A shake-out of consensus positions directed markets this week amid a quiet macro calendar. Lacking a fundamental catalyst, higher volatility reflected a combination of factors including the view that the Fed could already be behind the curve in terms of its easing cycle, earnings results that did not validate elevated tech valuations and the unwinding of short yen positions. Next week's calendar returns the focus to macro factors, with policy meetings from the Fed, BoE and BoJ, US nonfarm payrolls and inflation data in the euro area and Australia.
Despite concerns building around the outlook, US GDP expanded well above expectations increasing by 0.7%q/q in the June quarter as year-ended growth firmed from 2.9% to 3.1% - a pace well above peer economies. Solid domestic demand conditions (0.7%q/q, 3.0%Y/Y) continued to underpin growth, driven in turn by a household sector (personal consumption 0.6%q/q, 2.5%Y/Y) backed by rising real incomes and a still-robust labour market. A further tailwind to consumption from Fed rate cuts will likely come closer to fruition at next week's FOMC meeting as more of the path leading to the first cut is paved. Inflation remains on track to come back to the 2% target, albeit gradually with the headline PCE deflator softening from 2.6% to 2.5%yr in June and the Fed's preferred core PCE deflator holding at a 2.6%yr pace.
Over in Europe, a soft set of PMI readings for July came after the ECB at last week's meeting assessed that risks to the growth outlook were now 'tilted to the downside'. Euro area growth picked up in the March quarter, but that momentum looks to have softened across Q2, while the July PMIs suggest it has been a subdued start to Q3. The composite PMI was 50.1 in July - on the line that separates growth from contraction - down from a 50.9 reading in June. Activity in the services sector slowed but was still expanding (51.9 from 52.8); however, continued weakness was evident in manufacturing (45.6 from 45.8). In the UK, attention is on next week's Bank of England meeting in what could be a line-ball call between a 25bps rate cut or a hold from the Monetary Policy Committtee.
Australia's influence should become more lively next week with the key June quarter CPI report due on Wednesday. Expectations are for the inflation outcomes to remain firm on both a headline (1%q/q, 3.8%Y/Y) and core basis (1%q/q, 4%Y/Y). Upside surprises in core inflation and/or services prices are seen as a risk of leading the RBA to an August rate hike; however, a higher threshold may need to be cleared for that to occur - that being the CPI report causing the RBA to anticipate a more delayed return to the midpoint of the 2-3% inflation target band from the current forecast for 2026.