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September 20, 2024 BONUS >> What the latest economic indicators reveal
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⚡ Retail Sales: A Glimpse of Consumer Softening
Let’s start with retail sales. In August, US Core Retail Sales eked out a 0.1% rise, just under the 0.2% forecast. If you were looking for a strong recovery, this wasn’t quite it.
Even though we dodged a negative print, this figure is still down from the previous 0.4%. It reminds me of March 2020, when weak sales pushed the S&P 500 into a 12% decline.
And sure enough, back then, it was consumer demand - or rather, the lack of it - that had everyone worried. In contrast, July’s 1.1% bump gave markets some optimism, but the current cooling suggests the economy might not be as resilient as hoped.
🧠 Inflation in the UK and Eurozone: The Persistent Beast
Over in the UK and Eurozone, inflation is still top of mind. In August, both regions reported CPI YoY at 2.2% - steady and aligned with expectations.
But don’t let that number fool you; just a year ago, the UK was grappling with a 10% inflation rate, which sent bond yields soaring. We saw the UK 10-year gilt jump to 4.5% in September 2022, one of the highest levels in decades.
Equities in both regions had a rough time, with the Euro Stoxx 50 losing 6% in a similar inflationary scenario last year.
💥 Fed Rate Cut: A Bold Move with Deeper Implications
One of the more surprising moves this week came from the Fed, which cut interest rates by 50 basis points, bringing them down to 5.00% from 5.50%.
The last time we saw a rate cut of this magnitude was during the 2008 financial crisis, a reminder of how significant these shifts can be. It’s worth remembering that back then, the S&P 500 rallied nearly 12% in the following two months.
Bond yields, on the other hand, tend to dip after such cuts - think back to 2019, when the 10-year Treasury yield dropped from 2.0% to 1.5% following a series of cuts. But what’s really fascinating here is the potential impact on the US Dollar.
Just like in July 2019, when the DXY weakened by 3% after a similar cut, the greenback could be in for a slide.
💡 Jobless Claims: The Labor Market Stays Strong
On the labor front, Initial Jobless Claims came in lower than expected at 219K, continuing to beat forecasts.
A healthy labor market like this often acts as a backbone for the economy, helping to stabilize sentiment even when other data points show signs of cooling.
Back in November 2021, when jobless claims were similarly low, the S&P 500 jumped by 10% over the following two months.
But as we all know, a tight labor market can push wages up, leading to inflation concerns and ultimately putting more pressure on the Fed to stay cautious.
🔥 Housing Market: Existing Home Sales Continue to Struggle
The housing market is still showing signs of strain, with Existing Home Sales slipping to 3.86M in August - below the 3.92M forecast. Higher mortgage rates are clearly taking their toll.
When sales drop to these levels, housing-related sectors tend to follow. In June 2006, we saw a 4.3% decline in home sales followed by an 8% drop in the housing stocks index within a month.
Real estate struggles also tend to spill over into currencies like the Australian Dollar, which weakened by 2.5% against the USD following similar home sales data in August 2022.
🚨 BoJ’s Ultra-Low Interest Rate Policy: The Yen in Focus
Finally, the Bank of Japan kept its Interest Rate unchanged at 0.25%, which was widely expected.
Japan’s policy of ultra-low rates has been a familiar tune, but it’s worth noting how the yen often weakens as a result. In July 2022, following a similar BoJ decision, the yen dropped by 4% against the USD.
This weakness can be a boon for Japanese exporters, and indeed, we saw the Nikkei 225 rally by 6% over the same period.
For those of you trading currencies, keep an eye on the yen - any sudden policy shifts from the BoJ could create ripples in the market.
Best regards,
Alessandro
Founder of Macro Mornings
Disclosure
This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
Hey Alessandro, so what should people invest in? What's the takeaway?