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Markets were in waiting mode ahead of final pivotal data releases before September's round of central bank meetings. Equity markets were mixed, with European main indices outperforming their US counterparts amid Nvidia's somewhat disappointing earnings report, while bond yields were little changed. The post-Jackson Hole rally in EUR/USD cooled off, with the cross declining back below 1.11. Oil prices rose modestly due to supply concerns in Libya with Brent hovering close to USD80/bbl, as the situation remains unresolved (see Reuters).

Preliminary euro area August HICP showed headline inflation cooling to 2.2% y/y - the slowest pace in three years. That said, the decline was largely driven by negative base effect in energy prices, as core inflation was virtually unchanged at 2.84% y/y (July 2.85%).

In the US, Conference Board's August consumer sentiment survey was strong on the headline level but with soft details. Consumers turned more optimistic both with regards to current economic conditions (134.4; from 133.1) as well as the future outlook (82.5; from 81.1), but still saw their employment prospects weakening. The 'Jobs Plentiful' index fell to the lowest level since March 2021. Leading labour market data released so far in August has provided mixed signals, as both consumer sentiment and PMI employment indices weakened but jobless claims have still trended lower after July distortions.

Next week's most important data release will be the US August Jobs Report on Friday. We forecast a modest rebound in nonfarm payrolls growth to +170k (July +114k), we see unemployment rate remaining at 4.3% (unchanged) and average hourly earnings growth at +0.2% m/m SA (unchanged). Markets are currently pricing around 35% probability of the Fed initiating its easing cycle with a 50bp cut, but a print in line with our forecasts would likely push market pricing to converge towards a 25bp move (our call).

Leading up to Friday, US data calendar includes several other key releases as well, namely August ISM manufacturing and services indices as well as the July JOLTs data. Job openings from the latter are a key measure of labour demand for the FOMC.

Labour markets remain in focus in the euro area as well. ECB's key measure of wage growth, the Q2 Compensation per Employee data, is due for release on Friday. The ECB staff projections from June estimated that wage growth would increase to 5.1% y/y in Q2 from 5.0% y/y in Q1, but the indicator of negotiated wages (Q2 +3.6% y/y; Q1 +4.7%) pointed towards clear downside risks. Markets have fully priced in ECB's 25bp cut at the September meeting, in line with our call. Focus is turning towards the final meetings of 2024, where we expect one more cut in December. Markets price in cumulative 37bp for the last two meetings of the year, implying a 50% probability of the next move coming already in October.

Leading data is due for release from China as well. Official NBS PMIs will be released already tomorrow on Saturday and the private Caixin manufacturing PMI will follow on Monday. The manufacturing indices have sled below the neutral level of 50 over summer, where we expect them to remain, reflecting continued growth challenges in China.

Full report in PDF.

