1. Stock indexes in the U.S. posted gains on Friday. The tech-heavy Nasdaq index closed up 0.94%, the S&P 500 index rose 0.67%, and the Dow Jones index gained 0.73%.
2. The Dollar index ended the week at 104.1, reflecting a 0.7% weekly increase. In the bond market, the S. 10-year Treasury yield closed at 4.24%, down 2 basis points, while the 2-year Treasury yield, more sensitive to policy changes, closed at 5.06%, up 14 basis points. The 30-year Treasury bond yield edged lower by about 2 basis points to 4.29%.
3. European indexes had mixed performance, with the STOXX Europe 600 Index down 0.04% and the FTSE 100 Index up 0.07% from the previous close.
4. In Asia, stock indexes were down. Japan’s NIKKEI 225 Index fell 2.05%, and China’s Shanghai Composite Index dropped 0.59%.

Fed Chairman Powell’s speech at the Jackson Hole Economic Policy Symposium

On Friday, all eyes were on Fed Chairman Powell’s speech at the Jackson Hole Economic Policy Symposium. Powell mentioned that while they are optimistic about inflation moderating, it remains elevated, and they are prepared to raise rates if necessary. He emphasized data-driven decisions for rate hikes, intending to ensure sustainable progress toward the 2% inflation target before tightening policies.

Powell welcomed the recent decline in core inflation but noted that sustained progress requires growth below the average, even for those with forecasts. He indicated that upcoming data would guide their actions and that they need a restrictive policy stance for now.

Powell highlighted strong recent economic output and consumer spending data, suggesting that the economy may not cool as quickly as expected. He pointed out that evidence of growth consistently exceeding trends might risk inflation progress, potentially requiring further policy tightening.

Powell emphasized that upcoming meetings would consider data integrity, evolving outlook, and risks for their decisions. He also firmly rejected speculation about increasing the inflation target, stating that it remains at 2%.

Consumer Sentiment

The final reading of the University of Michigan Consumer Confidence Index for August was followed. The index was slightly revised downward from 71.2 to 69.5. The sub-index for current conditions decreased from 77.4 to 75.7, and the expectations sub-index dropped from 67.3 to 65.5. Year-ahead inflation expectations were revised upward slightly from 3.3% to 3.5%, while long-term expectations shifted from 2.9% to 3%.

US Economic Calendar Highlights for the Week Ahead

• Manufacturing Data: The final August readings for the S&P Global Manufacturing PMI and the ISM Manufacturing Index are anticipated. Preliminary data indicated a decline in manufacturing PMI from 49 to 47, signaling increased contraction due to notable drops in new orders and production, representing the sharpest contraction since January.

• Consumer Confidence: The Conference Board Consumer Confidence Index for August will be released on Tuesday. July’s index exceeded expectations, rising from 110.1 to 117, the highest level in two years. Evaluations of current conditions and short-term expectations showed positive trends, reflecting a robust employment market and moderating inflation. The index is expected to slightly decline to 116 in August.

• Housing Market: The S&P/Case-Shiller 20-City Home Price Index for June, pending home sales for July, and construction spending data for July will also be released on Tuesday.

The May S&P/Case-Shiller index showed a monthly 1% increase and a 1.7% year-on-year decrease. July is expected to see a slower monthly increase at 0.8% and a continued 1.7% year-on-year decrease.

Pending home sales, which experienced a slight recovery of 0.3% growth in June after a 3.7% decline in May, are expected to decline by 1% in July. June’s construction spending growth of 1.1% is projected to slow to 0.5% in July.

• Revised GDP Growth: On Wednesday, the revised annualized quarterly GDP growth for the Q2 2023 will be reported. Despite tightening financial conditions due to Fed rate hikes, the US economy’s Q2 growth rate increased from 2% to 2.4%, exceeding expectations of a slowdown to 1.8%. Consumption growth, although moderating from 4.2% to 1.6%, surpassed expectations. This strong growth, alongside robust labor markets and strong consumer spending against slowing inflation, has bolstered expectations of the US avoiding recession.

