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Markets and macro insights with Brian Flavin, Senior Equity Research Analyst
What do recent data releases tell us about the state of the US economy ahead of the Fed’s widely expected interest-rate cut on Wednesday?
- Firstly, it’s important to note that the market has moved away from a focus on inflation to focus more on the growth side of the equation. This means that good economic news should be good news for equity markets and vice versa.
- The initial take on the latest US jobs report was that it was weaker than expected and that it might prompt a larger 50bp cut from the Federal Reserve (Fed) this week. There were also fears that such a larger cut by the Fed, that would be prompted by weaker economic data, could lead to a repeat of the volatility caused by the Yen carry trade that we witnessed last month. These slowdown fears capped off what had already been a negative week for markets.
- There’s no doubt that we are experiencing a slowdown, the question is how big a slowdown. The US consumer is a key part of the answer to that question, meaning jobs data and retail sales will continue to be the main data points of interest coming from the US, for now. This makes tomorrow’s US retail sales report an important focal point ahead of the Fed’s interest rate decision on Wednesday.
- Of course, this doesn’t mean that US inflation data is no longer important. It remains so, but there is a sense that the market sees the Fed’s inflation mandate as under control and growth is now firmly on the market’s agenda. We saw this last week when higher core readings on both CPI and PPI were not sufficient to upset the disinflationary trend.
- August core CPI rose 0.3% month-on-month – a bit higher than the 0.2% expected – and that was driven by rents. However, there was a broadening of disinflation across more categories and a larger core goods decline than expected. With respect to producer prices inflation, although it came in slightly stronger than expected in August, it was offset by downward revisions to the prior month leaving the year-on-year trends in line with expectations. Taken together, what this means is that core PCE, the Fed’s favourite measure of inflation, is likely to print close to expectations when it is released later this month. That paves the way for the Fed’s cutting cycle to begin on Wednesday.
- Meanwhile, in the euro-area, the economy continues to lose momentum and the European Central Bank downgraded its growth forecasts at its meeting last week after cutting rates by another 25bps. It now sees GDP at 0.8% this year compared to 0.9% previously; 2025 at 1.3% versus 1.4% and 2026 at 1.5% versus 1.6%. We also saw that China is still struggling with subdued pricing pressures and its economy continues to weaken.
Risk sentiment in equities improved last week. Why was this – and does it impact our outlook for equities?
- Risk sentiment in equities improved last week as growth data, especially the recent US jobs data, was not considered weak enough to threaten the soft-landing narrative. In addition, the AI/tech trade enjoyed a boost from well-received earnings from Oracle as well as positive sentiment surrounding comments from companies such as Nvidia and Microsoft at a technology conference. As a result, we’ve experienced a significant reversal of much of the prior week’s losses, led by IT and cyclicals.
- Looking at the fundamentals, earnings forecasts remain resilient and are still looking for acceleration next year. Some of this is due to base effects, but sectors like IT, Industrials and Healthcare should continue to provide us with structural growth. And so, in that context, valuations are not a major concern.
- Our view remains that while the global economy is slowing down, we see no signs of an imminent recession. The key data to watch from here will be those related to the US consumer. We continue to advocate a modest underweight in equities with a preference for structural growth.
The week ahead: what to watch out for
It's a busy and important week on several fronts: we will get the latest read on the US consumer with the release of August’s retail sales data on Tuesday and the Fed will announce its interest rate decision on Wednesday. The market is expecting a 25bp cut, at least. The Fed will also release its quarterly Summary of Economic Projections, which will also allow us to see how they are thinking about future rate policy, the so-called ‘dot plot’. Other important events to note are the release of UK inflation data on Wednesday ahead of the Bank of England’s interest rate decision on Thursday, and the Bank of Japan will announce its interest rate decision in the early hours of Friday morning as it seeks to normalise policy.
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