2024 Weekly Update

Market update

The S&P 500 closed the week at 5,648.40, +0.24% higher. The Dow Jones closed at 41,563.08, +0.94%, with the Nasdaq lower by -0.92%. The volatility index VIX closed the week at 15, down from 15.86. The Euro Stoxx 600 rose +1.34%.

The 10-year UST closed at 3.90%, up from 3.80% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -122bps. US Corporate Bond spreads: Investment Grade spreads widened +1bp at 174bps and High Yield spreads narrowed -2bps at 352bps. German 10-year Bunds yield closed at +2.30% up from+2.22% a week before. In Europe, Corporate Investment Grade spreads remained at 129bps and High Yield narrowed -5bps at 356bps.

The US Dollar Index (DXY) appreciated +0.97% last week and closed at 101.7. The Euro closed at 1.1048 (-1.29%); the Yen depreciated -1.25%, closing at 146.17 and the Swiss Franc depreciated -0.20%, closing at 0.8496. Gold closed at $2,503.39, depreciating -0.37%. Oil was lower, Brent closed at $78.8 (-0.28%) and WTI at $73.55 (-1.71%).

Macroeconomy

US data

July PCE inflation data, the measure the Fed officially targets, showed core PCE coming in at a monthly pace of +0.16%, which brought down the 3m annualized rate falling to +1.7%. The y-o-y rate also remained at +2.6% for a third consecutive month (vs. +2.7% expected). The report was seen as confirming that the Fed would still be able to cut rates this month, and there were also some positive details in the components: core services ex housing measure, which Powell has cited in the past, fell to just +2.0% on a 3m annualized basis, which is the lowest it’s been since November 2020. In terms of recession risks, several data pointed away from a recession. Q2 headline GDP was revised up to show an annualized growth rate of +3.0% (vs. +2.8% previous estimate). On a y-o-y basis, that leaves real GDP up +3.1%. The GDP release included downward revisions to PCE inflation in Q2. Headline PCE was revised down a tenth to an annualized +2.5% rate, whilst core PCE was also revised down a tenth to +2.8%. So, a bit closer to the Fed’s 2% target than we previously thought. Also, the Atlanta Fed’s GDPNow estimate for Q3 moved up to +2.5%. Weekly initial jobless claims were in line with expectations at 231k over the week ending August 24 (vs. 232k expected). It brought down the 4-week moving average to a two-month low of 231.5k. The Conference Board’s consumer confidence indicator, as the confidence reading rose to a 6-month high of 103.3 (vs. 100.7 expected).

European data

August flash CPI came in at +2.2% as expected. That’s the lowest inflation for the Euro Area since July 2021, so that was seen as keeping the path open to another ECB rate cut at the September meeting. In addition, core inflation fell to +2.8% as expected. At a national level, Germany’s CPI fell to +2.0% (vs. +2.2% expected), the lowest since March 2021. In Spain, harmonized CPI was down to a one-year low of +2.4% (vs. +2.5% expected). The Euro Area M3 money supply grew by +2.3% y-o-y in July (vs. +2.7% expected). French consumer confidence ticked up to 92 in August as expected, which is its highest level since February 2022. Dutch central bank governor Knot said that “I will have to wait until I have the full data and information going into that meeting to decide my position on whether September is appropriate”.

Spotlight in France

After a week of consultations between President Macron and various political parties, only one outcome has emerged: Macron has rejected the possibility of forming a government led by the left-wing coalition NFP. Now the available options for forming a government are limited, ranging from a grand coalition to left or right-leaning minority governments, and possibly even a centrist minority government. Regardless, it is highly likely that the next government will be either a fragile coalition or a minority government. Political risk premium should persist due to the country’s fiscal position and the tight budgetary calendar. There was a significant fiscal slippage last year, with the deficit rising to 5.5% of GDP instead of the government’s initial projection of 4.9%. This led to the initiation of an excessive deficit procedure by the European Commission, which requires fiscal consolidation of at least 0.5% GDP per year. The next government will face the challenge of formulating a budget that adheres to the consolidation path, a difficult task. Key dates to watch include 20 September for the submission of the fiscal consolidation plan to Brussels, 1 October for the submission of the draft budget to the National Assembly, and 20 October for the submission of the same draft budget to the EU Commission for assessment. Failure to adopt a budget by 31 December would require a special law to continue financial operations based on the previous year’s budget. The rating agencies will also need to be monitored. Fitch (AA-, stable) and Moody’s (Aa2, stable) may downgrade the outlook when they review the rating on 11 October and 25 October respectively.

Highlights

On rates

Market participants’ expectations for central banks rate cuts have been little changed lately. In the US, 100 bps of Fed rate cuts are foreseen for the remaining of 2024, which would suggest either an inter-meeting 25bps cut or a 50bps cut. The probability for such a move in September meeting has been significantly reduced to 32%. Market participants now fully expect the ECB to cut rates in September but see a cut from the BoE as unlikely. Looking ahead the terminal rates priced in by the markets look elevated according to the five-year overnight index swap rate, except for Switzerland. Market participants see a terminal rate at 3.8% in the UK (against 3% from the swap rate), 3.4% in US (against 3%), 2.3% in the Euro area (against 2.3%) and 0.7% in Switzerland. Looking at the US, inflows into US money market funds continue to be strong, standing at USD107bn over the last three weeks. At the same time, because 3-month T-bill yields and Commercial Paper rates have been anticipating the Fed rate cuts, money market funds have shortened the maturities of their holdings. This has in part contributed to the renewed build up in the Reverse Repo Facility and fall in banks reserves at the Fed which could lead to an earlier end to QT if the trend continues.

Swiss franc

Recently, the Swiss franc has appreciated and is now once again close to its December 2023 high in real terms (which prompted some verbal comments from SNB’s Thomas Jordan in January). There are various drivers behind the recent appreciation of the franc. Downward pressure on interest rates has led to a narrowing in interest-rate differentials, weighing less on the low-yielding franc. As a natural funding currency, the burst of global carry strategies during the summer helped the franc. The weak economic leading indicators in the euro area (and around the world) do not bode well for capital flows out of Swiss securities. Without them, the surplus in the trade balance tends to favor upward pressure on the franc. Finally, speculative net positioning in the futures market has thus far remains short, which leaves room for upward pressure on the franc if those short positions are unwound. Despite the strength in the franc, the SNB has not been very vocal on the topic. Changes in sight deposits in CHF at the SNB suggest potential interventions at the start of August but this indicator is not particularly reliable. What’s more, with limited deflationary risks in Switzerland, the SNB is unlikely to cut aggressively the policy rate or to actively intervene in the FX market.

What to watch

• Monday: Labor Day in the USA and Canada; China Caixin PMI (Aug.); Switzerland: Retail Sales (July), PMI Manufacturing (Aug.)
• Tuesday: US ISM Manufacturing (Aug.); Switzerland: CPI (Aug.), GDP (2Q)
• Wednesday: US Trade Balance (July), JOLTS Job Openings (July), Factory Orders (July); Bank of Canada Rate Decision
• Thursday: Germany Factor Orders (July); US ADP Employment Change (Aug.), Initial Jobless Claims (Aug. 31), ISM Services Index (Aug.); Switzerland Unemployment Rate (Aug.)
• Friday: Germany Industrial Production (July); US Change in Nonfarm Payrolls (Aug.), Unemployment Rate (Aug.); Switzerland Foreign Currency Reserves (Aug.)