RBA August Minutes: Cash Rate Target Will Stay Steady for "Extended Period"

Remarks of Officials

Central Bank

Summary:

Minutes of the Reserve Bank of Australia's (RBA) August meeting indicated that while the possibility of further rate hikes was discussed, the decision to keep the key interest rate at 4.35% was deemed more justified. Given the uncertainty around future consumption and the outlook for the labour market, members assessed that the risk of inflation not returning to target within a reasonable timeframe had increased, so holding the cash rate steady for an extended period would be appropriate.

On August 20, the RBA released the minutes of its August monetary policy meeting, with the main points as follows:

Regarding the aggregate demand, domestic demand had been a little stronger in early 2024 than had been expected in May, driven by household and public consumption. That said, household consumption growth remained well below pre-pandemic averages. While there was still strong growth in underlying demand for housing, this had diminished slightly as the average household size had increased, possibly in response to higher rents and housing prices. Growth in GDP was still projected to remain below growth in aggregate supply for a period, bringing the economy to a more balanced state and thereby reducing inflationary pressure.

Labour market conditions in the June quarter continued to ease gradually. The unemployment rate had increased a little, owed more to reduced flows of workers into employment than an increase in layoffs. Both the participation rate and the employment-to-population ratio remained high, and the average hours worked were a little higher than previously expected. Meanwhile, the level of job vacancies remained well above both its pre-pandemic average and outcomes in other advanced economies, despite falling significantly from its peak. The labour market was expected to continue to ease gradually before stabilising in early 2026, and wages growth was expected to slow gradually as the labour market eased.

Underlying inflation had eased a little, but in quarterly terms, the outcome was not much lower than it was a year earlier. Inflation in prices of market services had eased in the June quarter but remained high, given the persistently strong growth in both labour and domestic non-labour costs. As such, the forecast return to the inflation target range of 2–3 percent was expected to be a little later than anticipated in May.

Data shows that inflation in the past months dropped steadily but remained above target. Members assessed that the risk of inflation not returning to target within a reasonable timeframe had increased, so holding the cash rate steady for an extended period would be appropriate to balance the prevailing risks to inflation with those surrounding the outlook for the labour market.

RBA August Meeting Minutes

Risk Warnings and Disclaimers

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Glendon

Economic

The Australian dollar (AUD) to US dollar (USD) exchange rate, also known as AUD/USD, is one of the most actively traded currency pairs in the global foreign exchange market. Today's performance of AUD/USD is a topic of keen interest for traders, investors, and those with financial interests in either Australia or the United States. In this article, we'll take a comprehensive look at the AUD/USD exchange rate as of today, analyzing its current value, recent trends, and factors influencing its movement.

Current AUD/USD Exchange Rate

As of today, the AUD/USD exchange rate stands at approximately $0.6583. This means that one Australian dollar can be exchanged for approximately $0.6583 US dollars. The current rate reflects a slight increase from the previous day's close of $0.6565, indicating a positive trend for the Australian dollar against its US counterpart.

Recent Performance

Over the past week, the AUD/USD exchange rate has fluctuated within a range of $0.6492 to $0.6785. The 7-day average exchange rate is $0.6603, with a change of -2.97% during this period. This data suggests that the Australian dollar has experienced some volatility against the US dollar, with an overall downward trend in the short term.

Looking at the past 30 days, the AUD/USD exchange rate has ranged from a low of $0.6492 to a high of $0.6785, with an average of $0.6642 and a change of -0.61%. This longer-term view indicates a more stable performance for the AUD/USD pair, with the Australian dollar maintaining its value relative to the US dollar.

Factors Influencing AUD/USD

Several key factors influence the movement of the AUD/USD exchange rate, including:

Economic indicators: The strength of the Australian and US economies, as measured by factors such as GDP growth, inflation, and employment data, can significantly impact the AUD/USD exchange rate.

Interest rate differentials: The difference between the Reserve Bank of Australia's (RBA) and the Federal Reserve's (Fed) benchmark interest rates can affect the relative demand for each currency, influencing the AUD/USD exchange rate.

Commodity prices: As a major exporter of commodities such as gold, iron ore, and coal, Australia's economy is heavily influenced by global commodity prices. Changes in these prices can impact the value of the Australian dollar.

