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MARKETS

Despite another inflation report sparking hopes for interest rate cuts, U.S. stocks took a breather on Friday, with the S&P 500 breaking its three-week winning streak. The S&P 500 (^GSPC) slipped by about 0.4% at the close, though it has enjoyed a nearly 15% surge in the first half of 2024. Meanwhile, the tech-centric Nasdaq Composite (^IXIC) fell around 0.7% yet boasts an impressive 19% year-to-date gain.

The so-called "Magnificent Seven" has fueled much of the stock market's rally. AI superstar Nvidia (NVDA) stands as the poster child of this success, with its shares skyrocketing 150% this year, underscoring the persistent strength of the AI boom in 2024.

Even with stocks celebrating a stellar first half, recent jitters—most notably from Nvidia—have stirred fears of a potential pullback in the latter half of the year.

Part of the issue today anyway, aside from long weekend housekeeping and “ The Street” entering the 4 week window prior to the “Dog Days Of Summer,” was the widely anticipated rate-cut-friendly PCE (Personal Consumption Expenditures) data that was entirely baked into the cake.

Even though the data suggests that two rate cuts are on the horizon as core inflation cools after the Fed’s favoured inflation measure moderated further in May. Still, it felt more like an afterthought.

The PCE release was hyped as pivotal, just like every other U.S. inflation update and jobs report. Everything seems "pivotal," or that's how Bloomberg keeps our investing lives brimming with subscription-worthy excitement. The reality is that recent CPI (Consumer Price Index) and especially PPI (Producer Price Index) figures, which share many similarities with the PCE index, have already hinted at this outcome. Thus, there was likely an element of disappointment that the core reading didn't come in even lower.

In a broader context, the data confirmed what May’s CPI and PPI reports had already hinted at: U.S. prices have eased after spikes in the year's first quarter.

Friday’s release might slightly increase the odds of a July rate cut, but my gut feeling suggests that the first Fed cut will come at the September SEP (Summary of Economic Projections) meeting. The refreshed dot plot could signal a few cuts for the entire year, depending on how labour market data evolves.

The markets have successfully navigated the first half of 2024 despite facing uncertainties on multiple fronts. The overall macro environment is signalling robust yet below-potential growth, lingering inflation pressures, and central banks hesitant to shift to full-scale easing.

U.S. technology and communication services stocks have kept their momentum, arguably the strongest asset classes through mid-2024. Both sectors have surged nearly 30% in the S&P 500 after posting gains of over 50% last year. As a result, many sentiment indicators have bounced back into bullish territory, and even meme stocks have made a comeback, reminding us that 2021 wasn't that long ago.

The rest of the U.S. equity market is performing perfectly well, though it remains overshadowed by big tech. On an equal-weight basis, the S&P 500 is up around 4% for the year compared to 15% for the traditional index. Nevertheless, all eight remaining sectors are showing gains so far this year. Fundamentally, valuations have slightly expanded on a P/E ratio basis, and the earnings yield spread versus 10-year Treasuries has narrowed to its lowest point since 2002. However, underlying earnings have proven very resilient, and forward-year expectations continue to rise.

Bulls point to ongoing disinflation and eventual Federal Reserve easing, historically a favorable setup for both equities and bonds. Underlying economic and earnings growth also appear supportive. On the flip side, we need to see U.S. inflation trends break more significantly, and real rates are marching higher as the Fed remains on hold. Plus, the November U.S. election looms large, adding another layer of intrigue to the market landscape.

FOREX MARKETS

Awaiting French Election Results

After an initial plunge following the announcement of snap elections in France, the EUR/USD pair has found some stability around the 1.0700 level. However, the upcoming week could see renewed volatility depending on the results of the first round of elections on Sunday. This first round will reveal the actual support for the right and left parties, compared to what we've seen in the polls.

There are four plausible scenarios based on current polling:

1. RN Wins Most Seats, No Majority (45%): The right-wing RN party could win the most seats but fall short of a majority. This scenario might introduce political uncertainty, potentially causing the euro to weaken.

2. RN Wins Outright Majority (25%): A clear victory for RN could stabilize the political landscape, possibly boosting the euro as market concerns ease.

3. NPF Wins Most Seats, No Majority (20%): A similar scenario for the left-wing NPF party could lead to volatility, depending on coalition talks and policy expectations.

