Wall Street Threw A Tantrum, But Main Street Carried On

Data Interpretation

Economic

Summary:

While Wall Street is quick to react to data signals, Main Street responds to on-the-ground economic conditions, which take longer to decipher.

The deep sell-off that gripped Wall Street two weeks ago was short-lived. The volatility was triggered by a Bank of Japan rate increase that drove up the yen and rattled global markets. In the U.S., weaker-than-expected jobs data piled on, stoking fears of a recession and extending the market downturn.

But by Friday, Aug. 9, the S&P 500 Index had all but returned to its closing level from the Friday before. A week of losses was erased.

The speed of Wall Street’s dive and recovery is at odds with the slowness of data that signal changes in the real economy.

Main Street establishments move at a slower pace than Wall Street’s market makers, speculators, and investors. And Main Street employment trends sometimes can be drowned out by the cacophony of monthly jobs data.

In fact, the Main Street economy continues to grow. While Wall Street licks its wounds, let’s take a look at some small business data.

High-propensity start-ups are increasing

Over the last four years, the Census Bureau has documented a surge in new business applications.

Between June 2020 and June 2024, new business applications averaged 440,799 a month, up from just 269,913 a month in the four years preceding the pandemic.

About a third of those applications are from high-propensity businesses. Census defines high-propensity businesses as start-ups with a likelihood of becoming employers with a payroll. These are Main Street’s job creators.

In the second quarter of 2024, high-propensity business applications were up 28 percent from the second quarter of 2019.

Banks are lending

One thing Main Street and Wall Street can agree on is the benefit of low interest rates. Cheap borrowing cuts costs and increases demand for loans.

In tandem with Federal Reserve interest rate increases, banks have been tightening lending standards for borrowers of all sizes. But while large companies can obtain financing in the stock and bond markets, most small employers are dependent on bank loans to grow their businesses.

The Federal Reserve’s Senior Loan Officer Opinion Survey last week was a light at the end of a long, dark tunnel for these small businesses. It found that the share of U.S. banks that tightened standards on small business loans fell to 8.2 percent in the third quarter, down from 19.7 percent in the second quarter and the lowest share since 2022.

Lending standards are likely to ease further when the Federal Reserve cuts its benchmark interest rate. That should tamp down financing costs and enable Main Street to continue its hiring growth.

Mom-and-pops are still hiring

The ADP National Employment Report has tracked hiring by small employers since 2010. In the first seven months of 2024, establishments with fewer than 20 employees hired 133,000 people. That’s a tremendous downshift in hiring from the same period a year ago, when these employers created 532,000 jobs.

One reason small employers hired aggressively in 2023 was because they had had difficulty competing with large companies in 2021 and 2022, as the economy recovered and demand for labor took off. As larger employers slowed hiring in 2023, smaller ones stepped in, aggressively rebuilding headcount lost during the pandemic.

Main Street hiring now is back to its normal pre-pandemic pace. The smallest establishments have created 133,000 new jobs so far this year, up from the 128,000 jobs they added during the first seven months of 2019.

What’s more, labor costs are returning to pre-pandemic levels. Median annual pay growth at small employers peaked in September 2022 at 5.6 percent for workers in the same job for a year or more, the job-stayers we track in our monthly Pay Insights report.

And while small employers tend to increase pay more slowly than large companies, they’re still growing wages faster than the current pace of inflation. In July, pay for job-stayers at small employers was up 4.1 percent year-over-year.

opinion

While Wall Street is quick to react to data signals, Main Street responds to on-the-ground economic conditions, which take longer to decipher.

And instead of focusing on theory and historical regularities, the way economists do, small business owners ask questions: Is it easier to get a loan? How quickly can I add staff? Am I seeing less turnover? Are my labor costs rising faster than revenues?

These questions take longer to answer, and those answers provide a more enduring sign of the economy’s trajectory than wild stock market swings.

The Week Ahead

Wednesday: With all eyes on September’s meeting of Federal Reserve policymakers, the Consumer Price Index measure of inflation, also from the BLS, will be the most important indicator of the week, or maybe even the year.

Thursday: After disappointing in June, retail sales data for July from the Census Bureau will help economists decipher whether consumer spending is still supporting growth in the third quarter.

