Macro Matters – Weekly review, w/c August 28

Diverging monetary policies across major economies are shaping markets, with the U.S. staying resilient while Europe and the UK face slowing growth. Key macroeconomic and geopolitical events, including Prigozhin’s death and U.S. Fed expectations, further influenced market sentiment.

Eurozone and UK flash PMIs indicate economic contraction, reflecting the impact of steep rate hikes by the ECB and Bank of England. This contrasts sharply with the U.S., where GDP growth is robust, as shown by the Atlanta Fed’s GDPNow model forecasting 5.9% growth for Q3. Markets now expect the Fed to hike rates one more time this year, with fewer cuts anticipated in 2024.

Prigozhin’s death remains a geopolitical focal point. While details surrounding the crash are murky, the event underscores Putin’s grip on power. Wagner Group’s reaction and the impact on Russian politics are yet to unfold. However, the war in Ukraine and financial markets remain largely unaffected.

At Jackson Hole, Jerome Powell reiterated the Fed’s data-dependent approach, emphasizing that inflation remains “too high.” Treasury yields climbed, with the 2-year yield surpassing 5% and the 10-year yield nearing multi-year highs. The Dollar Index broke above 104.00, reinforcing its upward trend, with resistance at 104.70.

The tech rally, driven by Nvidia’s stellar earnings, fizzled as broader market sentiment waned. Both the S&P 500 and NASDAQ 100 futures showed bearish signals, with key support levels at 4350 and 14609, respectively, being critical to watch this week. Nonfarm Payrolls on Friday will be pivotal, with markets anticipating 180,000 new jobs. A weaker report could ease the Fed’s hawkish stance.

In Europe, deteriorating PMIs suggest monetary tightening is curbing activity. German Ifo data highlights stagnation, and UK services inflation is beginning to slow. ECB members are now contemplating a pause, with Eurozone flash inflation data on Thursday likely to determine the path forward.

China faces growth challenges, with $9 trillion in local government debt weighing heavily. The real estate slowdown is exacerbating the issue, leading to weak demand for commodities and yuan weakness. Australia, too, remains under pressure as CPI data this week could signal whether the RBA resumes hikes or stays on hold.

In commodities, oil prices face headwinds from increased Iranian supply and deteriorating Chinese demand, with NYMEX oil futures testing key resistance levels. Meanwhile, gold remains under pressure as the USD strengthens, with $1884 as a critical support level.

This week’s key events include U.S. Nonfarm Payrolls, Chinese PMIs, Eurozone inflation, and the ECB’s meeting minutes. Markets will also focus on speeches from Fed officials and U.S. labor market data to gauge the direction of monetary policy.

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