US stocks markets delivered a fourth straight week of gains for Wall Street, which is the longest streak since late 2021. The S&P 500 and tech-heavy Nasdaq indices are up 18 and 24 per cent respectively since their lows hit in mid-June. Expectations for the Fed’s benchmark interest rate level have fallen back to 3.5% by year end from 3.6% before last week’s softer US CPI data. Is the bottom now in across equity markets or is this simply an extended bear market rally?

There appears to be quite a disconnect between what the Fed is saying and how markets are reacting. Certainly, Fed speakers will be worth paying attention to over the coming days, ahead of the next week’s Jackson Hole symposium which has historically sparked volatility in markets. Last week saw several officials continue to say that rate hikes were definitely still coming, even into the new year. Markets seem more sanguine to this risk, but we note the 200-day SMA on the S&P 500 at 4328 looms above.

Whilst US CPI saw some respite in July, the same is unlikely to be seen for the UK, where CPI is seen rising further on Wednesday. Further rises in gas prices also mean that the peak is unlikely to be in until at least October where economists predict inflation topping 12%. We also get labour market data where unemployment is expected to hold steady at 3.8%. The cost of living is a critical issue in the UK. Friday’s retail sales figures and consumer confidence numbers should provide important inputs into the Bank England’s thinking over the path of monetary policy. GBP failed again at key resistance around 1.2275/93 last week with several support level near current trading levels above 1.21.

The RBNZ meeting may provide some excitement midweek. The bank is set to hike rates again by 50bps. Domestic inflation remains strong even though there are some signs that demand is cooling.  Focus will be on the projection for the cash rate. Will it remain similar to the previous projection from May? Markets have moved to price in a lower peak for rates and an earlier start to interest rate cuts. Last week, NZD/USD broke strongly to the upside and is currently trading around its 100-day SMA at 0.6434. Strong resistance is at 0.6529.

Major risk events of the week

15 August 2022, Monday:

-China Retail Sales, Investment, Industrial Production: The market median is 5.0%, 4.5% and 3.5% for each data point, respectively. Analysts say momentum in consumption is starting to build, though Covid lockdowns in July will impact these figures. Ongoing strength in investment and trade is key to the recovery.

16 August 2022, Tuesday:

–UK Jobs: Economists forecast a 240k gain in employment, and combined with a higher participation rate, this should have kept the jobless rate steady at 3.8%. Base effects should bring down the rate of pay growth after a one-off boost last year when many workers returned to full-time work from reduced 80% furlough pay.

-German ZEW Business Survey: Analysts forecast expectations to remain below pre-pandemic levels. Overall business sentiment remains depressed amid major concerns about the energy supply in Germany and the ECB’s announced interest rate hike. Pandemic disruptions in China may also hurt the economic outlook.

17 August 2022, Wednesday:

-RBNZ Meeting: Markets expect another 50bp rate hike, lifting the OCR to 3%. This would be the seventh straight hike and fourth half-point rise. Domestic inflation pressures remain strong, but domestic growth is slowing, and commodity prices have eased back recently. The bullish run in the kiwi may pull back if the bank lowers its terminal rate in its updated forecasts.

–UK CPI: Consensus forecasts headline CPI rising to 9.7% from 9.4%. The core is seen holding steady at 5.8%. Easing in supply chain issues may contain the core rate, but higher food prices should boost the headline. The Bank of England expects the latter to rise to above 12% in early Q4.

–US Retail Sales: Analysts expect a substantial deceleration to 0.1% in July from the prior 1%. Higher rates and inflation are expected to hurt demand and spending capacity going forward. With retail sales being reported on a nominal value, the slowing price declines could act as a headwind in July after the softer than expected July CPI report. The June retail sales figures were supported by higher prices.

–FOMC Minutes: The Fed raised rates by 75bps as expected at this meeting. This took rates back to neutral for the first time since 2019. Chair Powell abandoned forward guidance and said the bank will take a data dependent approach on a meeting-by-meeting basis. Any views on the outlook to rates will be crucial, especially the terminal rate. Where is restrictive territory and were there discussions around the slowdown in growth? We note the minutes could be seen as a bit stale given the hot jobs report and cooler CPI since the last FOMC meeting.

19 August 2022, Friday:

–UK Retail Sales: Expectations are for an unchanged headline print and a core reading at -0.4%. The two bank holidays may play havoc with the data. Analysts see no relief for the rest of the year and start of 2023 as the economy heads into recession.