This week the ECB, next week the Fed
Irwin Stelzer, writing in the Sunday Times this weekend, sums up the conundrum most investors are currently grappling with. Precisely how resilient the US economy is and how much we should pay for exposure to the AI revolution. On the one hand, the US economy grew a healthy 3% in the 2nd quarter; on the other, according to the latest Beige Book survey, the number of districts that reported flat or declining activity rose from five in the prior period to nine in the current period. Friday’s employment report further muddied the waters as the US economy added 142,000 in August, below economists’ expectations, but rebounded from July’s downwardly revised 89,000 number. Shorter-dated treasury yields fell again as bets increased that the Federal Reserve will go for 50 basis points at their meeting a week after next. The S&P 500 index fell almost 4% on the week, the Nasdaq almost 6%, and Nvidia is now trading close to its lows in the August sell-off. The Vix index rose almost 50%, indicating how greed has once again turned to fear. Commodities had another poor week. The Reuters CRB index fell almost 10% this month, and oil is back below 70 dollars a barrel despite the continued geopolitical risks to supply. The FTSE 100 was not immune to the sell-off, but its tedious nature provided something of a backstop.
Looking to the week ahead, the highlight will probably be the ECB meeting on Thursday, but economists will also have a series of economic reports from major developed economies to consider. On Tuesday, we get a raft of employment data for the UK, including the unemployment rate and average earnings. Then, on Wednesday, we get the monthly and year-on-year GDP estimates, along with the latest industrial and manufacturing data. As for the US, things hot up from Wednesday onwards, when we get the latest inflation data, in which the year-on-year rate is expected to fall to 2.7% from 2.9% in the previous month. Depending on the outcome of the inflation report, it could result in an even greater clamour for a 50 basis point cut the following week. Then, the monthly consumer and inflation expectation report from the University of Michigan will be released on Friday. This month, no change to interest rates in Europe is expected, but as always, more interest will focus on the press conference.
Stocks in Europe look like they will open on a slightly more positive note. However, at present, one would expect most investors to sit on the sidelines until the inflation and growth interest rate picture becomes a little clearer, not go chasing much too quickly.