Risk sentiment: Shifts in global risk sentiment, driven by factors such as geopolitical events, trade tensions, and economic uncertainty, can lead to changes in the demand for the Australian dollar, which is often seen as a risk-sensitive currency.

Outlook and Forecasts

Looking ahead, analysts and economists have provided various forecasts for the AUD/USD exchange rate. Short-term predictions suggest that the exchange rate could range between $0.6500 and $0.6700 over the next few days, with the potential to reach a high of $0.6800.

For the longer term, some forecasts indicate that the AUD/USD exchange rate could average around $0.6800 by the end of 2024, with a potential high of $0.7000. However, these projections are subject to change based on evolving economic conditions and market sentiment.

Conclusion

Today's AUD/USD exchange rate reflects the ongoing dynamics between the Australian and US economies, as well as global market forces. While the Australian dollar has experienced some volatility against its US counterpart in recent weeks, its overall performance remains relatively stable. Factors such as economic indicators, interest rate differentials, commodity prices, and risk sentiment will continue to shape the future trajectory of the AUD/USD exchange rate. As always, it's essential for traders and investors to stay informed about the latest developments and to conduct thorough research before making any decisions.

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

Risk Warnings and Disclaimers

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Titan FX

Central Bank

Forex

Stocks

The Jackson Hole Economic Symposium is a significant event in the financial world, with a long history that dates back to 1982. It attracts central bankers, policymakers, academics, and journalists from around the globe. Held annually at Jackson Lake Lodge in Grand Teton National Park, Wyoming, the symposium is a crucial platform for discussing global economic issues, focusing on monetary policy.

The event is significant for market participants because the US Federal Reserve’s chairman often uses this stage to deliver crucial policy signals.

Why the Jackson Hole Symposium Matters

The symposium stands out from other economic meetings due to its influence on global financial markets. When the Fed Chairman speaks at Jackson Hole, traders and investors listen carefully, parsing every word for hints about the future direction of interest rates and monetary policy.

Given the recent cooling of inflation and a slowing job market in the US, the market is keenly awaiting signals on whether the Fed will cut interest rates to stimulate the economy. Currently, the market is pricing in nearly 100 basis points of rate cuts by the end of the year, with a strong expectation for a 25 basis point cut in September.

However, Powell is unlikely to give direct guidance on the size of the cuts during his speech. Instead, he may focus on the Fed’s data-dependent approach, possibly waiting for the following US employment report on September 6th before making any commitments. The most significant risk is a reversal of the current trend if Powell’s speech indicates that the size of interest rate cuts this year will be less than the 1% expected by the market. Such a signal could strengthen the US dollar and a potential sell-off in equity markets.

Must-Watch Sessions and Speakers

Aside from Powell, another key speaker to watch is Kazuo Ueda, the Governor of the Bank of Japan, who is also scheduled to speak on Friday. Given the recent volatility in the USD/JPY pair, Ueda’s comments will be crucial. Japan has recently begun raising interest rates, and any hints about the future pace of these hikes could cause significant market movement.

While comments from central bank governors are extremely important, it’s also essential to monitor remarks from regional US Federal Reserve governors. These officials are part of the voting process on interest rates, and their statements can result in significant market moves. To navigate these potential shifts, traders should ensure they place stop-loss orders in the market and set larger profit targets than usual. This approach helps manage the heightened risk during the symposium.

Potential Market Impact

Given the impact of US interest rates on the US and global economies, Jackson Hole’s implications will impact all markets. For instance, in 2022, Powell’s warning about higher interest rates led to a rapid market decline. In contrast, in 2023, his firm stance on fighting inflation drove expectations of further rate hikes.

This year, the US dollar has already shown significant weakness in August due to expectations of rate cuts. The most critical factor now is the potential reversal of this trend if Powell indicates that the cuts will be less severe than expected. If Powell confirms market expectations, however, the US dollar could continue its downward path, possibly testing support levels at 100 on the US Dollar Index.

US Dollar Index Daily chart

US Dollar Index and 10-Year US Interest Rates

The USD has weakened significantly as the market predicts lower interest rates in the long term. This fall of the 10-year US interest rates has weakened USD. Traders should closely watch these charts for any signals indicating a shift in market sentiment.

