The U.S. Bureau of Labor Statistics released the Producer Price Index (PPI) on August 13th, showing a year-over-year increase of 2.2% for July, lower than the previous month’s 2.7% and below market expectations of 2.3%. The month-over-month increase was 0.1%, also below the prior month and market expectations of 0.2%.

Breaking it down by components, the final demand for goods rose by 0.6% month-over-month, with food and energy prices up by 0.6% and 1.9%, respectively. However, final demand services decreased by 0.2% month-over-month, with trade services—which reflect the margins of wholesalers and retailers—declining by 1.3%, offsetting the gains in food and energy. Excluding food, energy, and trade, the core PPI saw a year-over-year increase of 3.3%, up by 0.1% from the previous month, while the month-over-month increase was 0.3%, up by 0.2% compared to the previous month.

Overall, inflationary pressures in the U.S. continue to ease, with service costs experiencing their decline for the first time this year. For the Federal Reserve, this development allows for a greater focus on the labor market, providing additional flexibility and leverage in determining the extent of future rate cuts. While the market has largely priced in a rate cut at the September FOMC meeting, there remains significant debate over whether the cut will be 25 or 50 basis points, with the final decision likely hinging on upcoming CPI and employment data.

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Over the past two weeks, the unexpected rate hike by Japan, coupled with weak U.S. manufacturing PMI and rising unemployment rates, sparked fears of an economic recession in the markets. Meanwhile the strengthening of the yen prompted a significant number of carry trade investors to sell assets to cover margin calls, leading to a sharp decline in global stock markets within a short period.

However, as the U.S. services PMI and jobless claims came in better than expected, along with dovish remarks from the Bank of Japan, global stock markets quickly rebounded. Given the market’s heightened sensitivity to macroeconomic changes, this week’s key economic data need to be closely watched. Below is a preview of the upcoming economic data this week, as well as potential  market outlook regarding these key indicators.

August 14:

• July U.S. CPI: In June, the U.S. CPI increased by 3.0% year-over-year, with the core CPI (excluding food and energy) rising by 3.3%. According to a survey by the Federal Reserve Bank of Philadelphia for the third quarter of 2024, it is expected that as the labor market slows and service inflation decreases, the CPI and core CPI will decline to 2.5% and 2.6%, respectively, by the end of 2024.

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• July U.K. CPI: In June, the U.K. CPI rose by 2% year-over-year, with the CPIH (including owner-occupiers’ housing costs) at 2.8%. Excluding food, energy, and tobacco, the core CPI and CPIH were 3.5% and 4.2%, respectively. According to the August MPC meeting minutes, the Bank of England expects the CPI to rise to around 2.75% by the end of 2024 due to a reduction in the impact of energy prices, before falling back to the target of around 2%.

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August 15:

• China’s July Economic Data: In June, China’s retail sales of consumer goods increased by 2% year-over-year, industrial output rose by 5.3%, and fixed asset investment grew by 3.9%. The market expects that with the summer season and a low base effect, retail sales could rebound to 2.6%. Meanwhile, industrial output is anticipated to increase to 5.4% due to sustained high growth in industrial exports, while fixed asset investment is expected to remain steady at 3.9%.

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• July U.S. Retail Sales: In June, U.S. retail sales increased by 3.0% year-over-year, with monthly growth flat. Core retail sales rose by 0.4% month-over-month, while double core retail sales (excluding autos and gasoline) increased by 0.8%, and control group retail sales rose by 0.9%. Given the slowdown in consumer spending, the market expects a modest monthly growth of 0.3% in July retail sales.

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• Japan’s Q2 Real GDP: In Q1, Japan’s real GDP contracted at an annualized rate of 1.8%, and was revised downward to -2.9% due to declines in consumption and exports. According to a survey by the Japan Center for Economic Research, economists expect Q2 2024 GDP growth to reach an annualized rate of 2.26% driven by a rebound in external demand. The Bank of Japan forecasts full-year 2024 GDP growth of 0.5% to 0.7%.

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(Photo Credit: Federal Reserve)

The National Bureau of Statistics of China released the CPI and PPI data on August 9. The Consumer Price Index (CPI) for July increased by 0.5% year-on-year, higher than the 0.2% growth in the previous month and above the market expectation of 0.3%. This marks the six consecutive months of positive growth. The increase was primarily driven by rising food prices due to weather conditions, which accounted for approximately 50% of the CPI’s annual growth in July. Excluding the relatively volatile food and energy prices, the core CPI rose by only 0.4% year-on-year, down from 0.6% in the previous month.

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On the other hand, the Producer Price Index (PPI) for July decreased by 0.8% year-on-year, matching the decline of the previous month and performing better than the market expectation of -0.9%. However, this marks the 22nd consecutive month of contraction. According to Dong Li-juan, a statistician at the National Bureau of Statistics, the decline was mainly due to weak market demand and falling international commodity prices.

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Overall, the domestic demand in China remains weak. Although the Chinese government committed to revitalizing domestic demand during the 3rd Plenary Session and the Politburo meeting in July, so far, the government has only lowered the Loan Prime Rate (LPR) and has not introduced detailed or large-scale fiscal stimulus measures. This presents a significant challenge to achieving the annual GDP growth target of 5% through increased domestic demand.

The U.S. Department of Labor released data on August 8th showing that initial jobless claims for the previous week stood at 233,000, a decrease of 17,000 from the revised figure of the prior week, and better than the market expectation of 241,000. The four-week moving average was 240,750, an increase of 2,500 from the previous week’s revised average of 238,250.

Meanwhile, continuing claims reached 1,875,000, an increase of 6,000 from the revised figure of 1,869,000 from the prior week.

Amid last week’s weak manufacturing PMI and employment situation data, the market was gripped by fears of an impending economic recession. However, these concerns eased somewhat with the better-than-expected service PMI and jobless claims data. According to FedWatch, the probability of a 50 basis point rate cut at the September FOMC meeting surged from 11% to 85% within a week, before falling back to 56%. It is expected that the market will be highly sensitive to any labor market data leading up to the September FOMC meeting. Therefore, close attention should be paid to whether the job market deteriorates in the coming weeks.

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The General Administration of Customs of the People’s Republic of China released the import and export data for July on August 7. The total export value in July, measured in USD, was $300.5 billion, representing a 7.0% year-on-year growth. However, this figure is lower than June’s 8.6% growth and falls short of the market expectation of 9.7%. Meanwhile, the total import value reached $215.9 billion, marking a 7.2% year-on-year increase, significantly higher than June’s -2.3%.

As the world’s second-largest economy, China’s slowdown in export growth may reflect a deceleration in global economic growth. With labor markets and consumer spending in various countries continuing to show weakness, coupled with strained trade relations due to China’s previous high export volumes, it may be challenging for China’s export growth to maintain its current pace for the remainder of the year.

The increase in imports might slightly alleviate the issue of weak domestic demand. During China’s Politburo meeting held on July 30, it was mentioned that policy efforts would be made to strengthen countercyclical adjustments, promote large-scale updates of equipment and durable goods, and enhance the consumption capacity of low- and middle-income groups.

However, these policies lack detailed implementation strategies. Similar to the Third Plenary Session, phrases such as “New quality productive forces” and “high-quality development,”  have been brought up frequently, but specific measures to boost domestic demand were only briefly mentioned.

In summary, with the potential decline in export growth due to the global economic slowdown and the uncertainty surrounding domestic demand stimulus policies, China faces significant challenges in achieving its annual GDP growth target of 5%.

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(Photo Credit: General Administration of Customs of the People’s Republic of China)