Market snapshot: calm before the storm?
We've not seen the volatility of last week, but there's potential for more sharp moves when key data is published in the days ahead. ii's head of markets runs through what to watch out for.
13th August 2024 08:21
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US markets struggled for direction overnight ahead of what could be a defining week, when further clues on inflation and retail sales will be revealed.
It remains to be seen whether the virtually flat line performance in the latest trading session is the calm before the storm, or whether it is simply a case of investors sitting on their hands before the new data is known.
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On Wednesday, the consumer price index is expected to show an unchanged annual rate of inflation of 3.2%, with a marginal uptick to 0.2% month on month. Any readings above these estimates could well lead to further volatility and concerns that the Federal Reserve has missed the boat in not cutting interest rates early enough, leading towards potentially recessionary territory.
Similarly, the retail sales print on Thursday carries true weight given the importance of the consumer to US growth. Alongside the numbers, which are expected to show a small level of growth, will be earnings releases from Walmart Inc (NYSE:WMT) and The Home Depot Inc (NYSE:HD) which will add colour to the state of the consumer, both in terms of activity and sentiment.
The two data releases will be somewhat co-dependent in setting investor expectations in the coming months, with optimists hoping for the best case scenario of slowing inflation and a strengthening consumer.
In the meantime, the consensus is evenly split between a cut of 0.25% and 0.5% at the next Fed meeting in September, given that there are clear signs that the economy is slowing. It is the speed of the slowdown, however, which has caused some consternation given the weak non-farm payrolls number, placing extra emphasis on each economic signal as they arrive.
The main indices have maintained their year-to-date growth after a tepid trading session, with the Dow Jones up by 4.4%, the Nasdaq by 11.8% and with a 12% rise for the benchmark S&P500 topping the table.
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In Asia overnight, Japan was back in sharp focus following a holiday on Monday and the Nikkei index rose by more than 3%, underpinned by some strength in technology shares. At the same time, the recent sharp moves in the yen have subsided for now, boosting exporters generally and the main index in particular.
The Nikkei has managed to regain a positive performance so far this year which equates to almost 9%, having recovered from the violent swings of last week. The next test will come with the release of GDP numbers on Wednesday, adding further clarity to the state of the nation’s growth trajectory.
In the UK, there was an early boost with the latest economic release, which showed that the labour market is stronger than expected, in sharp contrast to the recent US release which sent markets into a brief tailspin. Unemployment fell to 4.2% from the previous month’s 4.4%, and lower than the 4.5% consensus. At the same time, employee earnings also slowed in the latest quarter to 5.4% from a previous 5.7%, which in turn is promising news in the battle against inflation.
The numbers go some way in justifying the Bank of England’s recent decision to cut interest rates given a relatively stable economy, although the timing and amount of the next cut is up for debate, swinging from a possible November reduction to nothing further this year at all.
The news helped to nudge the main indices higher at the open, although the moves were relatively muted. The FTSE250, largely accepted as a better barometer of domestic economic prospects, added to its more recent gains and now currently stands ahead by 5.2% so far this year, amid a raft of releases which have tended to confound the doubters as the UK has remained on a stable, if unexciting, growth path.
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In the primary index, there were few features of note, mirroring the caution seen in Wall Street ahead of some pivotal data this week. There was a mixed picture for retailers, with JD Sports Fashion (LSE:JD.) adding just over 1% but with Marks & Spencer Group (LSE:MKS) dipping by over 2%, potentially being subject to some profit taking after a rise of 16.5% in the share price this year.
The measured progressive opening for the FTSE100 has lifted its year to date performance to a positive 6.4%, and some 2.5% away from the record high recorded in May.
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