US 10 year Interest Rate Chart

Equity Markets

Equity markets have been volatile lately, selling off recently due to increased recession risks in the US but rebounding in the past week. The Dow Jones Index has moved back above 40,000, targeting a test of the 2024 highs. However, concerns about US growth persist, and if Powell signals fewer interest rate decreases than expected, we could see a rapid sell-off in equities globally.

Trading Strategies for Jackson Hole

Volatility will be extremely high around the Jackson Hole Symposium, making it essential for traders to have a well-defined strategy. The market is already predicting lower interest rates in the long term, as evidenced by the recent weakness of the USD and the movements in 10-year US interest rates. However, this trend could reverse if Powell’s comments deviate from market expectations.

Cutting Losses and Extending Profits

Given the strong trends we’ve witnessed in currency, equity, and commodity markets, traders who can cut their losses quickly and patiently extend their profits will be well rewarded. It’s often easier to follow short-term trends rather than trying to pick reversal points following such speeches. Trading a small number of markets allows you to adapt quickly to market moves and identify trading opportunities.

Watch for Quick Market Direction Changes

As exciting as trading during Powell’s speech might be, traders must be prepared for quick changes in market direction as the market analyzes comments by central bank officials. Powell is unlikely to surprise the markets to avoid significant volatility. Still, the most considerable risk lies in reversing the recent weakness in the USD and recovery in equities if he signals slower interest rate cuts.

Focus on USD/JPY and Commodities

Following the recent fall of the USD/JPY as the carry trade unwinds, expect further volatility this Friday. Comments by Bank of Japan Governor Ueda could cause another round of selling should he signal an aggressive raising of interest rates in the next year. Many traders remain long USD/JPY, so a significant fall could present trading opportunities.

USD/JPY Daily Chart

Gold has surged to historic highs above $2,500, driven by expectations of lower interest rates. However, these gains could quickly reverse if Powell lowers expectations for future rate reductions. Commodities traders should be particularly vigilant, as gold’s movements will likely be closely tied to Powell’s comments on interest rates.

Risk Warnings and Disclaimers

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Thomas

Economic

Central Bank

Last week, the Tokyo stock market experienced historic volatility. The Bank of Japan's dialogue with the financial markets, which contributed to the turbulence, left a big question mark.

The benchmark Nikkei 225 index plunged a record 4,451 points on Aug. 5 to close at 31,458, a drop that exceeded the Black Monday stock market crash of Oct. 20, 1987. The next day, the Nikkei closed at 34,675, up 3,217 from the previous day's close, a record increase from one closing to the next.

Since the beginning of this year, the Nikkei has been in an overheated environment and is prone to entering an adjustment phase.

In the spring of 2023, the Tokyo Stock Exchange said it would focus on the price-to-book ratio, which indicates whether a stock is undervalued or overvalued. This policy would require companies to formulate improvement plans to revitalize the market further.

In 2024, an expansion of the Nippon Individual Savings Account program (NISA), in which income from small investments is tax-exempt, has attracted new individual investors and positively affected the Japanese stock market.

The Nikkei began this year at about 33,000 and then began a marked rise. On Feb. 22, it hit its then all-time high of 39,098, breaking the bubble-era record of 38,915 set on Dec. 29, 1989. In the following months, it rewrote the record again and again until hitting its latest all-time high of 42,224 on July 11.

The New York stock market was also overheated. On July 17, the Dow Jones Industrial Average closed at an all-time high of 41,198.

Several factors contributed to the overheating of the stock market.

The Federal Reserve raised its benchmark overnight interest rate to 5.25%-5.50%. However, the U.S. economy had remained surprisingly strong without significantly slowing.

Investors expected the stock market to continue rising, driven by the boom in generative AI and semiconductors. For foreign investors, the weak yen has made Japanese equities a bargain, and money was flowing into the Japanese stock market.

Skepticism about such favorable conditions triggered a historic decline in stock prices.

A U.S. employment report released on Aug. 2 fell far short of market expectations, intensifying fears of a recession.

Some have come to believe that growth expectations for AI were also excessive.

Furthermore, the Bank of Japan's monetary policy significantly impacted Japanese equities, causing a simultaneous global stock market decline.