• Revised PCE Price Index: On Wednesday, the annualized quarterly Personal Consumption Expenditures (PCE) Price Index data, a crucial inflation indicator for the Fed, will be released for Q2 2023. The index, including core data, saw a decline from 4.1% to 2.2% for Q2 2023, signaling a softening of inflationary pressures. The core PCE price index also decreased from 4.9% to 3.8%, suggesting easing inflationary pressures.

• PCE Deflator, Personal Income and Spending: Thursday will feature the release of July’s PCE deflator (including core), personal income, and spending July’s headline Consumer Price Index (CPI) increased to 0.2%, reflecting a similar increase in core CPI to 0.2% monthly and 4.7% annually. The PCE deflator is expected to show similar trends with a slight uptick in monthly and yearly rates.

• Employment Data: Employment indicators will be closely monitored for their impact on Fed policy decisions. Key releases include the July JOLTS job openings data on Tuesday, August ADP private sector employment data on Wednesday, weekly initial jobless claims, and August non-farm payrolls, unemployment rate, and average hourly earnings data on Thursday.

• JOLTS Job Openings: Despite a slight dip from 9.62 million to 9.58 million, the figures remain above pre-pandemic levels, suggesting a resilient labor market. Forecasts suggest that July’s JOLTS job openings could decline from 9.58 million to 9.45 million.

• ADP Private Sector Employment: Despite a decline from 455,000 to 324,000, the data surpassed expectations, reaffirming the robustness of the job market. August’s ADP private sector employment growth might slow from 324,000 to 195,000.

• Weekly Initial Jobless Claims: Offering a snapshot of job market health, last week’s claims dipped from 240,000 to 230,000. This marks a three-week low, indicating a resilient job market despite historical averages.

• Non-Farm Payrolls, Unemployment Rate, and Average Hourly Earnings: While non-farm payrolls rose from 185,000 to 187,000, the unemployment rate fell from 3.6% to 3.5%, showcasing the recovery’s steady progress. Non-farm payrolls could retreat from 187,000 to 168,000, the unemployment rate could remain steady at 3.5%.

• Average Hourly Earnings: In July, average hourly earnings rose by 0.4% on a monthly basis, surpassing expectations of 0.3%, and maintained a yearly increase of 4.4%, in line with the previous month but above the anticipated 4.2%. This underscores that wage-driven inflationary pressures remain robust.

Fed Official Speeches

Throughout the week, close attention will be paid to speeches by Federal Reserve officials for potential new signals regarding the central bank’s monetary policy stance.

European Central Bank (ECB) Meeting Minutes and Policy Signals

In Europe, the focus of the markets will be on the release of the minutes from the ECB’s meeting held on July 26-27, which is scheduled for Thursday. During its last meeting, the ECB increased interest rates by 25 basis points, in line with expectations, and indicated that future decisions would ensure that interest rates remain sufficiently restrictive to achieve the return of inflation to the target of 2% in a timely manner.

The decision statement emphasized that the Bank’s future decisions will ensure that interest rates are set at sufficiently restrictive levels as long as necessary to achieve the 2% medium-term inflation target and that a data-dependent approach will continue to be followed to determine the appropriate level and duration of restrictions. Moreover, it highlighted that core inflation remains generally elevated.

Following the interest rate decision, ECB President Lagarde mentioned that there would be no rate cut in September and that there could be a rate hike or they might decide to pause.

Manufacturing PMI Trends and Economic Outlook

The final manufacturing PMI data for August from HCOB for the Eurozone, providing information on the latest economic outlook, will be released on Friday.

According to preliminary data, the manufacturing PMI readings for August in the Eurozone continued to show contraction below the 50 threshold due to the tightening financial conditions associated with the ECB’s rate increases and the impact of weakening demand.

The manufacturing PMI readings in August increased slightly in Germany from 38.8 to 39.1, in the Eurozone from 42.7 to 43.7, and in France from 45.1 to 46.4, indicating a slight deceleration in the contraction pace in the manufacturing sector. However, the reading for the UK decreased from 45.3 to 42.5, indicating an acceleration in the contraction of the manufacturing sector.

Inflation Data and ECB’s Monetary Policy Decisions

On Wednesday, preliminary CPI data for August will be released for Germany, followed by Eurozone data on Thursday.

