German Ifo Business Climate Index Deteriorates in August, Highlighting Continued Weakness

Economic

Data Interpretation

Summary:

Data from the ifo Institute show that the German Business Climate Index fell from July's 87 points to 86.6 points in August, marking a new low since February 2024. The assessment of the current business situation dropped from 87.1 to 86.5, and the assessment of the business expectations declined to 86.8, indicating that the German economy is in a downturn.

On August 26, the ifo Institute for Economic Research published the German business survey data for August:

The German ifo Business Climate Index fell to 86.6 in August from 87 in July, compared with the expected 86.

The German ifo Current Business Situation Index dropped to 86.5 in August from 87.1 in July, in line with expectations.

The German ifo Business Expectations Index declined to 86.8 in August from 86.9 in July, compared with the expected 86.5.

The report shows that the sentiment among companies in Germany is on a downward trend. The ifo Business Climate Index fell from 87.0 points in July to 86.6 points in August, the lowest level since since February 2024. Companies assessed their current situation as worse. In addition, expectations were more pessimistic. The German economy is increasingly falling into crisis.

In manufacturing, the index fell considerably. Companies were significantly less satisfied with the current business situation. Expectations fell to the lowest level since February. Companies once again reported declining order backlogs. The situation for investment goods manufacturers, in particular, is difficult.

In the service sector, the business climate deteriorated. This was due in particular to skeptical expectations. In addition, the current business situation worsened somewhat.

In trade, the business climate rose slightly after declining two times in a row due to the somewhat less pessimistic expectations. Traders were, however, less satisfied with the current business situation. In construction, the index was unchanged. On the one hand, companies were slightly more satisfied with the current business situation. On the other, their expectations declined slightly.

German Ifo Business Survey

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Economic

US core PCE, eurozone inflation and China PMI highlights

Inflation readings out of the US and eurozone will be the highlights in the coming week as the market seeks near-term rates guidance. GDP updates will also be eagerly awaited, notably including from the US, Canada, Germany and India. A more up-to-date indication of economic conditions in mainland China will meanwhile be provided by the NBS PMI.

The attention turns back to economic data post the Jackson Hole Symposium, with July's US core PCE data to be especially keenly assessed. This follows prior CPI indications of softening inflationary pressures in the US, while the latest August flash PMI further showed that selling price inflation dipped to a seven-month low to hint at lower readings across official inflation gauges in the coming months. An easing inflation trend, alongside a weakening jobs trend in August (according to flash PMI data) are expected to be supportive of the Fed lowering rates, given recent FOMC meeting minutes showed members were generally supportive of a cut if the data behaved. Uncertainty regarding the size of the September cut remains, but signs of still-solid growth conditions observed via the latest flash PMI err towards 25 rather than 50 basis points. Additionally, the US also updates consumer confidence, personal income and spending data that will help shape the inflation picture and thereby steer monetary policy expectations for the market.

Over in the eurozone, preliminary August inflation figures will also offer insights into the European Central Bank's path forward as expectations gather for a September rate cut. The HCOB Flash Eurozone PMI signalled falling cost inflation, notably in the keenly-watched services sector where the input prices gauge hit a 40-month low.

Following the release of August flash PMI data for major developed economies and India, mainland China's PMI from the National Bureau of Statistics will be due over the weekend ahead of worldwide manufacturing and services PMI releases at the start of September. Growth and inflation conditions updates will be key as central bankers around the world contemplate rate cuts in line with the trajectory expected for the US Fed.

Flash PMI surveys bring (qualified) good news

Flash PMI data for August from S&P Global brought some encouraging news on developed world economic growth midway through the third quarter. A sustained robust expansion was seen the US, with growth also accelerating to solid rates in both the UK and Japan. Even the struggling eurozone reported an improved rate of growth, albeit still lagging behind. Measured across the G4 largest developed economies, output growth accelerated to the second fastest seen over the past 15 months.

Beneath the surface, however, the PMI data send some warning signals that growth is not as healthy as it seems. First, manufacturing is looking increasingly weak, as output fell sharply across the G4 as a whole amid slumping trade flows to leave growth dependent on the services economy. The latter saw August's expansion flattered in part by increased activity around the Olympics in France. Worryingly, backlogs of orders in the service sector fell across the G4 at the sharpest rate for eight months and future output expectations hit a nine-month low.

It's possible therefore that weakness from manufacturing will spread to services, though there is hope that lower interest rates will spur demand to help support the expansion. In this respect, the flash PMIs generally brought encouraging news, especially in relation to service sector inflation, the stickiness of which has been the greatest concern to policy hawks. Across the G4 economies, average prices charged for services rose at the slowest rate since December 2020, the rate of increase most notably cooling in the US to help open the door further for the FOMC to start cutting interest rates.

