From Markets to Economics – and Other Things You Need to Know – Executive Summary

Bonds could dominate next week’s events if yields continue to rise.

The most notable reaction after the last FOMC meeting was that of the bond markets, which continued to fall and yields to rise. Not even the US dollar has been able to significantly prolong its recovery, despite rising yields. But global stock markets certainly took notice and fell at the same time, as investors finally took seriously the Federal Reserve’s statement that interest rates would have to stay higher for longer. So, while we have US PCE inflation, consumer sentiment, GDP, retail sales and PMIs in China and CPI in Australia, it will likely be the behavior of bond yields next week that will determine the importance of these economic data. .

The past week

• The Fed maintained interest rates, as was widely expected, although it improved its forecasts for growth and inflation and reduced cuts in the Fed’s average interest rate forecast for 2024 by 50 basis points.
• This not only reinforces the idea of ​​“higher interest rates for longer” in the US, but also brings with it the prospect of further hikes – even if the financial markets are not expecting it.
• Weak post-Fed US jobless claims numbers also served as a reminder that the US economy is actually bearing higher interest rates. For a while at least.
• Bond yields rose on bets that interest rates will stay higher for longer, with 20- and 30-year bonds rising more than 17 basis points each.
• Global stock markets fell after the Federal Reserve meeting, and higher yields particularly impacted technology stocks, causing the Nasdaq 100 to hit a 5-week low and on track for its worst week in six months.
• The Bank of England also held interest rates, thanks to a set of lower-than-expected inflation figures the day before (and with four key members, including Governor Bailey, opting to hold rates, suggesting a peak of 5.25%).
• The Bank of Japan kept its policy unchanged, as was widely expected.

next week

Inflation in personal consumption expenditures in the United States

Energy prices and the base effect caused annual inflation in the US to rise for the second month in a row, although it is core inflation that matters most going forward. The Fed’s preferred measure of inflation is the personal consumption expenditures (PCE) series, which will be released next week. The core PCE index is less volatile than the core CPI and has been more stable than its CPI counterpart. With the Fed saying that high interest rates are here to stay, it would be an extraordinarily big mistake for markets to ignore what we have learned this week. This means that the personal consumption expenditures data is unlikely to change the market unless it is surprisingly bullish to generate new bets on another rate hike by the Fed.

American consumer confidence

Next week, two measures of American consumer confidence will be released: the Conference Board Consumer Confidence Survey and the University of Michigan Consumer Survey. The two have clearly differed since March 2020, with the latter being the more pessimistic and volatile. However, it also has a smaller sample size of 500 compared to 5,000 of CB, and focuses more on an individual’s situation, while CB focuses more on their perception of the economy as a whole. However, both have fallen recently, and this is a trend that should continue to reduce the odds of higher interest rates for longer. But again, if the bond market continues to decline and push yields higher, this could certainly have a negative impact on sentiment and the economy overall.

US macro data

US Retail Sales, GDP, and Unemployment Claims: As we suggested earlier, bond markets are the main driver. This means that level 2 data is less attractive. However, retail sales are a form of consumer sentiment, so any noticeably weak US data could at least indicate a slowing economy. We also have the final US GDP impressions for Thursday, although unemployment data is released at the same time and this could prove to be the biggest market mover if another set of strong data is printed.

IAustralian inflation, retail sales

The latest economic data puts the RBA’s maximum rate at 4.1%. Although the Fed meeting was hawkish, it does not put any additional pressure on the RBA to raise interest rates unless they do so themselves. Unless of course we see Australian inflation rise as we have seen recently in the US and Canada.

China PMIs

The slowdown in the manufacturing sector has eased according to official NBS government data, although the services PMI continues to grow at a weaker pace and is undoubtedly the most important PMI to follow next week. Note that a special survey conducted by Caixin will be released at the end of the week. But at this point, a positive surprise may be necessary to surprise the markets.

Nono melo
XTB Analyzer