Markets

Easy base effects due a high monthly EMU CPI reading last year already foreshadowed a substantial cooling of EMU headline inflation this month. On top of that, German (2.0%) and Spanish (2.4%) national data published yesterday surprised slightly to the downside. Maybe there was room for the EMU figure to also touch the psychological barrier of 2%? This didn’t materialize. The August Flash CPI printed exactly in line with consensus (headline 0.2% M/M and 2.2% Y/Y, core 2.8% from 2.9%). Slightly higher than expected French data prevented the hoped for bigger decline. Aside from favourable base effects, disinflation was mainly driven by lower energy prices (-1.0% M/M and -3.0% Y/Y). However core inflation (ex-energy, fresh food, alcohol & tobacco) still rose 0.3% M/M and 2.8% Y/Y. Services inflation is holding well above an underlying dynamics of 2% (0.4% M/M and 4.2% Y/Y from 4.0%). Core data only confirm that disinflation hasn’t reached a point yet for the ECB to pre-commit on the pace of further easing beyond the September meeting. In this respect, ECB’s Schnabel already before the CPI release indicated that policy still has to focus on inflation. Any easing should proceed gradually and cautiously as inflation momentum continues to be (too) high. In this context, there is no reason for markets to leave current indecisive pricing between 2 or 3 25 bps ECB rate cuts for the 3 remain meetings of this year. In the US, July personal income (0.3%) and spending (0.5) confirmed that the consumer stays in good shape. The closely watched price deflators also were almost exactly as expected (0.2% M/M and 2.5% Y/Y, core 0.2% M/M 2.6% Y/Y). The reaction to the data was limited. Yields drifted cautiously higher, confirming a ST bottoming pattern going into the US long weekend (Labour Day on Monday) and ahead of next week’s key data releases (ISM’s, payrolls). US yields add between 3.0 bps (2-y) and 0.5 bp (30-y). Similar pattern for in the EMU with the German 2-y yield adding 3.5 bps. The 30-y trades little changed. On FX, the dollar still extends its comeback but gains are more modest compared to yesterday and Wednesday (DXY 101.55 from 101.37, USD 1.1065 from 1.1075). EUR/GBP tested the 0.84 barrier, but no break occurred yet (0.8415). Equities still (gradually) extend the rally post the early month sell-off (Eurostoxx 50 + 0.1%, S&P +0.5%).

News & Views

The Chinese central bank has begun to actively trade government bonds in the market. In a statement on its website, the PBOC explained that it sold long-dated bonds while buying ones with shorter maturities. The combination resulted in a net purchase of CNY 100bn. There has been speculation about this for months after the central bank warned multiple times before taking other actions earlier in August on the investor stampede into the government bond market that pushed (long-term) yields to the lowest in many years. The Silicon Valley Bank saga in mind, Chinese authorities fear the liquidity and broader financial stability consequences in case of a sudden market reversal. At the same time, the central bank is seeking a steep-enough yield curve to provide incentives to invest and lend – hence the operation twist – at a time when the Chinese economy is struggling to regain traction. Both the Chinese yuan and yields reacted stoic though the news got out in late Asian trading hours. USD/CNY is extensively testing the December 2023 2-yr low around 7.08.

The Canadian economy grew a more than expected 2.1% q/q (annualized) in Q2 of this year. That is quicker than the 1.8% seen in Q1 and penciled in by analysts. Government consumption was a major driver, adding 1.27 ppts to the number. Household consumption contributed a mere 0.34 ppts. Business investments added some 0.8 ppts, about evenly split between business and governments. A drop in imports did not make up for the bigger decline in exports, producing a net export contribution of about -0.4 ppts. The Canadian dollar and government bond yields pared a kneejerk move higher after the growth details nuanced the headline beat. USD/CAD is trying to recover the 1.35 big figure on USD strength as well. Canadian yields maintain some of the gains but it’s limited to 2.0 bps at the front end of the curve. Money market expectations for the Bank of Canada’s meeting next week barely budged with a third 25 rate cut more than priced in.

Graphs

USD/CAD: Loonie doesn’t profit from better Q2 Canada GDP growth. BoC expected to continue easing next week.

Dow Jones industrial Index more than reverses early August sell-off to set now all time record on hoped for soft landing of US economy

USD/CNY testing end 2023 low as yuan strength takes over from USD correction earlier this month.

US 2y yield shows ST signs of bottoming as quite some Fed easing is discounted. Next week’s data to decide on next directional move.

Gold has hit a glass ceiling at $2525 an ounce on the spot market, which it has been battling against for the past two weeks. A series of smaller and smaller pullbacks and more frequent rallies to the resistance indicate impressive buying pressure. Under these conditions, we should expect a breakout to the historical highs soon, but it will be important to watch how the price behaves afterwards.

Over the past two weeks, a triangle of horizontal resistance and rising support has formed on the gold chart. This is a clear indication that buyers are taking the initiative at increasingly higher levels.

