While still elevated, cross-market volatility eased this week on reduced US recession fears and an associated scaling back of Fed rate-cut expectations. The unwinding of overcrowded trades was also a factor that saw US equities and the Yen stabilise. A couple of major risk events in the US are ahead next week including the July updates for CPI (Wed) and retail sales (Thu). Weakness in these data points likely sees a renewal of recession trades; however, outturns that suggest the US economy remains resilient has the potential to unlock equity upside and offer support to the dollar (DXY) that is sitting at its lowest levels since March.
Heightened focus on indicators of US growth during what was a light week for top-tier indicators led to markets keying off the ISM services report and the latest reading of jobless claims. An improved showing from the services sector saw activity rebound to an expansionary reading of 51.4 in July after contracting in June (48.8). Underlying the rebound were swings in the employment (51.1 from 46.1) and new orders (52.4 from 47.3) components, both consistent with signs of economic resilience. Following this, weekly jobless claims came down from 249k to 233k, below the 240k consensus, which encouraged markets; however, continuing claims showed little movement (1.875mn).
In the euro area, retail figures for June reported a 0.3% decline in volumes compared to the previous month - surprising to the downside of expectations (-0.1%). This weak outcome suggests that cost-of-living pressures and higher interest rates continue to weigh on demand. Although the ECB has commenced its easing cycle, it remains wary that persistent inflation may limit the extent to which it is able to dial back on restrictive policy. It is a similar story in the UK for the Bank of England. The central bank will be watching next week's CPI report for July closely, in particular the data on services inflation.
The RBA's decision to leave rates on hold (4.35%) came with a hawkish tone as Governor Bullock pushed back against market pricing for a rate cut by year-end. While many of its central bank peers are now more sensitive to the trade-off between inflation and growth, the RBA asserts there is still an asymmetry of risks to persistent inflation in Australia. Accordingly, the Board stated it remains 'vigilant to upside risks to inflation and ... is not ruling anything in or out'. A slightly more delayed return to the midpoint of the 2-3% inflation target band in 2026 is now anticipated after the RBA concluded in its August Statement on Monetary Policy that the economy is operating with a greater degree of excess demand than previously estimated. Elaborating on this in a speech following the meeting, Governor Bullock said that inflation was proving persistent due to this imbalance between demand and supply. For more in-depth analysis of the August meeting, please see my review here. Key events on the domestic calendar next week include the Q2 Wage Price Index and the July Labour Force Survey.
