Last week, a series of U.S. employment data fueled concerns about a potential economic recession, causing the S&P 500 to drop 4.2%, marking its worst weekly performance since January 2022. U.S. 2-year and 10-year Treasury yields fell, reflecting market expectations of a more aggressive rate cut path for the rest of the year, with the 10-year/2-year Treasury yield spread turning positive. The U.S. dollar index also declined as expectations for more significant Federal Reserve rate cuts rose. Below is a recap of key economic data from last week:

• United States ISM PMI: The U.S. Manufacturing PMI for August came in at 47.2 (previous 46.8), remaining in contraction territory for the fifth consecutive month. This continued to reflect the restrictive monetary policy and uncertainties around the U.S. election, dampening corporate investment sentiment. Meanwhile, the U.S. Services PMI for August was 51.5 (previous 51.4), marking two consecutive months of expansion, with all sub-indices in expansionary territory.

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• United States Employment Report: The U.S. unemployment rate for August was 4.2% (previous 4.3%), in line with market expectations. Nonfarm payrolls increased by 142,000 (previous 89,000), falling short of market expectations of 164,000. Additionally, nonfarm payrolls for June and July were revised downward, signaling further cooling in the U.S. labor market.

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• Canada Monetary Policy: On September 4, the Bank of Canada (BoC) announced a 25 basis point rate cut, marking the third consecutive rate cut since June. Although inflation has returned to the target range, the BoC has begun to express concerns about the risk of deflation due to economic weakness. As a result, markets now expect that if the Canadian economy continues to deteriorate, the BoC may adopt a more aggressive rate-cutting approach.

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Key Data to Watch This Week

• China CPI (September 9): China’s July CPI rose 0.5% year-on-year (previous 0.2%), driven primarily by food prices due to extreme weather. Excluding food and energy, core CPI was 0.4% (previous 0.6%). The market expects August CPI to rise to 0.7%, supported by seasonal demand during the summer and government policies promoting service consumption.

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• United States CPI (September 11): U.S. CPI for July increased 2.9% year-on-year (previous 3.0%), while core CPI, excluding food and energy, rose 3.2% (previous 3.3%), both in line with market expectations and marking the lowest growth since April 2021. According to the Cleveland Fed’s CPI forecast, August CPI is expected to fall to 2.56%, with core CPI projected to ease to 3.21%.

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• Eurozone Monetary Policy (September 12): The ECB left rates unchanged during its July meeting, mainly due to rising wages, which kept services inflation elevated. However, recent data now supports a rate cut, with August’s harmonised index of consumer prices (HICP) falling to 2.2% year-on-year (previous 2.6%). Additionally, adjusted wage growth, which has been a key driver of inflation, dropped to 3.5% in the second quarter (previous 4.7%). As a result, markets widely expect the ECB to cut rates again in September.

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As the unwinding of yen carry trades came to an end, the market returned to a more stable state, though it remains highly sensitive to economic data. The S&P 500’s gains narrowed due to underperformance in some tech stocks, while it also faced the challenge of reaching new highs. Meanwhile, U.S. 2-year and 10-year Treasury yields edged higher due to shifting expectations around rate cuts, though the overall yield spread narrowed to a range of -10 to 0 basis points. The U.S. Dollar Index also saw a slight increase, driven by reduced expectations of rate cuts from the Federal Reserve.

Economic Data Review for Last Week:

• U.S. PCE (July): The July Personal Consumption Expenditures (PCE) price index rose by 2.5% year-on-year (same as the previous month) and 0.2% month-on-month (up from 0.1%). Within the details, goods inflation was flat at 0% year-on-year (up from -0.2%), while services inflation increased 3.7% year-on-year (down from 3.8%), as both factors have a limited impact on overall inflation decline. Core PCE, which excludes food and energy, increased by 2.6% year-on-year (unchanged from the previous month) and 0.2% month-on-month (also unchanged), both in line with market expectations.

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• China CPI (July): The July Consumer Price Index (CPI) rose by 0.5% year-on-year (up from 0.2%), marking the sixth consecutive month of positive growth and exceeding market expectations. The increase was mainly driven by food prices, which were affected by extreme weather conditions. Excluding volatile food and energy prices, core CPI rose by only 0.4% year-on-year, down from 0.6% in the previous period.

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Key Data to Watch This Week:

• U.S. ISM Manufacturing PMI (9/3): The U.S. ISM Manufacturing PMI for July came in at 46.8 (down from 48.5). The decline in July mainly reflects reduced investment in manufacturing due to high interest rates, along with continued weakness in goods demand, leading companies’ production and revenue to contract prompting them to implement cost-saving measures such as layoffs and hiring freezes. The market expects the Manufacturing PMI to recover slightly to 47.5, but it is still expected to remain in contraction territory.

