Take Five: No Let-Up by Reuters

Market Insights: The Week Ahead

The tumultuous trading environment of September is likely to persist, as investors remain anxious in anticipation of crucial macroeconomic events that may influence market direction in the upcoming weeks.

Here’s a summary of what to expect in the market from contributors across various global financial hubs.

1. Economic Indicators and Inflation

While the focus has shifted towards U.S. employment and economic growth, the impending consumer price data set to be released on September 11 may still provoke significant market reactions. The upcoming Federal Reserve meeting on September 17-18 adds urgency to the importance of every data release.

Market participants are considering the implications of inflation remaining stubbornly high, which could diminish the case for a substantial 50-basis point rate cut—viewed as less probable compared to a more modest 25-basis point reduction. Conversely, a significant decline in consumer prices could suggest economic deceleration, potentially prompting a more dramatic interest rate adjustment.

Economists expect inflation to have increased by 0.2% in August, consistent with the rise from the prior month.

2. European Central Bank’s Decisions

The European Central Bank (ECB) is virtually certain to implement its second rate reduction of the current cycle. The key focus now shifts to what action will follow.

Traders are fully anticipating another cut post-September and assign close to a 50% probability for an additional rate move before the year concludes. In mid-July, expectations were much lower regarding a September cut.

With December cuts appearing likely, market participants are also eager for insight into the potential for an October reduction. However, ECB representatives are treading cautiously, avoiding definitive promises. There is an ongoing divide between policymakers regarding whether the weak growth outlook justifies addressing inflation concerns, as inflation fell slightly above the ECB’s target at 2.2% in August.

3. Divergence in Market Signals

Investors face a dilemma as they assess conflicting signals from the bond and stock markets. Bond yields suggest an impending recession, while stock prices, despite recent declines, continue to reach new highs, reflecting a belief in a soft economic landing.

The gold-to-oil ratio—a measure indicating how many barrels of oil can be exchanged for one ounce of gold—has reached its highest level since 2020. This ratio typically declines with increasing economic confidence due to expected improvements in energy demand and rises during periods of recessionary fears and prospective gold-friendly rate cuts. Currently, gold prices hover near record highs at approximately $2,500 per ounce, whereas oil struggles to maintain levels above $70 per barrel.

4. Employment Figures and the Pound

The Bank of England (BoE) acted faster than many of its counterparts in raising interest rates in 2021 and is anticipated to cut them with more restraint unless pivotal data, such as the monthly wage report due on September 10, signals an economic reassurance.

When the BoE executed its initial rate cut on August 1, it indicated close attention to pay growth as a significant inflation driver. Although UK wages saw their slowest growth in nearly two years for the quarter ending June 30, unemployment unexpectedly fell, and workforce participation exceeded forecasts.

A weak jobs report could be advantageous for borrowers but detrimental to the pound, which has surged based on expectations of sustained relatively high rates from the BoE. Most bullish positions in sterling are held by speculators utilizing borrowed funds, who might be inclined to sell at any whiff of trouble to avoid margin calls.

5. Leadership Shift in Japan

Japan’s forthcoming prime minister will inherit the responsibility of enhancing corporate governance, which has been instrumental in achieving record stock prices this year, backing the Bank of Japan’s shifting policies after years of deflation, and managing a burgeoning national debt that is the largest among industrialized nations.

Incumbent Fumio Kishida is stepping down amid a scandal, and the list of potential successors could swell to around ten as campaigning kicks off on September 12, ahead of a party vote on September 27.

Shinjiro Koizumi, the son of a former premier, advocates for deregulation, while mainstay contender Shigeru Ishiba has called for policy normalization before the BOJ’s recent controversial rate hike. Sanae Takaichi, the prominent female candidate, supports reflationary policies.

Though the BOJ operates independently, governmental influence remains significant. The next BOJ meeting occurs just a week before the ruling party’s vote, adding complexity to the timing of policy discussions.