Data watch post central bank fest

Last week was all about central bank decisions, but this week is about the stuff that future central bank decisions will be made of. A flurry of economic data is scheduled for release this week, including Eurozone CPI and US PCE both for August, along with US personal income and personal spending data. These data points could determine the outcome of future ECB and Federal Reserve meetings, and they have the power to move markets later this week. The focus is also on government bond yields, particularly in the US, where the 10-year Treasury yield rose 19 basis points last week, even though the Federal Reserve did not raise interest rates.

Markets unnerved even with central banks risk-friendly moves

As we start a new week, the move higher in US bond yields that we witnessed last week is ongoing. At the time of writing the 2-year US Treasury yield is up 2 basis points, and the 10-year yield is up 5 basis points. The 10-year yield is now at its highest level since 2007, at 4.49%, and the 2-year yield is at its highest since level since 2008. The issue with rapidly rising bond yields in the 2- 10-year space is that corporate borrowing is usually within this time frame. When yields rise, corporate borrowing becomes less attractive, which can have a negative impact on future economic growth. Bond yields tend to have an inverse correlation with risk sentiment, and it is no surprise that investors ditched stocks last week across the board, even though central bank decisions should have been risk friendly and analysts are revising up their earnings expectations for 2023. Last week was the worst week so far in 2023 for global stock markets as concerns about the implied path of interest rates unnerved investors. For example, according to the CME Fedwatch Tool, there is a 36% chance of no interest rate cuts in the US through to June 2024, which is up from a 27% chance a month ago. This shift in interest rate expectations, and the accompanying bear steepening in the US yield curve is dominating markets right now.

Big movers

Last week low volatility stocks outperformed, for example, over the past month the energy sector is one of the only sectors on the S&P 500 to post a gain of 2.91%, as the oil price has extended recent gains. Consumer discretionary stocks and the real estate sector were some of the most sold stocks in the US last week. The real estate sector lost more than 5.5%, while the IT sector was down more than 4.5%. Some of the biggest losers last week included Amazon, down 9.5% and Tesla, which fell 11.77%.

US data watch

Investors are in a brutal mood, the question now is will the inflation data from both the US and the Eurozone be enough to calm markets as we embark on the last few trading days in September, a notoriously dreadful month for stocks? Looking at the US first, the core PCE for August, is expected to show a MoM increase of 0.2%, while the annual rate is expected to decline to 3.9% from 4.2%. This is still well above the Fed’s 2% target rate, but if the estimate is correct then it would be the lowest level for YoY core PCE growth since 2021. While the decline in the core PCE rate would be a welcome development, there could be more worrying news from the personal income and personal spending data for August, personal income is expected to rise by 0.4%, up from 0.2% in July, while personal spending is expected to rise by 0.5%, down from 0.8% in July, but still at a high level. With economic data in the US surprising to the upside, according to the Citi US Economic Surprise Index, then there is a good chance that this data is stronger than expected. A stronger than expected reading of core PCE or personal income and spending for August, could see bond yields rise at the end of this week. It is also worth watching the University of Michigan 5-year consumer inflation expectations for September. This is expected to remain stable at 2.7%, which is above the Fed’s target rate, but still at a level that we think they could cope with.

Can Eurozone inflation calm markets?

The trashing of forward guidance means that week to week data releases have taken on a new importance, which ultimately can distort prices and cause excess volatility, especially when so much data is subject to hefty revisions (see the UK’s growth for the post-Covid period). The Eurozone inflation reading for September, which is also released on Friday, is also expected to show a decline in price pressures this month. The annual rate of headline CPI is expected to fall to 4.5% from 5.2%, while the core rate of inflation is expected to decline to 4.8% from 5.3%. Spanish CPI is seen as a lead indicator for the Eurozone as a whole, and it will report CPI for September on Thursday at 0700 BST. Thus, if Spanish inflation falls sharply, we could see an immediate reaction in financial markets before the overall Eurozone figure is reported on Friday.

FX focus

Unsurprisingly, the euro will be in focus this week. Even though the ECB was the only major central bank to raise interest rates this month, EUR/USD is down 1.24% so far in September, as the USD gains from haven flows. A weaker inflation print could see further declines for the euro, however, we think that the downside could be limited, as signs that inflation is retreating even after strong gains in the oil price could give risk sentiment a boost and reduce haven flows to the USD. GBP/USD is also in focus, even if the data calendar is lighter for the UK compared to elsewhere. GBP/USD has been falling sharply this month and there have been a flurry of bearish GBP outlooks for 2024 in the past few days. GBP/USD is down nearly 3% in the past month and is currently trading below $1.2230. Analysts now expect cable to fall below $1.20 in the coming months, on the back of (another) weak growth outlook or 2024 and stubborn inflation. In the short term, UK bond yields fell last week which dragged sterling lower across the board, after the BOE refrained from hiking rates after August inflation data posted a surprise decline.  

China concerns

Elsewhere, Chinese stocks have plunged this morning on the back of worries about the property sector. Chinese property giant Evergrande said that it could not issue new debt owing to an investigation into a subsidiary, and its shares fell more than 20%, dragging the Hang Seng down more than 1%, with the Hang Seng Properties Index losing 4.3%. The bad news in China has had a mildly negative effect on oil, with Brent crude dropping below $92 per barrel, however, the oil price remains near its highest level since November 2022.