The same conclusion can be drawn if we look at the longer-term chart period since April, when the trend of increasingly shallow corrections continued. The current consolidation is an oscillation around the upper boundary of the uptrend since then.

In the daily timeframe, we continue to see a divergence between the RSI and the price trend, which is a sign of upward exhaustion. However, we saw a similar situation from October 2023 to February 2024, which was followed by a strong uptrend rather than a short-term uptrend.

One of the main drivers of the gold price over the past two months has been the dollar’s near 5% weakness against a basket of major currencies, which largely explains the 8.5% appreciation in the ounce. However, we note that the DXY is attempting to reverse its direction to the upside as it reaches the lower end of its trading range in early 2023.

Together, these signals point to a likely near-term break of resistance with a renewal of historical highs, which could be followed by a medium- or even long-term reversal in the dynamics of the gold price.

If we take a look beyond the charts, gold’s short-term fate will be determined by the Fed’s monetary policy outlook: how much it will cut interest rates before the end of the year. The monthly Employment report on September 6th and the CPI on the 11th will help clarify the answer.

Personal income grew 0.3% month-on-month (m/m) in July, up from June's 0.2% gain and above market expectations (0.2%).

Accounting for inflation and taxes, real personal disposable income grew 0.1% for a second consecutive month.

Personal consumption expenditures growth accelerated in July, up 0.5% m/m. This was higher than the 0.3% recorded in June, but in line with market expectations (0.5%). Spending in real terms rose 0.4% m/m – adding to the upwardly revised 0.3% gain recorded in June (previously 0.2%). The uptick in real spending reflected increases in both goods (0.7%) and services (0.2%) outlays.

On inflation, the Fed's preferred inflation metric, the core PCE price deflator, held steady on both a monthly and annual basis. Core PCE rose 0.2% m/m and 2.6% annually. While the monthly reading was in line with market expectations (0.2%), the annual number came in marginally lower than expected (2.7%). Notably, on a 3-month annualized basis, the measure slid to 1.7% in July from 2.1% in June.

The personal savings rate declined to 2.9% in July from a downwardly revised 3.1% in June (previously 3.4%). This is the first time the measure has fallen below 3% in over 2 years.

Key Implications

Consumers seemed to have relied more heavily on savings to keep consumption going in July. While the resilience they have displayed thus far has been impressive, the slowdown in the job market and diminished savings will put this to the test going forward. As such, consumer spending, while not grinding to a halt, is expected to lose some momentum as the year draws closer to an end.

On the inflation front, the Fed's preferred core measure continues to maintain the recent cooling trend. While not slowing further, it has also not accelerated. What's more, on a 3-month annualized basis core PCE continues to decelerate from the flare-up in Q1 and has fallen below the Fed's 2% target for the first time since last December. On balance, there is nothing in today's report that would dissuade the Fed from cutting rates in September.

Daily Pivots: (S1) 0.8418; (P) 0.8456; (R1) 0.8512; More…..

Intraday bias in USD/CHF remains neutral as consolidations continues above 0.8399. Further decline is expected as long as 0.8540 minor resistance holds. Break of 0.8339 will resume the decline from 0.9223 and target 61.8% projection of 0.9049 to 0.8431 from 0.8747 at 0.8365, and then 0.8332 low. However, firm break of 0.8540 will turn bias back to the upside for 0.8747 resistance instead.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 144.28; (P) 144.92; (R1) 145.61; More...

Outlook in USD/JPY is unchanged. Intraday bias remains neutral and further fall is in favor with 146.47 minor resistance intact. Break of 143.43 will bring retest of 141.67 low. Firm break there will resume the whole fall from 161.94 to 140.25 support next. On the upside, above 146.47 will turn intraday bias back to the upside for 149.35 resistance instead.