Key diary events

Monday 26 Aug:UK, Philippine Market Holiday;Thailand Trade (Jul);Singapore Industrial Production (Jul);Germany Ifo Business Climate (Aug);United States Durable Goods Orders (Jul);United States Dallas Fed Manufacturing Index (Aug).

Tuesday 27 Aug:China (Mainland) Industrial Profits (Jul);Germany GDP (Q2, final);Mexico Trade (Jul);United States S&P/Case-Shiller Home Price (Jun);United States CB Consumer Confidence (Aug);United States Richmond Fed Index (Aug).

Wednesday 28 Aug:Australia Monthly CPI Indicator (Jul);Germany GfK Consumer Confidence (Sep);France Consumer Confidence (Aug);France Unemployment Benefits Claims (Jul).

Thursday 29 Aug:New Zealand ANZ Business Confidence (Aug);Spain Inflation (Aug, prelim);Eurozone Economic Sentiment (Aug);Spain Business Confidence (Aug);Germany Inflation (Aug, prelim);United States GDP (Q2, second estimate);United States Wholesale Inventories (Jul, adv);United States Pending Home Sales (Jul).

Friday 30 Aug:South Korea Industrial Production (Jul);Japan Unemployment Rate (Jul);Japan Industrial Production (Jul, prelim);Japan Retail Sales (Jul);Australia Retail Sales (Jul);Thailand Industrial Production (Jul);Japan Consumer Confidence (Aug);Japan Housing Starts (Jul);France Inflation (Aug, prelim);France GDP (Q2, final);Germany Unemployment Rate (Aug);Italy Unemployment Rate (Jul);United Kingdom Mortgage Lending and Approval (Jul);Eurozone Inflation (Aug, flash);Italy Inflation (Aug, prelim);India GDP (Q2);Canada GDP (Q2);United States Core PCE Price Index (Jul);United States Personal Income and Spending (Jul);United States Michigan Consumer Sentiment (Aug, final);Saturday 31 AugChina (Mainland) ;NBS PMI (Aug).

What to watch in the coming week

Americas: US Q2 GDP, core PCE, durable goods orders, home prices, consumer confidence, personal income and spending data; Canada Q2 GDP

Second quarter GDP data will be released in both the US and Canada, with the former following the initial 2.8% estimate. In Canada, a better performance is forecasted for the second quarter with PMI data having alluded to a higher Q2 average, though the more up-to-date July data signalled some weakness into the start of the third quarter.

US core PCE, the Fed's preferred inflation gauge, will also be updated for July amid increasing market hopes that tamed inflation will enable the Fed to lower rates in September. Besides which, the series of official releases including personal income and spending, durable goods orders and consumer confidence, will be scrutinised and assessed for insights into how much the Fed will lower rates at the September meeting.

EMEA: Eurozone inflation; Germany inflation, Ifo, GfK surveys, UK mortgage lending

Preliminary August inflation figures from the eurozone will be due Friday. This follows the August HCOB Flash Eurozone PMI which showed an easing of easing cost inflation, the softest in eight months, most notably in the service sector.

Germany also updates its preliminary August CPI data, in addition to the Ifo Business Climate and GfK Consumer Confidence data. The August HCOB Flash Germany PMI Future Output Index pointed to a slight easing of business confidence in the latest survey period amid deteriorating output and demand conditions.

APAC: Australia CPI; India Q2 GDP; Japan industrial production, unemployment rate and consumer confidence figures; China's NBS PMI data

In APAC, Australia releases its July CPI data, which are expected to show still-elevated inflation, albeit at a softer pace than June. The latest August Judo Bank Flash Australia PMI meanwhile showed a further cooling of selling price inflation, but rising cost inflation continued to pose a risk for the inflation outlook.

India's GDP for the April to June quarter will be due Friday. A slightly softer, but still substantial, growth rate has been signalled by the HSBC India PMI data, with the latest flash data further showing that the Indian private sector economy continued to thrive in August.

Additionally, key Japan data including industrial production and retail sales will be watched, while PMI data from mainland China's National Bureau of Statistics (NBS) will also be updated over the weekend.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Cryptocurrency

Market picture

Since Friday, the crypto market has been in a mood of easy greed, as evidenced by the corresponding index, which reached 55 on Monday, close to levels at the beginning of the month. Market capitalisation has also returned to $2.25 trillion, the highest since August 2.