Friday: Falling mortgage rates have been one bright indicator for Main Street lately. Residential construction data from Census might bring more good news that the housing market is starting to right itself after a streak of low inventory and high interest rates.

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

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Warren Takunda

Cryptocurrency

A recent $1.7 billion shift of “dormant” Bitcoin could lead to increased selling pressure in the crypto market, according to an onchain Bitcoin analyst.

In an Aug. 13 post to CryptoQuant, pseudonymous trader XBTManager wrote that a total of 29,206 Bitcoin laying dormant for up to three years had been transferred onchain between Aug. 11 and 12. Bitcoin Sell Pressure Risk as $1.7B in Dormant BTC Moves Over 2 Days_1

Bitcoin Sell Pressure Risk as $1.7B in Dormant BTC Moves Over 2 Days_1

Between Aug. 11 and 12, 29,206 dormant BTC was moved. Source: CryptoQuant

XBTManager shared that 18,536 BTC that had been inactive for two to three years was moved on Aug. 11 and created noticeable pressure on the price of Bitcoin. An additional 5,684 BTC that had been inactive for three to six months was also moved a few hours later.

On Aug. 12, 4,986 BTC that had been inactive for three to 12 months, along with 2,394 BTC that had been dormant for three to five years, was moved onchain.

“When these long-dormant Bitcoin are moved, it often leads to increased selling pressure in the market. In times of low liquidity, this can create downward pressure on prices, which could potentially continue.”

In an Aug. 14 investment note viewed by Cointelegraph, IG markets analyst Tony Sycamore offered a more bullish perspective on Bitcoin in the mid-term, noting strengthening macro conditions following the Aug. 5 and 6 $500 billion crypto market sell-off.

Sycamore said Bitcoin had been “boosted by the continued improvement in risk sentiment and sell-off in US yields” following cooler-than-expected United States Producer Price Index data.

“With positioning significantly cleaner after last week’s false break below $50,000 we look for Bitcoin to extend gains toward trend channel resistance near $70,000 in the sessions ahead.”

In an Aug. 13 market report, Glassnode analysts said the current market was characterized by a “discernible level of uncertainty.” However, they noted that a preference for hodling was beginning to emerge among market participants.

The analysts said that following Bitcoin notching a new all-time high in March, the crypto market faced an extensive “supply distribution” period — a technical way of saying that funds were moved around a lot.

“Over the last few weeks, this trend is showing early signs of reversing, particularly for the largest wallet sizes which are often associated with ETFs. These large wallets appear to be returning to a regime of accumulation,” wrote the analysts. Bitcoin Sell Pressure Risk as $1.7B in Dormant BTC Moves Over 2 Days_2

Bitcoin Sell Pressure Risk as $1.7B in Dormant BTC Moves Over 2 Days_2

Large wallets have started accumulating Bitcoin again. Source: Glassnode

The analysts concluded that overall, current onchain conditions point to an “undertone of high conviction” among the Bitcoin holder base.

Source: Cointelegraph

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ING

Commodity

Energy

Energy – Bullish API report

Oil prices rebounded in the early trading session today, with the ICE Brent front-month contract trading above $81/bbl following a larger-than-expected oil inventory withdrawal reported by API. If confirmed by the Energy Information Administration (EIA), this would be the seventh weekly decline in a row. Geopolitical risks in the Middle East remain elevated, with the market allocating an increased risk premium for oil because of uncertainty over any Iranian response to Israel.

The API reports that US crude oil inventories fell significantly by 5.2m barrels last week, compared to the market expectations for a draw of just 0.9m barrels. Crude stockpiles at Cushing decreased by 2.3m barrels. Product inventories remained mixed, with gasoline stocks falling by 3.7m barrels while distillate inventories rose by 612k barrels. The more widely followed EIA inventory report will be released later today.

The IEA's monthly oil market report was somewhat bearish, with the agency slightly revising down its demand growth forecasts for next year. It now expects global oil demand to grow by 950k b/d in 2025, down 30k b/d from their previous estimates. This revision lower is largely due to the impact of weaker Chinese consumption. However, the IEA left the demand estimates unchanged at 970k b/d for 2024. Earlier, OPEC also lowered its forecasts for global oil demand for both this year and next; however, the difference in demand growth numbers between the IEA and OPEC continues to stand out.

