This Week In Markets: 8th - 12th August 2022

Hello and welcome back to another look ahead for this week in global markets. And undoubtedly the main headline event is going to be US CPI data we're going to get on Wednesday. And of course, such an influential figure to shape the market's expectations about what the Fed are going to do come their next meeting at the end of this September. Then we've got other things, the expected contraction of the UK economy in the second quarter, and we can have a little chat about what that might look like for the economic picture of the UK beyond just this reading. And we've got things like eurozone industrial production coming on Friday and the latest temperature check on the US consumer in the University of Michigan sentiment figure we'll get on Friday as well. Before I go any further, if you don't already do so, please do subscribe to the YouTube channel, hit the bell icon. You'll be notified anytime we go for a live session as well as these regular updates that I do as well on the market. But taking a look at the charts this morning, and I guess one of the most eye-catching things is the fact that the NASDAQ 100 here in the bottom right with the S&P 500 futures, the latter of which is now trading up and above where we were after the initial sell-off from the payroll report we had on Friday. If you remember, cast your mind back, had a really hawkish jobs report, headline jobs, the average hourly earnings figure it was all pointing to the picture that the Fed are going to have to put their foot back on the pedal to accelerate their policy tightening kind of picture going forward. And as such, then the market has shifted from a 50 basis point expectation for the 21st of Sep meeting back to 75. However, the dust has settled, and although equities have fully recovered, some of the other markets a little bit lagging that, but still seemingly pointing towards a similar direction. At this point. The dollar just picking up a touch, um, or sorry, moving down just a touch, and gold prices also just breaking out the top end of their range. So yeah, interesting to see the fact that in the end the Fed are tightening and they are committed to tackling that of inflationary issue irrespective of the impact that that can have on the risk of growth and a subsequent recession. So I don't think what happened at the end of last week is too unsurprising, but also don't forget the fact that the Fed are data dependent And so there's still a heck of a lot of data to come between now and the 44 days or so until the next FOMC meeting. But let's get really stuck into this and let's talk a little bit about the main event of this week, which undoubtedly is US CPI. Such an important component for what investors and central bankers are looking at to shape and guide the near-term direction of assets over the subsequent policy decisions that may well come from the Fed. And what we're looking out for here is the headline expected at 8.7%. That is actually a bit of a decline from around the 9.1% we had in June, of course, which was a four-decade high. And the main rationale there is because of tumbling gasoline prices. Core inflation, however, is the one that you'll probably hear spoken about a lot and the one that traders will look at very closely because that is expected to continue to tick higher, essentially how is underlying inflation when you extrapolate out things like food and energy. So given that gasoline, uh, tumble taking some of the hot air out of the headline figure, what does the underlying inflation situation look like? And hopefully the core reading will give us some of that intel. A few other things just to mention, um, skyrocketing rents. So rents, shelter, that's provided quite an upside, uh, to recent inflationary pressures, as you can see here, really through the elevation through summer and Q1 of this year. But even though that will continue to play a big part in the inflationary picture, we're starting to see then the super rapid rise topping out slightly, and I should start to show through in CPI next year as we start to look beyond then these near-term Fed decisions. The other thing though is, and something you would have recognized from the jobs report we had from the US on Friday, was the average hourly earnings numbers as well, which were quite robust. And that's another thing where inflation may well prove to be ultimately more entrenched and certainly not transitory, as we know, uh, of what we might have been led to believe from the Fed not that long ago. The jobs market is still tight. There are around 1.8 job vacancies for every person unemployed, and so companies are having to pay up essentially to obtain a types of talent to attract to come and work at them. for them, and therefore wages are moving up, and that can be problematic, albeit there's still a large gulf between, uh, the wage level and that of inflation. A few other things though I just wanted to mention, and one was the— what can we, uh, another thing to look out for further on down the line. We've had obviously COVID, which has been hugely problematic for global supply chains. You've then had an energy crisis, and now you've got this new friction between that of US and China, which is really quite sharply escalated over the course of the last week or so. The reason why I'm mentioning that and sharing this map— we'll talk about US-China relations in a moment— this is more to do with major container and, and tanker trade routes, so maritime routes. And the Taiwanese Strait is super important for that. And so one of the things that I'm quite conscious to monitor as well going forward is any potential disruption to Taiwan, Taiwan would strike right in the heart of manufactured durable and big-ticket items. Durable items, just think of things like appliances, consumer electronics, motor vehicle parts, turbines, these types of things. So obviously it's just another thing to throw into the inflationary mix that could well then mean that inflation is just sticky over a longer period of time. What do the Fed think? Because we can look at the world from a data perspective, we can look at the world from geopolitics, but also what are the Fed guiding us towards in terms of their latest thinking? And two people spoke over the weekend. San Fran Fed President Mary Daly, she said the US central bank is far from done yet in bringing down price pressures, but notably she is a non-voting member. So perhaps more important is Michelle Bowman, who also spoke at the weekend and is a voter, and she said the Fed should keep considering large hikes similar to the 75 basis point increase approved last month until inflation is meaningfully declining. And as such, following the hot jobs report, following the comments from Bowman, following the comments from Jerome Powell, who at the time the market was quite obsessed with this idea about, you know, are we at the new neutral rate and have we hit peak interest rates and these types of things. Well, now one of the things he did say was data dependent, and the data would signal then that the market has switched correctly