By Zain Vawda

Weekly overview: time for policy adjustment

As the week draws to a close, Fed Chairman Jerome Powell certainly delivered on his promises with his speech at the Jackson Hole Symposium.

On the way to Powell’s speech, my biggest fear was that markets had already priced in a lot for September and that the reaction to Powell’s remarks might be muted. However, the Fed chair weighed in, noting that it is “time for policy to adjust” while reiterating his concerns about further weakness in the labor market.

Markets are pricing in a 34.5% chance of a 50 bps cut and a 65.5% chance of a 25 bps cut at the Federal Reserve’s September meeting. Between now and then, the biggest focus will be on the September 6 jobs data. This comes after the largest downward revision on employment data from the Bureau of Labor Statistics since the global financial crisis.

Any significant decline that the September jobs numbers miss and expectations of a 50 bps cut will increase. In the words of Fed Chairman Powell himself, “the Fed does not welcome further weakening in the labor market.”

After a brief pullback on Thursday, the DXY fell to new lows on Friday following Powell’s comments. The impact of this on the FX space saw GBP/USD push new highs above 1.3200 and EUR/USD finally reaching the 1.1200 mark again.

Oil is on track for two straight gains, but will likely end the week in the red. Ongoing demand concerns and stagnant airfares continue to weigh on oil prices. Expectations of rate cuts could add some optimism, but we’ll have to wait and see if that carries over into next week.

US indices enjoyed a strong week overall, with all three major indices on course for weekly gains despite some gyrations on Friday. Like gold, US indices failed to hold on to their gains following Powell’s comments. Is this a sign that much of the potential 25bps rate cut for September has already been priced in?

Next week: Lots of data, but Fed rate cut is a given

Markets in Asia Pacific

Asia has a busy week ahead for economic data, with inflation, GDP and manufacturing data taking center stage, and optimistic data prints expected.

Japan leads the way with a series of data releases, as market participants continue to watch closely. In Tokyo, consumer inflation is expected to decline to 1.9% in August from 2.2% year-on-year in July, mainly due to the government’s temporary energy subsidy program. Despite this, the services sector is expected to see an acceleration in price increases, fueled by robust wage growth.

Industrial production is expected to rebound with a month-on-month increase of 3.0%, reversing the 4.2% decline in June, as auto production gradually recovers and semiconductor-related output improves, as shown by recent export data. Meanwhile, labor market conditions are expected to remain tight amid persistent labor shortages, reflecting ongoing challenges in labor availability. The data should support the hawkish stance taken by BoJ Governor Ueda in testimony before the Japanese parliament on Friday, where he hinted at more rate hikes.

China does not publish any key data apart from loan interest rates and industrial profits.

Australia has a busy week ahead of it, with the RBA hoping the data will make their job and decision-making process easier. There is a lot of data coming out of Australia, but the biggest is likely to be the inflation report and retail sales. The RBA’s recent decision to leave rates unchanged was met with some scepticism, but there is hope that inflation has remained stable over the period. The combination of seasonality, a slowdown in food price inflation and falling petrol prices is expected to result in a broadly flat month-on-month change.

Europe + UK + US

In Europe and the US, it’s another week of heavy data. The UK has a bank holiday on Monday to start the week, but the US and other parts of Europe remain open.

Most of the high-impact data releases from Europe and the US are expected later in the week. The main highlights are EU inflation data and of course from the US we have the Fed’s favorite inflation gauge, the PCE price index.

Normally, the PCE would have a big impact on rate cut expectations, but next week’s release and jobs data will likely have a bigger impact. Unless we have a huge miss from the US and a significant increase in the PCE number, any reaction to the data will likely be muted.

The EU inflation figures are crucial, especially after ECB sources suggested that support for a 25 basis point rate cut could be increased at the central bank’s next meeting. If inflation falls slightly or in line with expectations, this could put some pressure on the euro as traders are likely to increase their bets on a rate cut.

Finally, on the earnings front, we have the much-anticipated Nvidia earnings release next week. Nvidia (NVDA) stock is still up roughly 150% this year as markets gauge investor enthusiasm for AI. There’s been increasing talk of comparing Nvidia’s rise to the dotcom bubble of the early 2000s, and the sell-off following disappointing data from Alphabet (GOOG) and Tesla (TSLA) has led to a steep sell-off. Will AI mania reignite confidence and propel U.S. indices to new heights?

Chart of the week

This week’s highlighted chart is Brent Crude Oil after a mixed week. Brent is now trading at a delicate level heading into the new week, with plenty of headwinds to consider as well.

The late rise from a key support level on Thursday and Friday has made the outlook for next week intriguing. We had two huge bullish days, which brings forward a retest of the descending trendline as the new week begins.

Demand concerns continue to plague oil prices and could hamper a deeper recovery next week. Immediate resistance rests at the psychological level of 80.00, with the falling trendline just above.

On the downside, the support at 77.25 is crucial before reaching the 75.00 level.

Brent Crude Oil Daily Chart – August 23, 2024

Important levels to consider:

Support:

Resistance:

• 80.00
• 81.58
• 82.54 (200-day MA)

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