Macro Matters – Weekly review, w/c August 05

TradeDay Macro Matters

Macroeconomic / Geopolitical Developments

• Global stocks sink on US recession fears

• US jobs report sends hard landing warning

• Fed points to September cut

• Mixed Magnificent 7 earnings reports

• Bank of England cuts rates

• What’s Ahead

Global Stocks Sink on US Recession Fears

Global stock markets plunged last week and again on Friday amid heightened fears of a potential US recession following disappointing earnings and a worrying jobs report. The US economy added only 114,000 jobs in July, a significant drop from June’s figures and far below expectations. Additionally, the unemployment rate rose to 4.3%, the highest level since October 2021. Weak manufacturing data earlier in the week exacerbated the situation, sending major US indices into a tailspin, with the Dow Jones Industrial Average closing down 1.5%, the S&P 500 dropping 1.8%, and the Nasdaq Composite falling 2.4%. Negative sentiment extended globally, with European and Asian markets also posting significant declines. Contributing to this turmoil were concerns over potential Federal Reserve interest rate cuts and the Bank of Japan’s rate hike, leaving investors speculating on the magnitude of future cuts amid economic cooling fears.

US Jobs Report Sends Hard Landing Warning

A surprising rise in the US unemployment rate has rattled financial markets, igniting concerns about a potential recession. Nonfarm payrolls grew by just 114,000 in July, down from 179,000 in June, while the unemployment rate increased to 4.3%. Other indicators of economic cooling, such as weaker manufacturing activity in July, have added to these fears. The uptick in unemployment has raised concerns about labor market stability, with notable job losses in manufacturing. The post-pandemic hiring surge appears to be waning, as the unemployment rate climbs to 4.3%, impacting over 7.1 million Americans.

Fed Points to September Cut

Federal Reserve Chair Jerome Powell signaled that interest rates could be cut as soon as September if economic conditions align with expectations. At its latest meeting, the Fed held rates steady in the 5.25%-5.50% range but softened its stance on inflation. The CME FedWatch Tool now shows a 71.5% probability of a 50 basis point cut in September. While the Fed maintains caution, Powell noted that future decisions depend on forthcoming inflation and employment data.

Mixed Magnificent 7 Earnings Reports

• Microsoft: Revenue grew 15% year-over-year to $64.7 billion, surpassing expectations, though Azure cloud growth missed targets, leading to a 7% after-hours drop.

• Amazon: Revenue fell short of expectations at $147.98 billion, but EPS of $1.26 exceeded estimates. Core retail faces challenges from competitors like Temu and Shein.

• Apple: Revenue rose 5% to $85.78 billion, beating estimates. iPhone sales declined slightly, but services performed well.

• Meta: Revenue grew 22% year-over-year to $39.07 billion, exceeding expectations. Cost-cutting measures boosted net income by 73%, driven by strong digital advertising performance.

Bank of England Cuts Rates

The Bank of England reduced interest rates by 0.25 percentage points to 5%, marking its first cut in over four years. Governor Andrew Bailey emphasized cautious future adjustments to ensure inflation remains under control. The decision aims to alleviate financial pressures, particularly for homeowners with variable-rate mortgages.

What’s Ahead

Central Bank Watch:

• Bank of Japan Monetary Policy Meeting Minutes (Monday)

• Reserve Bank of Australia Interest Rate Decision and Monetary Policy Statement (Tuesday)

Macro Data Watch:

• 08/05/2024: Global Composite and Service PMI; US ISM Service PMI; BoJ Monetary Policy Meeting Minutes

• 08/06/2024: EU Retail Sales; RBA Interest Rate Decision; German Factory Orders

• 08/07/2024: Chinese Trade Report; German Industrial Production

• 08/09/2024: Chinese CPI and PPI; German CPI; Canadian Employment Report

‍