The plethora of high impact risk events from last week will be digested this week. We said in our July monthly review it seemed like a month for the ages and the first couple of days of August didn’t disappoint either. Of course, we are in peak summer market mode, so price action is affected by thinner liquidity. But the under-par US jobs report has seen the market theme move from one about hot inflation to downside risks on the employment side, as Fed Chair Powell highlighted at his press conference last Wednesday. However, we note this is only one NFP report and there could be seasonal and weather effects.

Whatever, the debate has seemingly shifted to how big and how fast rate cuts will come with markets now expecting the Fed to lower borrowing costs by more than a full percentage point by the end of the year. That implies extra large 50bps cuts from at least one of its three remaining meetings. Of course, this is somewhat in contrast to the now rather dated June FOMC median dot plot of just one rate reduction for 2024. Treasury yields plunged last week with six straight days of bond buying, taking yields (which move in the other direction) into oversold territory. The dollar index will look for support just below 103.

With the data calendar fairly thin in the coming days, stocks will try to stem their losses after three consecutive weeks of losses. The VIX, the volatility measure known as Wall Street’s “fear gauge” has jumped above 20, double its year-to-date average and the highest level since the US regional banking crisis in March 2023.  Concerns about an economic slowdown have seen classic risk-off plays with sentiment also under pressure from earnings.

Have we seen the end of the rotation from Big Tech into smaller cap companies, if the economy weakens more sharply and undermines profits everywhere? RIP Goldilocks? Goldilocks means a fall in inflation but not a big gap in terms of economic activity. We note yen trades are deeply overbought so a correction could mean some hoped-for market stability, though rising geopolitical won’t offer much help to risk taking.

In Brief: major data releases of the week

Monday, 5 August 2024

-US ISM Services: Expectations are for a modest bounce bank into expansionary territory at 51.3, after June’s four-year low print at 48.8. Uncertainty around the November presidential election and persistent cost of living pressures still remain.

Tuesday, 6 August 2024

–  RBA Meeting: Markets are priced for no change and consensus agrees, with rates staying at 4.35%. But the bias is likely to be kept relatively hawkish with the focus on the bank’s updated forecasts to inform the outlook. 

Friday, 09 August 2024

– China Inflation: CPI is forecast to tick two-tenths higher to 0.4%. Economists cite increased capacity, soft consumer demand and intensified market competition as a continued drag.

– Canada Jobs: The headline print is forecast to come in at 28,700, better than the prior net loss of 1,400 jobs. The unemployment rate is seen one-tenth higher at 6.5%. The youth and temporary categories are causing major challenges. Another soft report could see three back-to-back BoC rate cuts.