progress in reducing inflation but cautioning against premature optimism. He suggested that the UK is not yet "out of the woods" concerning inflationary pressures that have persisted since the pandemic and the geopolitical upheaval caused by Russia's invasion of Ukraine. He stressed the need for continued monetary policy restrictions to manage these pressures effectively.

·????? The European Central Bank may need to further ease its monetary policy to support the region’s struggling economy, with two additional interest rate cuts likely this year, according to Governing Council member Yannis Stournaras. He suggested that if disinflation continues as anticipated, these cuts are probable, underscoring that growth is weaker than expected, which also favors lower interest rates.

Stournaras indicated that the decision for another rate reduction, potentially as early as September, will be data-dependent, considering all available information. He acknowledged that while inflation is projected to decrease smoothly and quickly, the path remains uncertain. The July inflation reading of 2.6% aligns with these projections, but there remains a risk of price growth falling below the 2% target in the medium term. Stournaras emphasized that the ECB should be equally vigilant about both overshooting and undershooting the inflation target.

The services sector, with its strong wage increases, has become a focal point due to concerns about persistent inflation. However, Stournaras cautioned against overemphasizing current data from this sector, noting that it tends to react slowly to falling inflation. He pointed out that forward-looking indicators suggest a decline in wage growth by 2025, implying that current wage-driven inflation pressures may not be as significant in the long term.

·????? Federal Reserve policymakers, including Chicago President Austan Goolsbee and Richmond President Thomas Barkin, have highlighted the central bank's cautious approach to adjusting interest rates, emphasizing the importance of assessing broader economic conditions rather than reacting to individual data points.

Austan Goolsbee stressed the need for a measured response, particularly after the release of a weaker-than-expected employment report. He stated that the Fed's role is to identify consistent trends in the data and proceed cautiously. He acknowledged that if interest rates remain restrictive for too long, it may adversely affect employment, which the Fed must consider alongside inflation in its dual mandate. Goolsbee noted that if inflation continues to decrease and the labor market cools further, the Fed should respond appropriately, especially if unemployment rises beyond what is considered the neutral rate. He emphasized that economic conditions will dictate the timing and magnitude of any rate reductions. Goolsbee remarked that maintaining interest rates at their current level for a year has increased pressure on the economy, given the cooling inflation. He concluded that the Fed must soon align its policy tightness with prevailing economic conditions.

In a separate discussion, Thomas Barkin expressed uncertainty about whether the labor market is returning to normal hiring rates or showing signs of a more significant decline. He highlighted the importance of distinguishing between a normalization and a weakening labor market, as this would influence whether the economy is stabilizing or facing increased unemployment. As a voting member of the Federal Open Market Committee, Barkin stood by his decision to maintain steady rates, pointing out that inflation is "normalizing" and the labor market's future trajectory remains uncertain. He emphasized the abnormality of the current low-hiring, low-firing environment, suggesting that conditions could improve if businesses recognize potential opportunities.

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