In the bigger picture, fall from 161.94 medium term top is seen as correcting whole up trend from 102.58 (2021 low). Deeper decline could be seen to 38.2% retracement of 102.58 to 161.94 at 139.26, which is close to 140.25 support. In any case, risk will stay on the downside as long as 55 W EMA (now at 149.38) holds. Nevertheless, firm break of 55 W EMA will suggest that the range for medium term corrective pattern is already set.

Daily Pivots: (S1) 1.3133; (P) 1.3180; (R1) 1.3215; More...

GBP/USD is extending the consolidation from 1.3265 and intraday bias stays neutral for now. Downside of retreat should be contained well above 1.3043 resistance turned support to bring rebound. On the upside, above 1.3265 will resume larger up trend to 100% projection of 1.2298 to 1.3043 from 1.2664 at 1.3409.

In the bigger picture, up trend from 1.0351 (2022 low) is resuming. Next target is 38.2% projection of 1.0351 to 1.3141 from 1.2298 at 1.3364. For now, outlook will stay bullish as long as 1.2664 support holds, even in case of deep pullback.

The Canadian economy grew by 2.1% quarter/quarter annualized (q/q) in 2024 Q2, while 2024 Q1 was revised higher (+0.1% q/q from +1.7%). Stripping out external factors, final domestic demand came in at a very strong 2.4% q/q. The flash estimate for July showed effectively no growth.

Government spending (+6.7% q/q) was a key driver of growth, as higher compensation of employees (an expense for governments) and purchases of goods and services came in well above expectations.

Business spending on non-residential structures and machinery & equipment rose by a massive 11.1% q/q. Higher spending on aircraft equipment/parts and engineering structures in the oil and gas sector drove the gain. Residential investment on the other hand fell by a whopping 7.3% q/q, on lower construction and renovation activity.

Consumer spending slowed in the quarter (+0.6% q/q from 3.6% q/q in Q1). While Canadians still had to shell out for 'need to haves' like rent, food, and electricity, there was a notable decline in big ticket items like trucks and SUVs.

Net trade subtracted 0.4 percentage points from growth, as "lower exports of unwrought gold, silver, and platinum group metals as well as of passenger cars and light trucks and refined petroleum energy products were moderated by higher exports of crude oil and bitumen". We expect trade to bounce back significantly in Q3, as the ramp-up of Transmountain causes a leg-up in oil exports.

Key Implications

Canadian economic growth surprised higher in 2024 Q2. While the headline print was encouraging, the details were less so. Most of the growth surprise was driven by government spending and aircraft purchases, which should come back down to earth in the Q3 data. Made worse is that the engine of Canadian growth – the consumer – has slowed the pace of spending in the face of still high rates. Combine this with the fact that momentum stumbled in June and July, and the outlook for the remainder of the year has become less rosy.

The Bank of Canada is scheduled to meet next week and another cut seems like a forgone conclusion. Importantly, markets have solidified around a 25 basis point per meeting pace through the rest of this year, which would bring the policy rate to 3.75% by December 2024. While this will provide some relief to consumers and businesses, we don't expect a meaningful acceleration in economic growth until late 2025 – when rates finally start moving closer to our target of 2.5%.

Daily Pivots: (S1) 1.1043; (P) 1.1091; (R1) 1.1127; More....

EUR/USD's retreat continues to extend lower today, but downside is contained well above 1.1007 resistance turned support. Intraday bias remains neutral and larger rally is still expected to continue. On the upside, break of 1.1200 will resume recent rally to 161.8% projection of 1.0665 to 1.0947 from 1.0776 at 1.1232, and then 1.1274 high.

In the bigger picture, break of 1.1138 resistance indicates that corrective pattern from 1.1274 has completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Dollar is showing mild strength in early US session despite slightly disappointing PCE inflation data. While the data reinforces the likelihood of a 25bps rate cut by the Fed in September, it does little to support the case for a more aggressive 50bps cut.

The greenback is getting a slightly boost from modest recovery in Treasury yields, which is also contributing to the slight weakness seen in Yen and Swiss Franc.

