Highlights.
Markets closed in the red as the S&P 500 and Nasdaq Composite snapped their three-week upward streak, shedding 0.10% and 0.35% respectively. In Europe, the pan-European Euro STOXX 600 was lower by 2.63%, undoing over two weeks of gains. Concerns about the potential erosion of the Federal Reserve’s independence garnered attention during the week following President Donald Trump’s announcement that he would be firing Fed Governor Lisa Cook, citing allegations that she committed mortgage fraud. Ms. Cook filed a lawsuit seeking to block the firing on Thursday, and a spokesperson for the Fed said the central bank will abide by any court decision. These jitters surrounding the independence of the Fed undid the gains that markets had realized in the week, propelled by the expectation that the U.S. Federal Reserve would lower its policy rate by 25bps in the next policy meeting in September. Governor Christopher Waller, who notably called for a 25-basis-point rate cut at the Fed’s most recent meeting, reiterated his stance for lowering borrowing costs in September saying that he will again support a 25-basis-point cut at the Fed’s next meeting and that he anticipates “additional cuts over the next three to six months,” noting that “the downside risks to the labour market have increased” and that “economic activity has slowed significantly.” Meanwhile, inflation held steady month over month in July, according to the Bureau of Economic Analysis’s (BEA) core personal consumption expenditures (PCE) price index—which excludes food and energy costs and is the Fed’s preferred measure of inflation. The index showed a 0.3% increase in prices from the prior month, roughly in line with June’s reading and consensus estimates, while personal spending and income both rose a tick higher from June at 0.5% and 0.4%, respectively. In Europe, minutes from the ECB showed that policymakers remained split on the path of the policy rate as several rate setters argued that risks were tilted to the downside at least for the next two years, citing weaker growth prospects, the impact of U.S. tariffs, and a strong euro while a few members warned that inflation risks could still be tilted to the upside, especially over the longer term, given uncertainties around energy prices and currency movements. The bar remains high for a ninth rate cut especially in light of the economy’s resilience. In addition to this, relatively muted inflation data from major eurozone economies added to the case for no change in the ECB’s monetary policy next month. In Asia, equities managed to eke out a gain for the week, with the Japanese Nikkei 225 closing 0.20% higher. Notably, trade talks with the U.S. were further delayed after chief trade negotiator Ryosei Akazawa cancelled a trip to Washington at the last minute, apparently due to unresolved issues that stand in the way of finalizing an agreement. Chinese stock markets remained on a tear with the benchmark CSI 300 Index rising 2.71% for the week and closing about 10% higher in August, ranking the index among the best-performing major indexes. However, many analysts believe that ample domestic liquidity, rather than a strong economy, is fuelling the rally as cash-rich households in China seek higher returns amid low interest rates and a lack of compelling investment options.
Data highlights:
The U.S. economy expanded strongly in Q2, with GDP growth coming in at 3.3% quarter-on-quarter, above both the 3.1% forecast and the prior contraction of 0.5%. In contrast, Canada’s economy contracted by 1.6% year-on-year in Q2, a deeper decline than the 0.6% expected and well below the previous 2% growth. Japan’s unemployment rate dropped to 2.3% in July, well below the 3% forecast. Australia’s Consumer Price Index rose sharply to 2.8%, higher than the 2% expectation by analysts.
Week ahead:
Eurozone Unemployment Rate – Monday | Eurozone Inflation YoY – Tuesday | Australia GDP Growth Rate YoY, – Wednesday | Switzerland Unemployment Rate – Thursday | U.K Retail Sales, Canada Unemployment Rate, U.S Non-Farm Payroll – Friday.