The BOJ raised its policy rate from the 0.0%-0.1% range to 0.25% on July 31. Gov. Kazuo Ueda made his hawkish stance toward tighter monetary policy clear at a press conference, and the yen, which had become weaker than ¥160 to the dollar in July, surged to the ¥141 level.

Until now, the weak yen had boosted the performance of export-oriented Japanese companies, but now that the yen has reversed to a strong position, investors are concerned that the performance of such Japanese companies will worsen.

It is essential to think about economic policy from the perspective that the Japanese economy is now trying to completely break away from the deflationary mentality and cost-cutting, contractionary tendencies that have gripped it for 30 years.

We should enter a new stage with sustainable wage growth; normalization of the BOJ's monetary policy is appropriate for Japan's economy.

In “a world with interest rates,” corporations must strive to earn returns that are greater than the interest rate, with their efforts to reach that goal leading to the revitalization of the economy through value-added goods and services. We are shifting from a “cost-cutting economy” in which labor costs are kept low and price hikes are avoided as much as possible, to a “growth economy” that also increases the added value of products and promotes investment in people.

However, it has been a long time since the Japanese economy became accustomed to a “world without interest rates.” The BOJ began a zero-rate era — not its first one — in October 2010 and introduced a negative interest policy in February 2016. Not until March this year did the BOJ lift its negative interest rate policy and enter a “world with interest rates.”

The BOJ should issue careful messages when raising interest rates to avoid surprising the financial markets.

However, in tightening monetary policy, the BOJ made two decisions that the markets did not expect.

Many in the financial markets expected the BOJ to lift its negative interest rate policy in April, but the BOJ brought the move forward to March. Also, many financial market participants expected an interest rate hike to 0.25% in the fall, but the BOJ raised the rate in July.

The BOJ moved up its decision both times from the financial market's expectations because of its careful consideration of the political schedule, the state of the economy, and prices.

Although it was not highly likely, the April monetary policy meeting could have coincided with a general election. Also, the September meeting could have coincided with the LDP presidential election.

The financial markets reacted to the two decisions in contrasting ways.

Financial markets were calm immediately after the BOJ ended its negative interest rate policy in March because the bank did not take a hawkish stance toward tightening monetary policy but rather a dovish one of caution toward raising interest rates.

However, in its July decision, the BOJ raised interest rates earlier than the financial markets had expected and did take a hawkish stance, indicating a willingness to raise rates further in the future. This hawkish stance caused panic in the financial markets.

Perhaps considering criticism from politicians, the public and others that the excessively weak yen had led to high prices, the BOJ avoided taking a dovish stance as it had in March to discourage the yen from weakening excessively. However, this decision backfired.

BOJ Deputy Gov. Shinichi Uchida tried to change course in a speech on Aug. 7, saying: “We will not raise interest rates amid instability in financial and capital markets. For the time being, we need to continue monetary easing firmly at the current level.”

Rather than asking whether the BOJ tightened monetary policy too soon, the lesson should be that tightening without allowing financial markets to fully factor in the imminent change raises the risk of causing turmoil in financial markets.

Since the current Bank of Japan law was enacted in 1998, increasing the bank's independence from the government, there have been two significant instances when politicians and economists criticized it for hasty monetary tightening.

In August 2000, the BOJ ended its zero-interest rate policy, which had been in place since February 1999. However, when deflation became more severe and threatened to disrupt the global economy, the BOJ was forced to return to a “world without interest rates” in the face of critical public opinion.

In March 2006, the BOJ lifted its quantitative easing policy. However, the consumer price index statistics were retroactively revised downward, and prices temporarily turned negative that year. This revision led to criticism that the BOJ had removed quantitative easing measures too quickly.

After the bubble economy burst, Japan suffered a long period of deflation from 1998.

Many economists argue that the BOJ tightened its monetary policy too hastily in 2000. A certain number of economists also criticize the 2006 decision. And the Japanese economy has yet to emerge fully from deflation.

The current process of monetary tightening is the Bank's third attempt to completely break free from deflation and could be a significant turning point for the Japanese economy.

Also, the next anticipated policy rate raise would be the third one in this normalization process.

Will the third time be the charm?

In the financial markets, there is speculation about whether the BOJ will raise interest rates further before the end of the year.