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• Bank of Canada Monetary Policy Meeting (9/4): The Bank of Canada (BOC) has cut rates by 50 basis points since June. As inflation continues to decline, the BOC has increasingly shifted its focus to cope with economic weakness. The market expects the BOC to announce another 25 basis point rate cut at its September meeting, with two more cuts likely by the end of the year.

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• U.S. ISM Non-Manufacturing PMI (9/5): The U.S. ISM Non-Manufacturing PMI (NMI) for July was 51.4 (up from 48.8). The rebound in July mainly reflects strong business activity, although respondents indicated potential challenges ahead, and they remain cautious due to the upcoming U.S. presidential election. The market expects the NMI to decline slightly to 50.9, but it is still anticipated to remain in expansion territory.

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• U.S. Employment Situation Report (9/6): In the household survey, the unemployment rate rose to 4.3% in July (up from 4.1%), mainly reflecting an increase in labor supply and reduced hiring by companies. In the establishment survey, nonfarm payrolls increased by 114,000 in July (down from 206,000), significantly below the 12-month average of 215,000. Overall, the labor market appears to have returned to a balanced state, with no signs of widespread layoffs, though ongoing developments should be closely monitored. The market expects the unemployment rate to fall back to 4.2%, with nonfarm payrolls expected to rise by 164,000 in August.

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The Japanese Ministry of Internal Affairs and Communications (MIC) released the consumer price data on August 22, showing that the July CPI increased by 2.8% year-over-year, the same as the previous month, and slightly above market expectations by 0.1%.

This sustained growth was mainly due to a significant rise in electricity and gas prices, which drove energy prices up by 12.0% (compared to 7.7% the previous month). However, the year-over-year increase in fresh food prices fell to 4.2% (down from 8.2% the previous month), offsetting some of the overall increase.

The core CPI, which excludes fresh food, increased by 2.7% year-over-year, slightly higher than the previous month’s 2.6%, marking the 28th consecutive month above the Bank of Japan’s 2% inflation target. Further excluding energy, the double core CPI rose by 1.9%, down by 0.3% from the previous month, marking the first time it has fallen below 2% since September 2022.

At the end of July, the Bank of Japan unexpectedly raised interest rates by 15 basis points, causing significant market volatility. Subsequently, the Bank of Japan Governor stated that there would be no rate hikes during periods of market instability. However, according to the latest Shunto negotiations, Japanese wages saw the largest increase in 33 years (5.33%).

Simultaneously, on August 20, the Bank of Japan published two reports on the impact of demographic changes on wage structures and the impact of service inflation on overall CPI.

This appears to signal that the Bank of Japan may continue to raise rates in response to the persistence of service inflation. The market currently expects the Bank of Japan to maintain rates unchanged in September but anticipates another rate hike before the end of the year.

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Eurostat released the July CPI data for the Eurozone on August 20, showing an annual growth rate of 2.6%, slightly up by 0.1% from the previous month and in line with market expectations. The three countries with the lowest annual inflation rates were Finland (0.5%), Latvia (0.8%), and Denmark (1.0%), while the highest rates were observed in Romania (5.8%), Belgium (5.4%), and Hungary (4.1%).

Among the components of the overall CPI, services inflation made the largest contribution, with an annual growth rate of 4.0%, slightly down from 4.1% in the previous month, contributing 1.82 percentage points to the overall CPI increase. This was followed by food, alcohol, and tobacco (0.45 percentage points), non-energy goods (0.19 percentage points), and energy (0.12 percentage points).

According to the European Central Bank’s (ECB) third-quarter professional forecasters’ survey, the CPI growth rate is expected to decline to 2.4% by the end of 2024, with long-term inflation projected to return to the ECB’s 2% target. Additionally, the main refinancing rate is expected to decrease to 3.75% in 2024 (currently 4.25%), with the market anticipating that the ECB will implement a 25 basis point rate cut in both September and December, and further reductions to 3.0% and 2.5% in 2025 and 2026, respectively.

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The U.S. Bureau of Labor Statistics released the CPI data on August 14th, showing a year-over-year increase of 2.9% in July, slightly below the data in the previous month and market expectations of 3.0%. The core CPI, which excludes food and energy, rose by 3.2% year-over-year, down from 3.3% in the previous month. Both figures represent the smallest increases since 2021.

Breaking down the details, the primary contributor to the overall increase was inflation in housing services, which saw a monthly gain of 0.4%, up from 0.2% in the previous month, accounting for 90% of the total monthly increase across all items. However, this gain was offset by declines in several areas, including used cars and healthcare.

Similar to the PPI data released yesterday, the CPI data further confirms that inflationary pressures are continuing to ease. If the initial jobless claims over the next few weeks, as well as the unemployment rate and non-farm payroll data to be released on September 6th, remain stable, and if retail sales maintain moderate growth, the Federal Reserve will have more flexibility in its monetary policy decisions. Currently, the market anticipates a 64% probability of a 25 basis point rate cut at the September FOMC meeting, compared to a 36% probability of a 50 basis point cut.

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