to the idea that the Fed are going to have to keep at that 75 basis point pace. Key thing here, of course, I think if I scroll up here, you know, we've got a countdown, 44 days to go until the next Fed meeting on the 21st of Sept. That's a heck of a long time to play. And a lot of things will come out, not just the things we cannot quantify, like what might happen with the US and China and other things like COVID lockdowns and so forth, But importantly, more jobs data, more inflation metrics will come between now and then. So that's how the market is priced now, but it's something we'll continue to be in flux until we get up to that point. All right, talking of US-China tensions, you might have read this morning China has extended its military exercises near Taiwan on Monday, signaling that Beijing wanted to keep up pressure on the island past a series of drills announced immediately after, of course, that visit from the third highest-ranking official in the US, US House Speaker Nancy Pelosi, in Taipei last week. Now, a couple of things. Here's a map that will probably help. So, a bit of context: the escalation here quite evident because China's military's live-fire exercises areas, if you could go back some 25-odd years or so, was only really situated along the Taiwan Strait median line, which is the key area really between mainland China and the island of Taiwan. But you can see here the Chinese military's live-fire exercises areas last week were all around the island itself. And of course, that sends, uh, symbolically a very strong signal about this engulfing or circling of that particular area, fitting into the strategy about the sovereignty, China's One Policy or One China Policy objectives. So one of the things here, shortly before the drills ended on Sunday, about 10 warships, each from China and Taiwan, maneuvered at close quarters around the unofficial median line of the Taiwanese Strait, according to people familiar with the situation. So we continue to watch this very closely. I would continue to expect more military exercises, very strong verbal rhetoric um, continue to expect potentially to talk about sanctions, particularly on the Taiwanese firms who of course are strong trade partners with not just China but also with America. And so yeah, lots of war of words, lots of actual physical live-round military exercising, but at this point I would say by definition of how markets are reacting this morning, it's a considered risk for markets but not one that I think has gone beyond where we were last week. And in fact, I think we're starting to then move down, uh, the order of, uh, I guess, uh, fears in markets of this translating into something much worse, like a military confrontation of the two, which is still highly, uh, improbable, i.e., US and China. But again, we continue to monitor quite closely. Then looking at the UK, This is one of the bigger data points that will probably capture a lot of headline news, definitely here in the UK, of course. And that's because the UK is expected to have shrunk by 0.2% in Q2, with the country set for almost 2 years without any growth. I mean, it's quite incredible. But let's have a look at a few different things. So you can see here, these are the different forecasts that we're looking for. And one thing is that we might see a a brief dip here in Q2. Now, one thing to keep in mind is that, um, the economy probably shrunk 1.2% in June alone, held back in part by the bank holidays to mark the Queen's Jubilee. If you remember, we had those extra bank holidays, and that does have an underlying impact on the economy with those days when people aren't at work. Then a brief period springing back in Q3 before then ultimately we start to see the real decline kick in. You've got the energy price tariff hikes that are coming in October, and that of course as well is when the Bank of England have upgraded their forecast once again that UK inflation is going to peak up at around 13.3% at that point in time. And this comes of course as the Bank of England last week raised rates by 50 basis points. That's the largest margin they've hiked rates in some 30 years, and the odds are on that they're going to have to continue to be very proactive amid these ever-increasing inflation forecasts that they've been issuing. In terms of then a couple of other things, this is what we're looking at, and this is what created a lot of that downside movement on what otherwise was a big rate hike from the Bank of England. And that's because about the deep and long nature of the recession that's likely to hit the UK. And perhaps then history can give us a bit of a kind of a precedence of what this might look like, or at least a bit of context. So after some growth in the third quarter, the bank has said the UK is projected to enter recession from basically Q4 of this year and continue to contract until the end of 2023. So you can see here then that the UK is facing a recession akin to early 1990s. So not the credit, not the actual credit crunch or the financial crisis, but actually going all the way back to then the early, early '90s. All right. Quick look at what else is on the agenda. So we've really talked about the main things. And, you know, if you are thinking about the week in terms of where the potential meaningful moments are that could really shape investors' kind of positioning and expectations, it's really centered around Wednesday. Wednesday is when we get the, the US CPI report. There's also a batch of Fed speakers. There's also Chinese inflation metrics coming out on the same day, CPI and PPI as well. But if we go further down, you get your regular jobless claims coming out of the States. You get PPI data as well from the States on Thursday. And then Friday you get the University of Michigan and also the eurozone industrial production figures. So for the eurozone IP data for June, that will likely show the impact of soaring energy prices, prolonged supply chain disruptions on industrial output. So very much expected to factor into that figure. And then from the US perspective, the other thing that will be closely watched is the University of Michigan Sentiment Index. This is the prelim reading for August. And to give you an idea of what that's looked like of late, this is looking at a chart of the last 25 years or so. And you can see here, although we've turned just off the low, Basically, the Michigan consumer sentiment reading has plunged due to the cost of living crisis and falling equity markets, which has kind of sapped spending power and confidence. One, I guess, silver lining is that gasoline prices, as I mentioned when we're talking about inflation, have dropped from their national average of $5 in June down to around $4.15 in early August. So that should provide a little bit of relief and support according to some analysts. But nonetheless, the consumer is still down in the doldrums somewhat at this present point in time. All right, that is it. Gonna wrap it up there. Any questions at all, feel free to just drop a comment on this video. Otherwise, I will see you next week. Okay, take care.