Meticulous dialogue between the BOJ and the financial market is crucial to breaking out of deflation entirely, achieving the 2% price stability target, and ushering in a new era for the Japanese economy.

Of course, if the BOJ were to raise interest rates again, it would need to choose an appropriate time based on a deep analysis of price trends and lessons learned from the past.

Source: The Japan News

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

Risk Warnings and Disclaimers

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FastBull Featured

Economic

Daily News

Central Bank

Political

[Quick Facts]

1. Harris super PAC founder says public polls are too optimistic.

2. Netanyahu appeases the U.S. while pressuring his own team.

3. AAA reports record domestic summer travel, boosted by lower gas prices.

4. Rehn says weak euro area growth strengthens the case for a rate cut.

5. The Conference Board LEI For the U.S. declined in July.

[News Details]

Harris super PAC founder says public polls are too optimistic

The founder of the main outside spending group backing Kamala Harris' presidential bid says their own opinion polling is less "rosy" than public polls suggest and warned that Democrats face much closer races in key states. Chauncey McLean, president of Future Forward, a super political action committee, or super PAC backing Harris, said that the committee has raised hundreds of millions of dollars to back Harris in the Nov. 5 election.

"Our numbers are much less rosy than what you're seeing in the public," said McLean, who rarely talks publicly. McLean said Pennsylvania remains the most consequential state in the group's analysis and he called the race a "coin flip" based on its polls. He says Harris must win one of three states - Pennsylvania, North Carolina or Georgia - to win the White House. McLean said the race is as tight as ever.

Netanyahu appeases the U.S. while pressuring his own team

Israeli Prime Minister Benjamin Netanyahu told U.S. Secretary of State Antony Blinken on Monday that he is committed to reaching a Gaza hostage and ceasefire agreement, but Israeli officials say he has refused to give his own negotiators enough space to make a deal, according to AXIOS.

Netanyahu's negotiating team briefed him on Sunday that if he gave them more wiggle room, a deal might be possible. Netanyahu refused to budge and reprimanded them for "caving," two senior Israeli officials tell Axios. But Netanyahu continues to argue that if Israel stands firm, Hamas will eventually cave.

That was after the White House claimed significant progress was made during talks in Doha last week. Blinken said that Netanyahu had accepted the U.S. proposal and it was now incumbent on Hamas to follow suit. That statement baffled some Israeli officials who told Axios that Netanyahu's hard lines are actually making a deal much harder to reach. Netanyahu endorsed the U.S. proposal — which incorporated several of his updated demands — knowing Hamas would reject it.

AAA reports record domestic summer travel, boosted by lower gas prices

Bookings for domestic travel over the U.S. Labor Day weekend are up 9% from last year, according to the American Automobile Association (AAA). While the estimate only includes travel booked through AAA, the data adds to a sanguine picture for summer fuel demand in the United States.

The week of the July 4 Independence Day likely saw record domestic travel, following a Memorial Day weekend that recorded the highest travel volume in 20 years. Supported by lower gas prices, U.S. travel growth has remained resilient this year. AAA expects the retail gas price to average $3.50 per gallon during the Labor Day weekend, lower than $3.81 per gallon last year.

Rehn says weak euro area growth strengthens the case for a rate cut

The road ahead to the European Central Bank's (ECB) 2% medium-term inflation goal is still likely to be bumpy this year, said Olli Rehn, Governor of the Bank of Finland and a member of the ECB Governing Council, on Monday. He noted that there are no clear signs of recovery in the manufacturing sector and that the slowdown in industrial production may not be as temporary as assumed. The recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September, provided that disinflation is indeed on track.

The Conference Board LEI For the U.S. declined in July

The Conference Board Leading Economic Index (LEI) for the U.S. Fell by 0.6% in July, following a decline of 0.2% in June. It was expected to decrease 0.3%. "The LEI continues to fall on a month-over-month basis, but the six-month annual growth rate no longer signals recession ahead," said a senior manager at the conference board. "In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread."