On the supply side, the IEA estimates global supply to increase by 730k b/d in 2024 and 1.9m b/d in 2025 as OPEC+ supply gradually returns to the market. Non-OPEC+ production is seen increasing by 1.5m b/d for both this year and next.

Metals – LME zinc inventories rise

LME zinc inventories increased by 23,625 tonnes (the biggest daily addition since 22 November 2023) to 263,150 tonnes yesterday - the highest since 3 April 2024. The majority of the inflows were reported from warehouses in Singapore. On-warrant stocks reported gains after falling for four consecutive sessions, rising by 23,675 tonnes to 238,475 tonnes yesterday. Yesterday, the cash/3m spread moved to a deeper contango of $51.3/t (vs $48.4/t a day earlier), reflecting a comfortable prompt market.

In copper, recent statements from BHP suggest that the main union at the Escondida copper mine in Chile declined to resume talks following a new company invitation to reach an agreement. The company said it initiated the demobilization of striking workers and activated contingency plans. Meanwhile, the mine workers who are not part of the negotiation are able to continue working. The mine accounts for about 5% of the global copper mine supply, and the potential disruption will worsen the already tight supply conditions of the global copper concentrate market.

The latest LME COTR report shows that investors decreased their net bullish position for copper by 6,681 lots to 59,385 lots for the week ending 9 August 2024. This is the lowest net longs for copper since the week ending 26 January 2024, following a weak demand outlook. A similar move has been seen in aluminium, with speculators decreasing their net bullish bets by 1,960 lots for a sixth consecutive week to 96,543 lots over the last reporting week. This was the lowest level since the week ending on 22 September 2023. In contrast, money managers increased net bullish bets for zinc by 1,432 lots for the first time in four weeks to 18,735 lots as of last Friday.

Agriculture – CONAB raises soybean production estimates

Brazil's agriculture agency, CONAB, expects soybean production to rise to 147.4mt for the 2023/24 season, higher than the previous estimate of 147.3mt but below the average market expectations of 148.6mt. Soybean production was reported at 154.6mt in 2022/23. The estimated increase is driven by expectations that the harvest area could be higher at 46.03m hectares than its earlier projection of 46.02m hectares. In contrast, corn production estimates were revised down to 115.6mt for the abovementioned period compared to the previous estimates of 115.9mt. The estimates were also below the average market expectations of 117.1mt. In 2022/23, Brazil’s corn output was at 131.9mt.

Sugarcane crushing in CS Brazil was weaker over the second half of July, with dry weather conditions in major regions reporting a decline of 10% YoY in July yields. Data released by UNICA shows that sugar cane crushing in Centre-South Brazil fell to 51.3mt for the second half of July, down 3.4% from a year ago. The cumulative cane crushing rose 6.7% YoY for the 2024/25 season to reach 332.8mt. Meanwhile, sugar production dropped to 3.6mt (-2.2% YoY) over the fortnight, with around 50.3% of cane allocated for sugar production. Cumulatively, sugar production rose by 8% YoY to 20.8mt.

Meanwhile, Brazil’s total coffee exports rose 26% YoY to 3.8m bags (60 kg) in July, according to data released by Cecafe Group. The group said that the Arabica coffee exports rose 13% YoY to 2.5m bags, while robusta coffee exports surged significantly to a second-largest record of 900.8k bags (slightly lower than record ~902k bags in November 2023) for the period mentioned above. The rise in coffee exports could be attributed mainly to the implementation of new anti-deforestation rules.

In its latest report, the European Commission revealed that the EU’s soft wheat exports for the ongoing season stood at 3.1mt as of 11 August, down 22% compared to 4mt reported a year ago. The major destinations for these shipments were Morocco, Egypt, and Nigeria. The decline in exports was largely driven by France’s crop harvest, which has been impacted by rain and storms. The commission added that the nation’s corn imports stood at 2.4mt, up 19% compared to a year ago.

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Warren Takunda

Economic

Foreign investors were net buyers of Asian bonds for the third consecutive month in July, spurred by strong regional export growth and expectations of a September rate cut by the U.S. Federal Reserve.

