2024 Weekly Update

Market update

The S&P 500 closed the week at 5,626.02, +4.02% higher. The Dow Jones closed at 41,393.78, +2.60%, with the Nasdaq higher by +5.95%. The volatility index VIX closed the week at 16.56, down from 22.38. The Euro Stoxx 600 rose +1.85%.

The 10-year UST closed at 3.65%, down from 3.71% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -124 bps. US Corporate Bond spreads: Investment Grade spreads remained at 178bps and High Yield spreads widened +9bps at 369bps. German 10-year Bunds yield closed at +2.15% down from +2.21% a week before. In Europe, Corporate Investment Grade spreads widened +3bps at 134bps and High Yield widened +10bps at 380bps.

The US Dollar Index (DXY) depreciated -0.06% last week and closed at 101.11. The Euro closed at 1.1075 (-0.08%); the Yen appreciated +1.02%, closing at 140.85 and the Swiss Franc depreciated -0.69%, closing at 0.8488. Gold closed at $2,577.7, appreciating +3.21%. Oil was higher, Brent closed at $71.61 (+0.77%) and WTI at $68.65 (+1.45%).

Macroeconomy

US inflation

August headline CPI came in at +0.19% on the month, which took the y-o-y rate down to +2.5% as expected (down from+2.9% in Jul). That’s the lowest annual inflation rate since February 2021, before the inflation spike begun. Core inflation was running at a monthly pace of +0.28%, with the y-o-y number at +3.2% (unchanged vs. July). The services ex-energy line accelerated to +0.4% m-o-m (up from +0.3% in July) thanks to another hot shelter reading (+0.5%, a 7-month high, vs. +0.4% in July) and a big surge in airline fares (+3.9% in Aug. vs. -1.6% in July and -5% in June). On the former, the Owners’ Equivalent Rent makes up just over a quarter of the overall CPI number, and around a third of the core CPI number, so it plays a big role. On the latter, the airline fare advance is a function of the major carriers in the US deliberately dialing back capacity. On the producers side, PPI for August came mostly in-line expectation, with y-o-y growth in headline PPI(+1.7%) and core PPI excluding food and energy (+2.4%) beating consensus. Monthly rise for headline (+0.2%) and core (+0.3%) were just 10bps above estimates.

ECB rate cut

The ECB decided to cut its deposit facility rate by 25bps to 3.50% at Thursday Governing Council meeting, as widely expected. President Christine Lagarde mentioned that the decision was unanimous. As result of the ECB’s review of its operational framework, the refi rate and the marginal lending facility will also be lowered to 3.65% and 3.90%, respectively. The changes will take effect on 18 September 2024. The ECB’s new staff projections were updated. Specifically, while headline inflation forecasts were unchanged from June (2.5% in 2024, 2.2% in 2025 and 1.9% in 2026), the ECB revised its core inflation forecast slightly higher for 2024 and 2025 by 0.1pp to 2.9% and 2.3%, respectively. The 2026 forecast was left unchanged at 2.0%. The ECB cut its growth forecasts by 0.1pp across the forecast horizon to 0.8% in 2024, 1.3% in 2025 and 1.5% in 2026, reflecting weaker domestic demand. The essential point is that the ECB continues to see inflation “dropping to 2% over the course of 2025”. Lagarde mentioned that the balance of risks on growth was tilted to the downside, but she did not mention any clear bias regarding inflation, highlighting both downside and upside risks. There was little guidance on the next steps, with Lagarde emphasizing that the ECB will remain “data dependent and follow ameeting-by-meeting approach”. President Lagarde stressed that services inflation “needed monitoring”. She expressed (again) confidence that wage growth would slow down next year.

US data

US weekly initial jobless claims increased marginally to +230k (vs 226k expected), suggesting that layoffs remained low even as the labor market slows. Continuing claims increased by +5k to 1.85 million for week ended August 31st. Overall, the data posed no surprise and the figures were aligned with the recent drop in unemployment rate in the last week’s payroll report. Also, growth is certainly not currently falling off a cliff given the updated Atlanta Fed’s GDPNow update. The latest reading included August jobs report, which lifted the Q3 growth estimate from an annualized +2.1% rate to +2.5%. If realized, that would be the 8th quarter in the last 9 where growth is running at an annualized pace above 2%. Along similar lines, the New York Fed’s Staff Nowcast stood at +2.6% for Q3, so still pointing well away from recessionary levels. Adding to the generally resilient cyclical data, US consumer credit release for July (+$25.5bn) showed the strongest monthly rise since October 2022.

Global data

Former ECB President Mario Draghi published his long-awaited report into European competitiveness. Among others it called for additional investments of €750-800bn per year, and it said that some “joint funding of investment at the EU level is necessary to maximize productivity growth”. Overall, the report contained a fairly blunt message, and Draghi said toreporters that “For the first time since the Cold War we must genuinely fear for our self-preservation”. UK monthly GDP was unchanged in July (vs. +0.2% expected). As a result, investors dialed up their expectations for BoE rate cuts over the months ahead, and gilts outperformed with the 10yr yield down -5.8bps. Japan’s PPI rose +2.5% y-o-y in August, less than the expected +2.8% and down from the +3% gain reported the previous month. The BOJ board member Naoki Tamura commented that the bank needs to raise interest rates to at least 1% to avoid inflationary risks. Looking ahead, the BOJ is set to meet next week, with the consensus mostly expecting the bank to remain on hold for now.

Highlights

FOMC preview

The FOMC is expected to announce its monetary policy decision on Wednesday afternoon. Latest economic data make the 9/18 rate decision a very close call between a 25bps and 50bps rate cut. Aug. CPI ran a bit hot on a core sequential basis however, the US is still in a state of disinflation (which means policy is passively tightening). Labor fundamentals are cooling (as evidenced by the last two jobs reports) and officials have made clear (including the recent speech from Waller and Powell’s Jackson Hole address) that the Fed is pivoting to the employment side of their mandate. As of Thursday, investors were leaning towards a 25bps cut until a WSJ article by Nick Timiraos hit on the afternoon discussing whether the Fed will cut 25bps or 50bps. The article doesn’t really express a strong opinion, but it does quote several former Fed officials (Jon Faust, William Dudley, Donald Kohn, and Esther George) who think the Fed should start at 50bps. As of Friday, futures were pricing in a 47.5% chance of a 50bps move. Investors will pay as much attention to the expected size of the rate cut as to the additional announcements (updated dot plot, statement, supplemental, and press conf.) which are expected to be quite dovish. In the meantime, US retail sales for Aug. will be released on Tuesday. Consensus is looking for a moderation in the headline number (+0.2% m-o-m vs. +1% in July) while the control group holds steady (+0.3% m-o-m, same as in July).

What to watch

• Monday: US Empire Manufacturing (September); Eurozone Trade Balance (July)
• Tuesday: Germany ZEW Survey (September); US Retail Sales (August), Industrial Production (August), NAHB Housing Market Index (September)
• Wednesday: UK CPI (August); US Building Permits (August), Housing Starts (August), FED Meeting
• Thursday: BoE Meeting; US Leading Index (August), Existing Home Sales (August)
• Friday: Japan CPI (August); UK Retail Sales (August), Eurozone Consumer Confidence (September, preliminary); BoJ Meeting