Market Outlook for the Week of nineteenth – twenty third August

Monday’s calendar is very light, with no significant economic events scheduled. On Tuesday, Canada will release its inflation data and Wednesday will feature the release of the FOMC meeting minutes, which could shed more light on the likelihood of seeing a first rate cut in September.

Thursday will bring a series of flash manufacturing and services PMI data for Australia, Japan, the eurozone, the U.K., and the U.S. In the U.S., we will also get existing home sales figures and the Jackson Hole Symposium will begin.

On Friday, we’ll have several important releases: retail sales q/q for New Zealand, national core CPI y/y for Japan, and both core retail sales and retail sales m/m for Canada. In the U.S., new home sales data will be reported.

The second day of the Jackson Hole Symposium will feature a speech by Federal Reserve Chair Jerome Powell, who is expected to discuss the economic outlook. Additionally, Bank of England Governor Andrew Bailey is also scheduled to speak at the event.

Throughout the week, various FOMC members are expected to deliver their remarks.

The consensus for this week’s Canadian inflation data is that headline inflation will drop to 2.4%, with core inflation also expected to decline. The trimmed mean CPI is anticipated to slow to 2.8%, while median inflation is projected to print 2.5%.

Recent inflation data in Canada has shown progress, prompting the Bank of Canada’s latest rate cut. This week’s figures could offer important insights into potential monetary policy decisions at the September meeting.

According to Wells Fargo, even if inflation and hourly wage growth for permanent employees remain elevated, the labor market is softening overall and economic activity is slowing, which is easing price pressures.

If this week inflation data prints below expectations and economic activity continues to weaken, the BoC is likely to deliver another 25 bps rate cut at the September meeting.

This week’s manufacturing and services PMI data for the eurozone could provide more clues about a potential rate cut by the ECB in September. The economy saw solid growth during the first half of the year, with the GDP rising 0.3% q/q in both Q1 and Q2. This was supported by easing inflation, employment growth and rising real income. However, sentiment surveys have weakened recently, especially for Germany’s manufacturing sector. For August, the consensus for manufacturing PMI is a modest rise to 45.9 from 45.8 and services PMI is expected to decrease to 51.7 from 51.9. A significant deviation from consensus could impact the ECB’s policy decisions. Prints well below expectations will favor a September rate cut.

The consensus for U.S. existing home sales is 3.92 million, up slightly from the previous 3.89 million. The housing market continues to struggle due to high mortgage rates and rising prices, with existing home sales declining for four consecutive months as of June, nearing levels last seen in 2010. While a potential Fed rate cut in September could lower mortgage rates and attract buyers, strong price growth and slowing income are likely to limit resales.

Preliminary data from June indicates that a slight dip in mortgage rates sparked a modest rebound in activity in July. According to analysts from Wells Fargo, pending home sales and mortgage applications saw small increases, and they anticipate a 1.3% rise in existing home sales for July, reaching a 3.94 million-unit annual pace.

The consensus for Japan’s national core CPI y/y is an increase from 2.6% to 2.7%. The BoJ will closely monitor this week’s data to determine whether to implement another rate hike or delay it. One potential reason for the expected rise in inflation could be the government energy subsidies, as the pace of price increases for food and services has slowed. Inflation in Japan remains above the 2% target.

The consensus for U.S. new home sales is a rise from 617K to 628K. However, momentum for home builders is fading, with new home sales declining by 0.6% in June, marking the second consecutive decrease and leaving sales 7.4% below last year’s pace. A softer job market and expectations of lower future mortgage rates are cooling demand, while builder incentives are losing effectiveness, according to Wells Fargo analysts. In June and July, 61% of builders offered incentives, the highest percentage since January.

The Jackson Hole Symposium is an important event that many Fed Chairs have used over time to deliver significant speeches on monetary policy. Even though this hasn’t happened every year, there’s a good chance Fed Chair Jerome Powell will use this opportunity to signal an important shift in policy considering the current economic environment: inflation has decreased significantly, the labor market has softened and the unemployment rate has risen.

Many analysts believe that a rate decrease is coming in September, which is likely to be signaled during this speech. However, Powell will likely stop short of commenting on the size of the adjustment considering that another round of inflation and employment prints are expected until the September FOMC meeting. While the market already anticipates a 25 bps cut, a 50 bps decrease cannot be ruled out, depending on what the upcoming data will show.

Wish you a profitable trading week.