Overseas investors purchased a net $7.91 billion worth of bonds in Indonesia, India, Malaysia, South Korea and Thailand in July, data from regulatory authorities and bond market associations showed, following an about $3.03 billion worth of net accumulations in the previous month.

Asian Bonds Attract Hefty Inflows on US Rate Outlook, Strong Exports_1

"The macroeconomic fundamentals in Asia remain positive. This should attract more inflows, especially with the U.S. Federal Reserve on track to cut rates soon," said Khoon Goh, head of Asia research at ANZ.

Reports signalled that regional economies including China, South Korea and Taiwan witnessed higher volumes of exports in July.

Indonesian bonds attracted a significant $3 billion in July, marking their third consecutive month of net buying, largely driven by foreign investments in Bank Indonesia Rupiah Securities (SRBI).

Demand for Indian bonds soared with a net investment of $2.68 billion, the highest figure in five months, following the inclusion in JP Morgan's emerging market debt index on June 28.

Indian bonds are expected to gain monthly inflows of about $2 billion until they reach a weight of around 10% in the JPMorgan's index by March 2025.

Cross-border investors also poured $1.75 billion and $749 million, respectively, into Malaysia and Thai bonds, while they pulled a net $270 million out of South Korean bonds.

Financial markets experienced increased volatility in early August following a weaker-than-expected U.S. payrolls report and disappointing manufacturing data, heightening concerns about an economic slowdown.

A weekly employment report last week, however, showed a drop in unemployment claims.

"Last week's better-than-expected U.S. jobless claims data helped assuage market concerns. We believe that the U.S. recession fears are overblown," ANZ's Goh said.

"We expect the mix of steady labour market statistics along with cooling inflation to keep the hopes of a U.S. soft landing alive, which will help portfolio inflows into Asia."

Source: Reuters

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

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FOREX.com

Commodity

Oil Price Chart – WTI Weekly

Technical Outlook:

In last month’s Oil Price Forecast we noted that WTI was, “approaching major support hurdles into multi-month consolidation support- risk for downside exhaustion / price inflection just lower. From a trading standpoint, look to reduce portions of short-exposure / lower protective stops on a test of the 2023 trendline near ~73- rallies should be capped by the 200-day moving average IF price is heading lower on this stretch with a close below the yearly open needed to mark downtrend resumption.”

Oil prices registered a close low at 72.95 before rebounding sharply with WTI breaking above the 200-DMA yesterday (rally of more than 11.8% off the monthly low). The advance is faltering this week at the 52-week moving average (~79.67) and while the broader focus remains on a breakout of this multi-month consolidation pattern, the immediate advance may be vulnerable here.

Oil Price Chart – WTI Daily

The daily chart shows WTI continuing to trade within the confines of the descending pitchfork formation we highlighted last month. A recovery off the median-line is now testing downtrend resistance with a sliding parallel extending off the late-July high converging on the 61.8% Fibonacciretracement around ~79.60- risk for possible exhaustion / price inflection into this region.

Oil Price Chart – WTI 240min

A closer look at oil price action shows WTI faltering into this threshold today with the pullback now approaching initial support at the 200-day moving average near the 78-handle. Lateral support rests just lower at 76.90 and is backed by a more significant confluent zone at 74.90-75.42- a region defined by the 61.8% retracement of the August range, the July low-day close (LDC), and the 8/7 reversal close (both levels of interest for possible downside exhaustion IF reached).

A topside breach / close above this slope would shift the focus back towards consolidation resistance, currently near the July 7 reversal close at 82.39 and the July high-day close (HDC) at 83.30. Ultimately a breach / weekly close above the 84.39/57 hurdle would be needed to validate a larger breakout of the yearly consolidation pattern.

Bottom line:

The oil rally has responded to confluent downtrend resistance and the focus is on this pullback. From a trading standpoint, losses should be limited to 74.90 IF price is heading higher on this stretch with a close above 75.690 needed to fuel the next leg in price.

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Warren Takunda

Economic

Sterling gave ground to all major currencies except the New Zealand Dollar with its largest losses seen in relation to the Swiss Franc, Canadian Dollar and Euro after Office for National Statistics figures showed inflation rising less than expected in July.