4. No Clear Winner (10%): A political deadlock could result in significant market uncertainty, likely weakening the euro. ( Scenerios Via MUFG)

In summary, the outcome of the first round of the French elections will be crucial in determining the direction of the EUR/USD pair in the near term. Traders should brace for potential market swings as the political landscape in France unfolds.

Another USDJPY Ripper?

Despite higher-than-expected Tokyo inflation and cooling core US PCE inflation, USD/JPY closed the week near 161. This suggests that Japanese policymakers seeking a stronger yen will need more than a July rate hike to positively influence the currency's trajectory.

Japanese authorities closely monitor the USD/JPY exchange rate, particularly as it approaches previous intervention thresholds seen in April. Masato Kanda, Japan's top currency official, noted that recent movements in USD/JPY are considered "rapid" but not yet "excessive." This distinction implies a cautious approach, where a significant 10 yen move within a month could potentially trigger intervention. In April, USD/JPY rose from 150 to just under 160 over a similar period, meeting Kanda's criteria.

With USD/JPY approaching 160 within two months of the last intervention and possibly eyeing 165, Japanese authorities are hesitant about further action. Despite previous interventions totaling USD 61 billion, these measures are seen as short-term solutions to manage volatility rather than to fundamentally correct a structurally weak yen. Future intervention decisions will heavily rely on US economic indicators, particularly the Federal Reserve's policies, which significantly impact the yen's strength.

Looking ahead, Japanese officials may resort to verbal interventions and closely monitor market reactions before considering additional measures. A potential move towards 165 in USD/JPY could prompt reassessment and potentially trigger further action. We anticipate that the cooling core PCE should limit upside in USD/JPY ahead of US jobs data. Given stretched positioning, traders may revert towards 160 before Non-Farm Payrolls (NFP) data, as is typical ahead of significant market-moving events.

While the cooling PCE was largely anticipated and not a significant market mover, NFP has the potential to significantly impact the dollar, particularly on a reading below 125K jobs added.

A Strong US Dollar Is Political

A robust US dollar is a contentious issue, particularly in the lead-up to a pivotal presidential election. Unlike President Joe Biden, Donald Trump is vocal about the dollar's value, viewing it through the lens of the persistent US trade deficit.

According to Politico, Trump's advisers, led by Robert Lighthizer, the architect of former President Trump's China tariffs, are debating strategies to weaken the US dollar. However, this goal is challenging to achieve. Trump's proposed tariffs and tax cuts could paradoxically strengthen the dollar by fueling inflation, potentially prompting the Fed to resume tightening monetary policy.

It's evident that Asia shouldn't count on a weaker US dollar if Trump returns to the White House. Significant depreciation in the currency would likely require a sharp slowdown in the US economy and quicker-than-expected rate cuts by the Fed, scenarios unlikely to materialize this year. "King Dollar" will likely continue to be a concern for Asian policymakers in the foreseeable future.

The Stumble And Bumble Heard Around The World

Donald Trump decisively clinched victory in the first 2024 U.S. presidential debate, a triumph made even more apparent by Joe Biden's lackluster performance. Biden struggled to articulate his thoughts, often failing to complete even short sentences. His responses, when decipherable, seemed laboriously rehearsed, yet he frequently forgot his lines. Biden appeared utterly lost and defenceless, without a mental script and unable to think on his feet. At one point, Trump quipped, "I don’t know what he said there at the end. I don’t think he does either."

In stark contrast, Trump was sharp and focused. This juxtaposition was particularly striking early on when Biden repeatedly froze mid-sentence, at times resorting to muddled rhetoric in a futile effort to mask what has become painfully obvious to many: rumours of Biden’s cognitive decline are no longer just rumours.

Below is a clip from the Channel News Asia Prime Time election debate segment and Trump economic policy analysis. I was honoured to join

US dollar pushes higher as investors see Trump leading Biden in presidential debate

Democrats, both publicly and privately, found themselves in a state of alarm in the aftermath, with growing frustration toward a candidate and campaign that had long dismissed concerns over the president's age and acuity as exaggerated. This uncertainty about the president's future in the race has intrigued many, though he assured reporters of his intention to continue his campaign later that night.

The democratic party and the left-wing media should be ashamed of themselves for allowing this charade to continue. Nonetheless, It's in very poor taste to lampoon President Biden for his mental acuity, regardless of where one stands on the political spectrum.