[Today's Focus]

UTC+8 09:30 RBA's August Monetary Policy Meeting Minutes

UTC+8 17:30 Swiss National Bank Chairman Jordan Speaks

UTC+8 20:30 Canadian CPI YoY (Jul)

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

Risk Warnings and Disclaimers

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Samantha Luan

Stocks

U.S. stocks historically rise around the Federal Reserve's annual Jackson Hole Economic Policy Symposium — a gathering this week that will be closely watched by investors on Friday, when Fed Chair Jerome Powell is scheduled to give a speech, according to DataTrek Research.

"The S&P 500 tends to rally over the 2 weeks on either side of the Fed's Jackson Hole conference, with returns coming mostly after the Chair's speech," said DataTrek co-founder Nicholas Colas in a note emailed Monday. "We expect to see the same pattern this year."

The Jackson Hole Economic Policy Symposium, a gathering of central bankers and economists in Jackson Hole, Wyo., will be held this week on Aug. 22-24. Powell is scheduled to speak at the retreat on Friday at 10 a.m. Eastern time.

The S&P 500 index 0.97%, a gauge of U.S. large-cap stocks, has averaged a 0.9% return over the two-week period around Jackson Hole since 2010, according to DataTrek. "Fed Chairs don't always attend, and we have noted those years," Colas said, referring to the table below.

Here's How U.S. Stocks Historically Perform Around the Fed's Jackson Hole Gathering_1

DataTrek considers 2022, when the S&P 500 saw a big slump around the time of Jackson Hole, as "an outlier year given the Fed's aggressive monetary policy" aimed at taming high inflation with a series of interest-rate hikes.

Powell's 2022 Jackson Hole speech "surprised markets," as he signaled the Fed would do whatever it takes to bring down inflation, according to Colas. Powell also warned at the time that higher rates would probably lead to "some pain to households and businesses," as the Fed's tightening of monetary policy would likely slow growth and soften the labor market.

Now, investors are anticipating rate cuts from the Fed, as inflation has eased substantially and concerns about the economy increased following a recent softening in the U.S. jobs market.

"Market expectations for Fed rate cuts later this year are very high," Colas said. "Powell should be reassuring enough on the topic this Friday to see the typical ‘Jackson Hole Drift' higher over the next 2 weeks."

The S&P 500 saw a strong rally last week, finishing Friday 2% below its record closing high on July 16, according to Dow Jones Market Data. The U.S. stock market rebounded after worries over a softer-than-expected jobs report earlier this month sparked a selloff.

Here's How U.S. Stocks Historically Perform Around the Fed's Jackson Hole Gathering_2

Meanwhile, companies don't seem all that worried about a recession in the near term, at least judging by their recent earnings calls, according to DataTrek.

Six percent of S&P 500 companies mentioned "recession" during their calls with investors and analysts about their second-quarter earnings results, which is "quite low," said Colas.

"That is not so much an economic observation as a signal that corporate managements remain confident in their companies' near-term earnings power," Colas said. "If there were any need to excuse either earnings misses or reduced forward guidance, we would certainly be hearing more about recession looming somewhere just over the horizon."

By contrast, the "pandemic recession" in the first quarter of 2020 saw 42% of S&P 500 companies cite "recession" in their investor calls for that period, according to the DataTrek note, which cited FactSet data in the chart below. Here's How U.S. Stocks Historically Perform Around the Fed's Jackson Hole Gathering_3

Here's How U.S. Stocks Historically Perform Around the Fed's Jackson Hole Gathering_3

During the "technical recession" in the U.S. in the first half of 2022, when gross domestic product was "negative" for two straight quarters, mentions of "recession" peaked at 47% in the second quarter of that year, the DataTrek note shows.

Such mentions remained elevated for the remainder of 2022, despite the U.S. economy "clearly not experiencing" a recession as defined by the National Bureau of Economic Research, said Colas. He noted that a recession amounts to "a significant decline in economic activity that lasts more than a few months and is spread across the economy."

In Colas's view, "the managements of S&P 500 companies, facing difficult 2021 comparisons in 2022, used ‘recession' as an excuse for the contraction in their earnings."

Investors on Thursday will see flash readings on the U.S. manufacturing and services sectors this month from S&P Global's purchasing managers' index. That same day, weekly data on initial jobless claims in the U.S. will be released.

"Last Thursday's initial claims report reassured markets that U.S. labor demand remains OK," Colas said, so Powell can "lean into a confident message about the American economy."