Profit-taking in GBP/EUR and GBP/CHF appeared to drive Sterling's losses after inflation rose to 2.2% last month, up from 2% but below the expected 2.3%. Core inflation, meanwhile, fell back to 3.3%, from 3.5%, when it was expected at 3.4%.

"This may not alleviate the Bank’s concerns about persistent price pressures entirely. And it probably isn’t enough to prompt a back-to-back interest rate cut in September,” Capital Economics economists said.

"But it does lend some support to our view that CPI inflation will be back below the 2% target next year and that interest rates will fall further and faster than markets expect," they added in a note to clients following the report.

Pound Sterling Struggles After Inflation Rises Less than Expected_1

Above: Interbank reference rates for Sterling relative to G10 currencies on Tuesday. Source: Netdania.

Most notably, the closely watched measure of services sector inflation fell back to 5.2% in July, from 5.7%, marking a two-year low that will likely be welcomed by the Bank of England.

This opens the door for further interest rate cuts later in the year, according to Capital Economics, and likely explains why the Pound weakened almost across the board following the report.

Services inflation is closely monitored by the Bank of England because it has been flagged as a leading indicator for overall inflation and the risk of it persisting at an above-target level in the coming years.

The other indicator watched most closely-watched by policymakers is average earnings growth, the elevated level of which was part of what discouraged the BoE from cutting interest rates until August.

However, data out on Tuesday showed earnings growth moderating to its slowest pace January 2021 in June, after it declined to an annual 4.5% when bonuses are included, and to 5.4% when bonuses are excluded.

Pound Sterling Struggles After Inflation Rises Less than Expected_2

Above: Pound to Dollar rate shown at daily intervals alongside Pound to Euro rate.

Source: Poundsterlinglive

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Danske Bank

Economic

In focus today

Today we get CPI numbers out of the US, UK, and Sweden.

In the US, we expect both headline and core CPI to come in at 0.2% m/m seasonally adjusted. The release is the second to last before the next FOMC meeting in September, and the Fed will undoubtedly keep close watch of the figures. The inflation data are released at 14.30 CET.

In Sweden, we get July inflation data at 8.00 CET. We expect July inflation to continue to print below the Riksbank’s current inflation forecast as per the June Monetary Policy Report (MPR), with our forecasts of CPIF at 1.4% y/y and CPIF excl. Energy at 2.0% y/y being 0.4 p.p. and 0.2p.p. below the MPR, respectively.

We expect CPIF excl. Energy to print below 2.0% for the remainder of the year, which adds pressure on the Riksbank to continue cutting its policy rate. Today’s figure will be important input ahead of next week’s meeting, where markets are pricing 28bp of cuts, whereas we forecast a 25bp cut down to 3.50%. After that, we expect two more cuts for 2024 but note that markets are discounting 25bp cuts at each remaining meeting this year (September, November and December).

In the UK CPI inflation is due at 8.00 CET, where analysts expect headline to come in at 2.3% y/y (prior 2.0% y/y), whereas core inflation is expected to stand at 3.4% y/y (prior 3.5% y/y).

Overnight the Q2 Japanese national accounts will be released. It shall be interesting to see if growth has come back on track following three weak quarters. Preliminary data suggests it has, although private spending has likely remained weak.

Economic and market news

What happened yesterday

In the US, yields across the curve dropped and equities gained with the technology heavy Nasdaq leading the way, as markets viewed a softer-than-expected PPI print as dovish ahead of today’s CPI print.

Market pricing for the coming September FOMC meeting also changed slightly, with markets now seeing a marginally larger probability of a 50bp cut in September than a 25bp cut. However, it is worth noting, that pricing has been very volatile lately given last week’s surge in recession-fears.

What happened overnight

The Reserve Bank of New Zealand cut its cash rate by 25bp to 5.25%. Market pricing was pointing towards a cut, whereas consensus amongst analysts had been more divided and leaning towards an unchanged cash rate decision. As such the New Zealand dollar is trading lower this morning against the US dollar (NZD/USD), down around 1% at 0.602.

In Japan, Prime Minister Fumio Kishida announced he would step down, as he will not seek re-election this September as president of the Liberal Democratic Party (LDP). As the LDP is by far the dominant party in the current two-party coalition government, the next leader of the party looks set to become the country’s next Prime Minister.

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

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