A decisive breakthrough came on Friday when Fed Chairman Powell supported optimism in global financial markets, tipping the scales in favour of the bulls. The cryptocurrency market has managed to overcome the local resistance of the past few weeks and is likely to head towards the upper end of the range, now nearing $2.35 trillion.

Bitcoin broke above both its 50- and 200-day moving averages on Friday and briefly touched the $65,000 level on Saturday and Monday morning. The bulls will need to confirm this breakout by holding above $63.0K on Monday.

Toncoin is stabilising at nearly $5.66 after losing more than 15% on the news of Pavel Durov’s arrest. Technically, the coin is consolidating near its 200-day moving average, which is acting as local support. In our view, there is a high probability of a deeper dive to the $4.3 (200-week) or even $2.5 (April 2022-February 2024 resistance area).

News background

Data from CryptoQuant and major options exchange Deribit signalled moderate optimism in the crypto market. Bitcoin reserves on centralised exchanges fell to multi-year lows in August.

According to SoSoValue data, total weekly inflows into Bitcoin-ETFs totalled $506.4 million, the highest in 4 weeks. Cumulative inflows since the BTC-ETF was approved in January rose to $17.88bn.

In contrast, the Ethereum-ETF has seen a negative trend, with outflows of $44.5 million for the week after outflows of $14.2 million previously. Net outflows since product approval have risen to $464.7 million.

According to Spot On Chain, the non-profit Ethereum Foundation moved 35,000 ETH ($94 million) to cryptocurrency exchange Kraken, the largest Ethereum Foundation transaction this year.

Ethereum’s Dencun update, activated in March, has led to an increase in bots’ activity and failed transactions on Layer 2 networks, according to Galaxy Digital.

Risk Warnings and Disclaimers

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Warren Takunda

Economic

Stocks

Asian stocks were mixed Monday after U.S. markets rallied close to their records on the expectation the Federal Reserve will start cutting interest rates soon to help the economy.

U.S. futures edged lower. Oil prices rose after Israel and the Lebanese militant group Hezbollah traded heavy fire on Sunday, triggering potential supply worries.

On Friday, Fed Chair Jerome Powell said the time had come to lower the main interest rate from a two-decade high.

“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

The stance lifted the yen against the dollar, with the dollar slipping 0.45% to 143.72 yen in Monday trading.

The Bank of Japan’s governor had hinted Friday that more hikes in Japanese interest rates may be coming if inflation stays on course to sustainably hit its 2% target. He also mentioned the bank was closely monitoring recent gyrations in stock prices and currencies.

Japan’s benchmark Nikkei 225 slipped 0.7% and ended at 38,110.22 in response to the stronger yen.

The People’s Bank of China maintained its one-year medium-term lending facility (MLF) rate at 2.30% on Monday, after cutting it by 20 basis points in July. This was delayed from its usual mid-month schedule as part of the central bank’s plan to overhaul its policy rate system and reduce the role of the MLF rate in favor of using short-term rates to guide the markets.

Hong Kong’s Hang Seng index added 1.2% to 17,816.92 while the Shanghai Composite index rose less than 0.1% to 2,855.61.

Australia’s S&P/ASX 200 rose 0.8% to 8,084.50. South Korea’s Kospi closed 0.1% lower at 2,698.01.

On Friday, the S&P 500 rose 1.1% to 5,634.61 after the index pulled within 0.6% of its all-time high set last month and has clawed back virtually all of its losses from a brief but scary summertime swoon.

The Dow Jones Industrial Average rose 1.1% to 41,175.08, crossing the 41,000 level for the first time since it set its own record in July, while the Nasdaq composite jumped 1.5% to 17,877.79.

Powell’s speech marked a sharp turnaround for the Fed after it began hiking rates two years ago as inflation spiraled to its worst levels in generations. The Fed’s goal was to make it so expensive for U.S. companies and households to borrow that it slowed the economy and stifled inflation.

While careful to say the task is not complete, Powell used the past tense to describe many of the conditions that sent inflation soaring after the pandemic, including a job market that “is no longer overheated.” That means the Fed can pay more attention to the other of its twin jobs: to protect an economy that’s slowing but has so far defied many predictions for a recession.

The smaller stocks in the Russell 2000 jumped 3.2% to lead the market. Smaller companies can feel greater benefit from lower interest rates because of their need to borrow to grow.

In the S&P 500 index of big companies, more than 85% of the stocks climbed.

In the bond market, the yield on the 10-year Treasury fell to 3.79% from 3.86% late Thursday. The two-year Treasury yield, which moves more closely with expectations for action by the Fed, dropped to 3.91% from 4.01% late Thursday.