In Germany, following a 0.3% monthly increase in headline CPI in June, July saw a similar 0.3% increase, as expected. On a yearly basis, headline CPI decreased slightly from 6.4% to 6.2%, also in line with expectations.

Germany’s core CPI decreased from 5.8% in July to 5.5%. It is expected that in August, headline CPI will increase by 0.3% on a monthly basis and decrease slightly from 6.2% to 6.0% on a yearly basis. The core CPI is also expected to decrease slightly on a yearly basis, from 5.5% to 5.3%.

Consumer Confidence Indicators

On Wednesday, the final consumer confidence data for August for the Eurozone and the September GfK consumer confidence data for Germany will be released. The preliminary consumer confidence data for the Eurozone decreased from -15.1 to -16, reflecting the negative trend in the Eurozone’s consumer sentiment due to the tightening financial conditions resulting from the ECB’s rate hikes.

In Germany, the July GfK consumer confidence data increased slightly from -25.2 to -24.4, influenced by the expectations of slowing inflation but still reflecting a weak trend due to the continued impact of the ECB’s rate hikes.

France’s Second Quarter GDP Growth

On Thursday, the final GDP growth data for the Q2 2023 will be released for France. After showing limited growth of 0.1% in the Q4 2022 and Q1 2023, the French economy recorded stronger growth of 0.5% in the Q2 2023, exceeding expectations of 0.1% growth and marking the strongest growth since the Q2 2022.

China’s Economic Indicators and Manufacturing PMI

In Asia, market attention will be on China’s economic signals. On Thursday, the official manufacturing and non-manufacturing PMI data for August will provide insights into the country’s economic trajectory. Additionally, on Friday, the Caixin manufacturing PMI for August will shed light on the activities of small and medium-sized enterprises.

July’s Manufacturing and Non-Manufacturing PMI Trends

In July, China’s official manufacturing PMI rose slightly from 49 to 49.3, indicating a mild slowdown in the contraction of the manufacturing sector. However, the sector continued to exhibit contraction for the fourth consecutive month due to weak domestic and global demand. The official non-manufacturing PMI, which provides insights into the performance of the service and construction sectors, declined from 53.2 to 51.5 in July, suggesting a deceleration in growth for non-manufacturing sectors. This marked the seventh consecutive month of growth but maintained the lowest levels since January.

July’s Caixin Manufacturing PMI

China’s Caixin manufacturing PMI for July declined from 50.5 to 49.2, indicating the first contraction since April in the manufacturing sector. New orders for firms decreased in July, and overseas sales experienced the sharpest decline since September 2022.

The US Market Outlook and Economic Events

• Federal Reserve Chairman Powell’s speech at the Jackson Hole Economic Policy Symposium indicated that the Fed remains vigilant about moderating inflation. The possibility of rate hikes is on the table, driven by data-driven decisions to ensure sustainable progress toward the 2% inflation target.

• The University of Michigan Consumer Confidence Index for August was revised downward to 69.5, with sub-indices for current conditions and expectations also showing declines. Year-ahead inflation expectations increased slightly, while long-term expectations shifted upward as well.

• The upcoming week features manufacturing data, consumer confidence indices, housing market indicators, revised GDP growth and PCE price index, and employment data releases.

The European Economic Outlook and Economic Events

• The release of minutes from the ECB’s July meeting will be closely observed for signals on future monetary policy decisions. The Bank’s emphasis on data-driven decisions and core inflation trends will be of particular interest.

• European manufacturing PMI data for August will be released, reflecting a continuing contraction trend due to tightening financial conditions and weakening demand.

• Inflation data for Germany and the Eurozone will be monitored, with slight decreases in headline and core CPI expected.

• Consumer confidence data for the Eurozone and Germany will provide insights into consumer sentiment, influenced by the ECB’s rate hikes.

• France’s Q2 2023 GDP growth data will reveal stronger growth than previous quarters.

The Asia’s Economic Indicators

• July saw a mild slowdown in China’s official manufacturing PMI, while the non-manufacturing PMI indicated deceleration. The Caixin manufacturing PMI showed the first contraction since April.