Contents
The financial markets experienced a turbulent week as they grappled with two significant shocks. On one front, the escalating war in Israel sent shockwaves through the markets, particularly impacting oil prices. Simultaneously, this geopolitical tension bolstered gold and the Swiss franc, making it the sole G10 currency to appreciate against the US dollar. Meanwhile, the second shock emerged as an unrelenting deluge of US Treasury supply. This was accompanied by higher-than-expected Producer Price Index (PPI) and Consumer Price Index (CPI) data.
Despite these challenges, US 10-year and 30-year yields experienced an unexpected decline of nearly 20 basis points. This drop marked the end of a continuous six-week increase in yields. This marked only the second weekly decline in the past twelve weeks, underscoring the market’s resilience.
While concerns lingered due to the Israel conflict, market analysts and observers recommended shifting focus. They suggested that as long as the war stays contained, attention can turn to macroeconomic drivers. In December, West Texas Intermediate (WTI) crude oil became a significant driver. It initially surged, but uncertainty grew over the weekend. Threats from Iran loomed, especially concerning a new front in the conflict if the Gaza blockade persisted.
US Economic Resilience Amid Skepticism
Upcoming days will see the US economy shifting its focus from prices to the real sector. As the quarter comes to a close, analysts expect economic data for Q3 to show a loss of momentum. This could potentially pave the way for a more pronounced slowdown in Q4.The US GDP tracker from the Atlanta Fed predicts a slight acceleration over Q2. The economy is expected to grow at slightly above 5%. This indicates a positive trend in economic performance.
China also remains a key player in the global economic landscape. China’s economic data, including Q3 GDP figures and September details, hold immense importance for analysts. They are anticipated to be pivotal in shaping the global economic outlook. The UK and Canada are reporting September CPI figures, closely monitored by their central banks. The swaps market indicates a probability of just under 50% for the Bank of England to take action. Conversely, the likelihood for the Bank of Canada stands slightly above 50%.
Throughout the post-Covid economic recovery, many economists have been skeptical, and recession calls have only recently been rescinded. Notably, this skepticism is not limited to private sector economists. In December of the previous year, the median forecast by Federal Reserve officials predicted a meager 0.4% economic growth for the current year. However, Federal Reserve officials revised this estimate to 1% in June and further raised it to 2.1% in September. The Atlanta Fed is even more optimistic, tracking a robust 4.5% growth in Q3. While Bloomberg’s survey has a more conservative estimate of 3.0%, it drops to 0.5% for the current quarter.
US Retail Sales and Industrial Output
Despite substantial nonfarm payroll figures, showing an increase of 336,000 jobs, a closer examination unveils worrisome data details. For instance, the loss of full-time positions for the third consecutive month signals an ongoing problem. Furthermore, a surge in uncontracted self-employed workers has occurred, further accentuating these concerns. Moreover, the rise in individuals holding two full-time jobs adds complexity to the situation. These findings have led analysts to predict a loss of economic momentum. Analysts anticipate that upcoming data will confirm this trend. It points to potential challenges in the economic landscape.
Core September retail sales, excluding autos, gasoline, building materials, and food services, may have declined for the first time in six months. A 0.3% decline would mean an annualized rate of around 2% for Q3, following the robust 6.5% pace in Q2. strong performance in July and August. Similarly, we anticipate a slight decline in industrial output following its robust performance in July and August. Additionally, we project a fourth consecutive month of falling existing home sales, with the largest decline of the year expected at 3.5%. The Leading Economic Indicators index has not risen since February 2022 and remains at recession-levels of -7.5% in August. Housing starts, however, may deviate from this trend and show signs of improvement.
The US Dollar Index experienced a notable upswing following the US CPI report, reaching a key retracement objective after pulling back from recent highs. The index has shown strength despite challenges, with potential resistance around 108.00. Further upward momentum could push the index closer to the 109.00 mark. Conversely, a break below 105.25 may signal a top formation, with the 20-day moving average offering an essential reference point for assessing the trend.
China’s Economic Outlook and Policy Responses
China is entering a crucial period with three significant developments in focus. Firstly, interest rates will take center stage as Beijing prepares to announce the benchmark one-year Medium Term Lending Facility (MLF) rate. Market participants highly anticipate his announcement, especially following a flat reading of the Consumer Price Index (CPI) in September.
While there is a possibility of a rate cut, it is more likely that the rate will remain unchanged at 2.50%. Second, Beijing will unveil Q3 economic performance data early on October 18. After a 0.8% growth in Q2, China is expected to record a 1% growth in Q3, bringing the cumulative growth for the year to approximately 4%. This falls short of the 5% target, and the report will also include data on industrial production, retail sales, and fixed asset investment for September. In addition, the property market’s latest readings will be closely watched.
The third significant development is the possibility of China increasing government borrowing by as much as CNY1 trillion (approximately $137 billion) to surpass the 3% budget deficit cap. The funds are likely to be allocated for infrastructure projects, with a particular focus on water projects. While these measures are designed to support the economy, their impact and potential consequences will be of interest to market participants.
China’s mainland markets reopened following an extended holiday period, witnessing mixed performance despite efforts to support equities. The yuan remained stable due to policy interventions, although a risk of weakening exists, particularly if the dollar approaches the CNY7.3125-75 level. Furthermore, foreign portfolio investors have been cautious about reentering the market, adding to the uncertainty surrounding the yuan’s performance.
Japan’s Economic Outlook
Japan’s industrial production showed signs of strain with a 1.8% decline in July and an anticipated flat performance in August, pending revision. Industrial output figures have been particularly volatile on a month-to-month basis. August’s reading is essential as it impacts the yearly average, which currently stands at -0.1%, notably lower than last year’s average of 50.1%. The tertiary industry index also plays a significant role, as it has shown annualized growth rates of 2% in Q1 and 4% in Q2. This indicator reflects the health of Japan’s services sector, which is pivotal to the country’s economic stability.
In addition, Japan’s September trade figures are worth monitoring. Historically, the trade balance in September has improved compared to August. However, Japan reported a trade deficit of JPY937.8 billion in August, highlighting the economic challenges it faces. Despite a weakened yen, Japan’s goods exports fell on a year-over-year basis in July and August, marking the first declines since late 2020.
The national Consumer Price Index (CPI) is another key data point to watch, even though the Tokyo figures had already made significant impact with a slowdown in headline and core rates. The nationwide headline CPI has been hovering around 3.2%-3.3% since May
Do you need help in finding the best forex broker for your needs? Click here: Best Forex Broker
Disclaimer:
Please note that this article serves solely for informational purposes. Thus, must not construe as financial advice. We advise readers to conduct thorough research and consult with financial professionals before making any investment decisions.