However, overall trading remains relatively subdued as in the final trading day of August. GDP data from Canada and CPI figures from Eurozone have largely been ignored by the markets.

For the week, New Zealand Dollar remains the strongest performer, followed by Canadian Dollar and Dollar. Meanwhile, Euro continues to lag as the worst, followed by Yen and Sterling. Swiss Franc and Australian Dollar are positioned in the middle of the performance chart.

In Europe, at the time of writing, FTSE is up 0.21%. DAX is up 0.18%. CAC is up 0.26%. UK 10-year yield is down -0.0331 at 3.960. Germany 10-year yield is down -0.007 at 2.275. Earlier in Asia, Nikkei rose 0.74%. Hong Kong HSI rose 1.14%. China Shanghai SSE rose 0.68%. Singapore Strait Times rose 1.13%. Japan 10-year JGB yield rose 0.0035 to 0.893.

US PCE core unchanged at 2.6% yoy, vs exp 2.7% yoy

US personal income rose 0.3% mom or USD 75.1B in July, above expectation of 0.2% mom. Spending rose 0.5% mom or USD 103.8b, matched expectations.

PCE price index rose 0.2% mom, while core PCE (excluding food and energy)rose 0.2% mom, both matched expectations. Prices for goods decreased by less than -0.1% and prices for services increased 0.2%. Food prices increased 0.2% and energy prices increased by less than 0.1%.

From the same month one year ago, PCE price index rose 2.5% yoy, unchanged from June's reading, below expectation of 2.6% yoy Core PCE price index rose 2.6% yoy, unchanged from June's reading, below expectation of 2.7% yoy. Prices for goods decreased by less than -0.1% and prices for services increased 3.7%. Food prices increased 1.4% and energy prices increased 1.9%

Canada's GDP grows 0.5% qoq in Q2, flat in June

Canada's economy posted growth of 0.5% qoq in Q2, slightly up from the 0.4% seen in Q1. This growth was driven by higher government consumption, increased business investment in engineering structures and machinery, and a rise in household spending on services. However, these gains were somewhat offset by declines in exports, residential construction, and household spending on goods. Notably, on a per capita basis, GDP declined by -0.1% in the second quarter, marking the fifth consecutive quarterly decline.

For June, GDP remained essentially flat, failing to meet expectations of a 0.1% mom increase. Goods-producing industries contracted by -0.4%, the largest decline since December 2023, with manufacturing and construction being the primary drags. In contrast, services-producing industries saw a modest 0.1% increase, continuing their growth streak for the third month in a row. Overall, 12 out of 20 sectors experienced expansion.

Advance information suggests that real GDP by industry remained unchanged in July. Declines in construction, mining, quarrying, and oil and gas extraction sectors were balanced by gains in finance, insurance, and retail trade, signaling a mixed economic outlook.

Eurozone CPI falls to 2.2%, core down to 2.8%, services up to 4.2%

Eurozone CPI slowed from 2.6% yoy to 2.2% in August. CPI core (ex-energy, food, alcohol & tobacco) ticked down from 2.9% yoy to 2.8% yoy. Both matched expectations.

Looking at the main components, services is expected to have the highest annual rate in August (4.2%, compared with 4.0% in July), followed by food, alcohol & tobacco (2.4%, compared with 2.3% in July), non-energy industrial goods (0.4%, compared with 0.7% in July) and energy (-3.0%, compared with 1.2% in July).

ECB's Schnabel: Rate cuts can't be mechanical amid stubborn domestic inflation

In a speech today, ECB Executive Board member Isabel Schnabel addressed the recent declines in inflation across parts of the Eurozone, describing them as "welcome developments." However, she cautioned that the "current level of headline inflation understates the challenges monetary policy is still facing."

