Are markets at a crossroads?

Last week's volatility storm retreats for now  

By the end of last week, stocks had clawed back many of the big losses incurred on Monday. Volatility has calmed down, with the stock market's fear gauge, the VIX index falling from a peak of over 65 on Monday to just over 20 on Friday. 

The US S&P 500 equity index ended the week almost unchanged, falling just -0.04% over the week, following the +0.47% gain on Friday. Closer to home, the pan-European STOXX 600 equity index even managed to eke out a marginal gain. However, it was a more difficult experience for Asian markets, as Japanese equities were unable to avoid losses for the week. 

Inflation data keeps markets on edge

The global economic calendar is looking crowded this week. These data points could significantly influence market sentiment and investment decisions. Top billing sees two sets of US inflation data landing this week. The US Producer Price Index (PPI) for July reading is due today, followed by the US Consumer Price Index (PPI) data due a day later on Wednesday. Then, on Thursday, we have US consumer retail sales data due. Book-ending the week, we have important US consumer sentiment data in the shape of the latest University of Michigan survey. Also, giving a read on the US consumer will be quarterly results from US retailers Walmart and Home Depot. 

Meanwhile, it is just as busy at home in the UK: UK labour market data is out today, UK CPI is on Wednesday, monthly UK Gross Domestic Product (GDP) is on Thursday, and UK retail sales are on Friday. Not to be left out, Europe has a distinct Scandi focus this week, with a Norway central bank rate decision on Thursday. Before that, we have CPI prints from Sweden on Wednesday and Denmark, which landed on Monday, coming in at +1.1% year on year, a little lighter than expected.

US policymakers quash emergency rate cut

Last week, a series of US Federal Reserve (Fed) speakers effectively quashed any lingering chances for an emergency rate cut, with some Fed speakers even going further to talk up the relative strength of the US jobs picture.

It seems the economic analyst community was paying attention. In a Bloomberg survey conducted between 6 and 8 August last week, only 22% of economists were predicting a US recession as inevitable. Further, in the US jobs market, an even smaller 16% of the respondents expected to see job cuts coming. 

Finally, underscoring the general sense of ease more broadly, almost 80% of economists surveyed predict the US Federal Reserve will only cut rates by 0.25% at its next scheduled meeting on 17-18 September.

Our view 

The Fed has a very simple dual mandate: to promote maximum employment and stable prices. While the former was in focus earlier this month around the shock non-farm payrolls data, markets will be hoping for better news in this week’s inflation data. Of course, the adage ‘be careful what you wish for’ is true here. Ideally, investors will likely prefer inflation in line with expectations or a touch below. 

However, if inflation data later this week is a lot weaker, the risk is that it could be seen as a worrying sign about broader US economic momentum deteriorating faster than expected. This could drive a risk-off in markets, irrespective of whether it makes a Fed interest cut more likely. This is the familiar challenge facing investors: when does good inflation news equal good news on rate cut hopes, and when does it equal bad news for the outlook for the economy?

Last week's volatility and market nervousness are timely reminders to investors not to be unsettled by short-term market fluctuations. Instead, focusing on long-term investment goals and being diversified is likely to provide peace of mind and stability in volatile times.