In energy trading, benchmark U.S. crude rose 62 cents to $75.45 a barrel. Brent crude, the international standard, rose 69 cents to $78.84 a barrel.

The euro cost $1.1180, down from $1.1190.

Source: AP

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FOREX.com

Commodity

Key Events for the Week Ahead

•Crude Oil Inventories (Wednesday)

•US Prelim GDP (Thursday)

•US Core PCE (Friday)

•Chinese Manufacturing and Non-Manufacturing PMI (Saturday)

Fed Powell’s Latest Remarks

Focus is shifting away from inflation trends to gauge the confirmation and magnitude of the next policy decision on September 6. Chair Powell has clearly indicated the beginning of a monetary easing cycle in September with a likely 25 basis point cut, assuming the latest economic data aligns with expectations. The emphasis is on the labor market, as the Fed aims for conditions away from further cooling.

Chinese Economic Data

As one of the major factors influencing oil’s recent downturns, upcoming data from the Chinese economy will be fundamental. Scheduled for Saturday, the Manufacturing and Non-Manufacturing PMI figures will provide insight into the strength of China’s industrial activity. While weakness is evident in the manufacturing sector, non-manufacturing PMIs are showing expansion above the 50-mark.

Technical Outlook

Analyzing the US Dollar Index:

Crude Oil Outlook: DXY – 3 Day Time Frame – Log Scale Crude Oil Outlook: Week Ahead_1

The Fed's announcement of monetary easing has pushed the US Dollar Index back to its December 2023 lows, with the Relative Strength Index (RSI) on a 3-day time frame also nearing oversold levels last seen in January 2018. Without a clear catalyst for reversal, the next level to watch is the July 2023 low.

Crude Oil Perspective

Crude Oil Outlook: USOIL – 3 Day Time Frame – Log Scale Crude Oil Outlook: Week Ahead_2

The decline in the US Dollar, coupled with bullish sentiment surrounding potential upcoming stimulus, has allowed crude oil to rebound from its 2024 lows and return to the consolidation zone. Currently positioned near the lower boundary of its consolidation around the 75-resistance zone, there is still a possibility of a pullback towards the lower 70 range. However, the upcoming week's data—including crude oil inventories, US GDP, US Core PCE, and Chinese Manufacturing PMIs—will offer a more definitive insight into oil demand, moving beyond speculative projections.

• Bearish Projections: A drop below the 70-69 barrier is expected to align with support zones at 65 and 60-58.

• Bullish Projections: A rise above the 76 zone is expected to align with resistance levels near 77.90 and 80.

Risk Warnings and Disclaimers

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Forex

Central Bank

Fed's dovish stance supports AUD/USD rally

At the start of a new week, the AUD/USD hovers close to its 2024 highs after securing a third consecutive week of gains.

Last week's rally followed comments from Federal Reserve (Fed) Chair Powell at Jackson Hole, which validated market expectations of Fed interest rate cuts before year-end. The US interest rate market is currently pricing in a 75% chance of a 25 basis point (bp) Fed rate cut and a 25% chance of a larger 50 bp cut in September.

RBA considers rate hikes and lower volatility boost AUD/USD

In contrast, on the home front, the minutes from the Reserve Bank of Australia’s (RBA) August board meeting confirmed that the RBA discussed raising rates again to address stubborn inflation, which is currently testing the RBA's patience.

In addition to a dovish Fed countering a hawkish RBA, gains in the AUD/USD were also supported by risk-seeking flows and lower volatility as concerns about a hard landing, which surfaced after July’s soft US non-farm payrolls report, continued to fade.

Key event: monthly CPI indicator

This week's key event for the AUD/USD will be Wednesday's monthly consumer price index (CPI) indicator. While this is likely to bring some relief to households grappling with the cost-of-living crisis, it could present a headwind for the high-flying AUD/USD.

RBA monthly CPI indicator

Date: Wednesday, 28 August at 11.30am AEST

Key Australian inflation measures released in late July were marginally softer than expected:

•Headline inflation: rose by 1.0% in the June quarter (the consensus was +1.0%), bringing the annual rate to 3.8%, up from 3.6% previously. This marks the first increase in annual CPI since December

•The trimmed mean: rose by 0.8% in the June quarter (consensus was +1.0%), allowing the annual rate to fall to 3.9% from 4.0% prior – marking the sixth consecutive quarter of lower annual trimmed mean inflation

•The monthly CPI indicator: for June rose by 3.8% over the 12 months to June, easing from 4.0% in May. The core reading eased to 4.1% from 4.4% in May.