Schnabel highlighted that domestic inflation remains elevated at 4.4%, driven largely by "persistent price pressures in the services sector," where disinflation has stalled since last November. She pointed out that the continued high inflation momentum, particularly the annualized three-month-on-three-month change, indicates that services prices are still rising at a significant pace of almost 5%.

Schnabel noted that while incoming data broadly supports ECB's baseline outlook, caution is needed as policy rates approach the upper band of the neutral rate, "the less certain we are how restrictive our policy is"

The pace of policy easing, she emphasized, "cannot be mechanical" and must be guided by data and analysis to ensure that monetary policy does not itself become a factor hindering disinflation.

Swiss KOF rises to 101.6, signaling hesitant economic recovery

Swiss KOF Economic Barometer edged up to 101.6 in August, slightly above expectations of 100.6, signaling a modest improvement in economic activity. The indicator remains just above its medium-term average, suggesting that Swiss economy is on what KOF describes as a "hesitant recovery path."

The upward movement in the Barometer was driven primarily by gains in the other services sector, consumer demand, and construction industry. Additionally, the manufacturing and hospitality sectors saw modest improvements.

Meanwhile, the indicators for foreign demand remained nearly stable, while the financial and insurance services sector faced a slight decline.

Japan's Tokyo inflation accelerates in Aug as production and retail sales miss estimates in Jul

Japan's Tokyo CPI data for August shows further acceleration in inflation, with core inflation (excluding food) rising to 2.4% yoy, above the expected 2.2%. CPI core has been climbing steadily every month since hitting a bottom of 1.6% yoy in March.

Core-core CPI, which excludes both food and energy, also ticked up to 1.6% from 1.5%, while headline CPI surged to 2.6% from 2.2%.

These figures are often seen as a leading indicator for nationwide trends. Some economists noted that rise in prices growth was primarily driven by the phase-out of government subsidies on utility bills and a spike in rice prices. Underlying inflation trends may moderate in the coming months as these one-time factors dissipate.

Also released today, Japan's industrial production rose by 2.8% mom in July, slightly below the expected 3.3%. Looking ahead, manufacturers surveyed by the Ministry of Economy, Trade, and Industry anticipate 2.2% increase in output for August, followed by -3.3% contraction in September.

Retail sales growth also slowed to 2.6% yoy in July, down from 3.7% in June, and below the expected 2.9%.

Additionally, the unemployment rate rose to 2.7% from 2.5%, surpassing expectations of it remaining steady at 2.5%. The jobs-to-applicants ratio, however, edged slightly higher to 1.24.

Australia's retail sales stagnate in Jul as spending momentum stalls

Australia's retail sales turnover for July showed no growth on a monthly basis, falling short of the expected 0.2% mom increase. This flat result comes after consecutive 0.5% mom increases in both June and May, driven by mid-year sales events.

According to Ben Dorber, head of retail statistics at the Australian Bureau of Statistics, "After rises in the past two months boosted by mid-year sales activity, the higher level of retail turnover was maintained in July."

However, the detailed breakdown reveals a mixed picture across industries, with most sectors either seeing declines or remaining flat. The only industry to post an increase was food retailing, which managed a modest 0.2% rise.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.1043; (P) 1.1091; (R1) 1.1127; More....

EUR/USD's retreat continues to extend lower today, but downside is contained well above 1.1007 resistance turned support. Intraday bias remains neutral and larger rally is still expected to continue. On the upside, break of 1.1200 will resume recent rally to 161.8% projection of 1.0665 to 1.0947 from 1.0776 at 1.1232, and then 1.1274 high.

In the bigger picture, break of 1.1138 resistance indicates that corrective pattern from 1.1274 has completed at 1.0665 already. Decisive break of 1.1274 (2023 high) will confirm whole up trend from 0.9534 (2022 low). Next target will be 61.8% projection of 0.9534 to 1.1274 from 1.0665 at 1.1740. This will now be the favored case as long as 1.0947 resistance turned support holds.

Economic Indicators Update