The U.S. stock market was rising Monday afternoon, with the S&P 500, the Dow Jones Industrial Average and the technology-heavy Nasdaq Composite each climbing around 0.6%, according to FactSet data, at last check. The market's increase brought the S&P 500's year-to-date gain to around 17%.

Source: MarketWatch

Risk Warnings and Disclaimers

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Samantha Luan

Economic

Forex

Commodity

Markets

In the absence of high profile headlines present, softer yields and a weaker dollar initially proved the to be the path of least resistance, even as the momentum of this trade eased as US traders joined. German/EMU yields reversed small declines to currently trade up to 1.5 bps higher. US yields show a similar picture. Still, any sustained rebound in yields looks difficult for now. US inflation, while still well above the 2% target, has softened enough for the Fed to give more weight to growing signs of a cooling of activity and, in particular, a slowdown in job creation.

Last week’s US data (retail sales) suggest that the US economy is heading for a soft landing, rather than an outright recession. Still markets see room for the Fed to ‘substantially’ scale back policy tightening in order to prevent an unnecessary slowdown in activity/rise in unemployment. This week, the (US) PMI’s, comments at the Fed Jackson Hole symposium, the minutes of the July Fed meeting and the annual revision of the BLS’ US payrolls data might help markets to make up their mind on the pace of Fed easing. The debate remains open (and that probably remains the case after Jackson Hole), but markets continue to err on the side of the Fed being behind the curve. Fear for a sharp US downturn triggered a wild risk-off correction early August, but stocks in the meantime rebounded on the hope of easier (global) financial conditions.

However, with especially US markets having reversed course, the risk rebound is shifting into a lower gear. Europe now outperforms the US (Eurostoxx 50 + 0.5%, S&P 500 +0.1%). Oil (Brent $79.2/b) still struggles to hold the $80/b reference despite ongoing geopolitical tensions in the Middle East region as uncertainty on global demand lingers.

Anticipation of easier financial conditions keep the dollar in the defensive. USD/JPY this morning tested the 145.20 area (compared to a 147.63 close on Friday) but the USD selling gradually eased intraday (146.15 currently). EUR/USD (1.1035) regained the 1.10 barrier. The EMU eco picture remains uninspiring, but high wage growth (Q2 ECB negotiated wages to be published on Thursday) might force the ECB to take a guarded approach on further easing. The December EUR/USD 1.1139 top is within reach with the 2023 top at 1.1276. Sterling initially tried to extend its post-CPI comeback from end last week, but EUR/GBP 0.85 support holds (currently 0.852).

News & Views

Bulgarian president Radev unexpectedly declined to approve a new interim cabinet, adding he will delay snap elections until after October 20. His decision deepens the political turmoil in the country, which will head to the ballot for the seventh time in less than four years.

President Radev, whose powers have already been clipped by the government following several unilateral decisions to form governments over the past years, said that interior minister Stoyanov wouldn’t be able to guarantee fair elections if he continues in his role. The current political crisis delays Bulgarian efforts to join the euro. The middle of 2025 target date (already delay from 1/1/2025) is on a slippery slope. Apart from politics, the country has difficulties meeting the price stability criterion for joining EMU with average inflation rates well above the ECB’s June 2024 convergence report reference value (3.3%).

Rating agency Fitch this weekend confirmed the Czech Republic’s AA- rating with a stable outlook. It is underpinned by a record of credible macroeconomic and monetary policies, and a robust institutional framework. Fitch has revised down this year’s real GDP growth forecast to 0.9%, from 1.2% expected in February, given the weak start to the year and subdued external demand, but puts forward an average 2.4% growth rate in 2025-2026. Headline inflation has been moving close to the central bank’s target of 2% and is set to average 2.2% in 2024-2026, allowing the CNB to continue its easing cycle bringing the key rate at 3.75% by end-2024 (in line with our forecast) and 3.5% by end-2025.

Fitch expects the budget deficit to narrow to 2.5% of GDP in 2024 and 2.2% in 2025 from 3.5% in 2023. The debt/GDP ratio is set to increase to 43.7% in 2025, from 42.4% in 2023 and to gradually decline to 42.9% in 2028 driven by the narrowing of primary budget deficits and recovering economic growth.