The RBA's board meeting minutes from August highlighted the slow pace of inflation's decline towards its 2-3% target: "Underlying inflation had fallen very little over the prior year in quarterly terms, and while the June quarter outcome had been in line with the staff's forecast, inflation was still some way above target."

Limited updates in new monthly CPI indicator

As July is the first month of the new quarter, this monthly CPI indicator will only provide updates on about 60% of the basket. Additionally, it will be skewed towards goods rather than the troublesome service components such as dining out, medical services, and transportation.

However, due to a sharp fall in energy prices following the start of the Federal Government's energy rebates, headline inflation in July is expected to fall to 3.3% year-on-year (YoY), edging closer to the RBA’s 2-3% inflation target.

This partially explains why the Australian interest rate market is currently pricing in 28 bp of RBA rate cuts by year-end and a cumulative 76 bp of cuts by May 2025.

AUD/USD Rally to be Tested by Sharp Decline in Australian CPI_1

AUD/USD technical analysis

The AUD/USD remains within a messy multi-month range after testing and rebounding from support near 0.6350 in early August.

AUD/USD Rally to be Tested by Sharp Decline in Australian CPI_2

Last week's gains saw the AUD/USD test resistance at 0.6798, stemming from the mid-July high. While the AUD/USD remains below the 0.6798 resistance level, it may rotate back towards horizontal support at 0.6700.

If the AUD/USD can break above 0.6800, it could open up a test of the December high at 0.6871, before encountering multi-week trendline resistance at 0.6940, originating from the 0.8007 high in February 2021. AUD/USD Rally to be Tested by Sharp Decline in Australian CPI_3

AUD/USD Rally to be Tested by Sharp Decline in Australian CPI_3

Risk Warnings and Disclaimers

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Warren Takunda

Economic

Pound Sterling (GBP) can extend its rally in the coming days, aided by an increasingly supportive technical setup and firm fundamental foundations.

That said, we look for a near-term pullback in GBP/EUR in the early stages of the week as the exchange rate very rarely records four subsequent daily advances. We think the strong moves in the latter half of last week could leave the pair a little exhausted. Indeed, Friday's pullback from the 1.1833 peak hinted at this behaviour.

However, the key takeaway at this juncture is that weakness is likely to be limited to a couple of days, and the broader trend is higher, so we set an upside target of 1.1850.

From a technical perspective, Pound-Euro has risen back above its 200-day and 100-day moving averages, signalling a medium-term uptrend is the pair's overarching backdrop. The RSI is pointed higher at 57 and advocates for further near-term gains.

Pound to Euro Week Ahead Forecast: It Was a Bear Trap_1

GBP/EUR fell rapidly in the first two weeks of August as Sterling was weighed by the combination of a Bank of England rate cut and a fall in global stock markets.

The dip below the key moving averages warned that the trend might have turned to the downside, but the subsequent recovery suggests this was a pullback within the uptrend and warns of the dangers of following technical studies exclusively.

Indeed, the fundamentals for further advances over the coming weeks are compelling and always hinted that sellers had entered a bear trap:

1) Global stock markets are pointed higher thanks to Friday's speech by Jerome Powell that signalled the looming onset of interest rate cuts at the Federal Reserve. This has boosted investor sentiment, which is traditionally supportive of the British Pound against the Euro, Dollar, Franc and Yen.

2) The UK economic picture is supportive, with August PMIs showing the expansion continues. Importantly, forward-looking elements of the report are constructive, particularly when compared to the dour findings of the Eurozone's poor PMI report.There will be no major data releases out of the UK in the next five days, and we think the thrust of action will depend heavily on how global markets behave.

On this count, it is hard to be anything other than bullish now that the Fed has greenlighted rate cuts with Powell's speech sounding so 'dovish' that it invited the prospect of a decisive 50 basis point cut in September.

We can look for some exhaustive pullbacks in markets - and, by extension, the Pound in the coming days - but ultimately, standing in the way of this train will be difficult and risky to justify.

The Eurozone is the locus of GBP/EUR-specific data for the coming days. Germany is performing poorly and is why Monday's IFO business sentiment survey and Tuesday's GDP release are important.

Pound to Euro Week Ahead Forecast: It Was a Bear Trap_2

There are upside risks to GBP/EUR in the event that disappointing readings bolster the odds of a faster pace of rate cuts at the ECB in the coming months in response to the slowdown in Europe's largest and most important economy.

Thursday is another important day as we have German and Spanish inflation releases to look forward to. Any surprises here can shake the market ahead of Friday's all-Eurozone inflation release.

An undershoot of the consensus expectation for HICP to print at 2.3% year-on-year can weigh on the single currency.