Meanwhile, before the debate, polls and betting markets suggested Trump's odds of winning in November were strong. And those odds have likely increased due to undecided voters jumping on the red bandwagon. Twelve of the 14 people in a focus group of undecided voters hosted by Republican pollster Frank Luntz said they were more likely to vote for Trump after watching what they described as Biden stumbling through the debate.

Polling in crucial swing states suggests a more significant win for Trump, with some even predicting a landslide victory.

While it's impossible to predict precisely what Trump's economic policies will be and their impact on the market, expectations lean toward a pro-business stance and tax cuts, which traditionally support market sentiment. However, a growing chorus is concerned about the potential implications of a prospective GOP election sweep for U.S. fiscal policy, bond yields, and inflation, sparking a sense of concern about the potential market impact.

These concerns aren't confined to Donald Trump's many critics. The worry, in a nutshell, is that between sweeping new tariffs, curbs on immigration, and tax cuts, a unified Republican government might reverse whatever progress America has made in the inflation fight. This potential reversal is causing a wave of worry and caution among the market audience while simultaneously underscoring the worst fears of those inclined to fret over deficits and debt.

Some of the policies being discussed include:

• Extending his 2017 Tax Cut and Jobs Act, which is set to expire at the end of 2025

• Severely restricting immigration with a plan to deport foreign-born illegal immigrants

• Imposing tariffs on all imports

• Rolling back much of Biden's clean energy policies

• Replacing Powell (after his term ends) with some talk of changing the Federal Reserve Act to reduce the Fed's independence

But come August's Democratic convention, we could conceivably see a Trump vs. yet-to-be-determined candidate

The New Normal: U.S. Economic Outlook for 2024

The U.S. economy in 2024 presents a markedly different landscape compared to the robust growth seen in 2023. As anticipated, the economic dynamics have shifted significantly. Here, we delve into the key factors shaping this new normal, examining GDP growth, consumer spending, labor market conditions, business investment, and housing market trends.

GDP Growth: A Cooling Pace

2023 saw an impressive GDP growth, with the second half averaging 4.2%, driven by strong consumer spending and a surge in immigration and population. However, 2024's first quarter GDP showed a modest growth of 1.4%, slightly revised up from 1.3%. Despite this upgrade, underlying data reveals a weaker performance in consumer spending, signaling a broader economic slowdown.

Consumer Spending: A Significant Slowdown

Real consumer spending growth dropped to 1.5% annualized in Q1 2024, a sharp decline from 3.3% in Q4 2023. Durable goods spending fell by 4.5%, much worse than the initially estimated 1.2% drop. Similarly, spending on non-durable goods and services saw notable downward revisions. Early indications for Q2 suggest that consumer spending is not improving significantly.

Labor Market: Shifting Dynamics

The strong and tight labour market of 2023 is beginning to show signs of strain. While detailed labour market data is still emerging, initial indicators suggest a cooling off in employment growth and wage increases, reflective of the broader economic deceleration.

Business Investment and Inventories: Piling Up and Pulling Back

May's data on wholesale and retail inventories indicate a concerning build-up, which could contribute a percentage point to Q2 GDP growth but also foreshadows a potential significant pull-back in business inventories and investment in the latter half of the year. Non-defense capital goods orders declined by 0.6% in May, highlighting a tepid outlook for equipment spending and manufacturing.

Housing Market: Continued Weakness

The housing market continues to struggle, with new home sales plummeting by 11.3% in May and pending home sales down by 2.1%. This trend suggests a substantial 5.0% annualized decline in Q2 residential investment, further compounded by lower broker commissions.

Trade Deficit: Widening Gaps

The advance goods trade deficit surged above $100 billion in May, pointing to a real trade deficit in Q2 of over $1 trillion annualized—the largest since early 2022. This could potentially subtract around 1.3 percentage points from Q2 GDP growth, exacerbating the economic slowdown.

Outlook: Embracing the New Normal

With various economic indicators pointing to a slowdown, U.S. GDP growth is expected to maintain a subdued pace, around 1.6% annualized in Q2 2024, and stay within the 1.0%-to-1.5% range for the rest of the year. This new normal reflects a recalibration from the high growth rates of 2023 to a more restrained economic environment in 2024.

( Data compiled via Bank of Montreal Economics)

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