The Davy Digest - 12th August 2024

Global equity markets began the week lower with US stocks experiencing their largest daily drop in nearly two years. Although a disappointing jobs report reignited fears of a hard landing in the US, Japan was the epicentre of the market rout, with the Topix falling over 10% on Monday. The yen continued to rally through the week following on from the Bank of Japan’s recent interest rate hike. This move led to the unwind of the popular yen carry trade, exacerbating the broad sell-off in global risk assets. European equities were not immune from the volatility and also retreated early in the week. In bond markets, US Treasury yields pushed lower to start the week before rebounding after a weak 10-year auction and improved jobs data across Wednesday and Thursday. Additionally, the yield curve – a closely watched recession indicator – briefly exited its prolonged inversion. Markets remained volatile throughout the week, but trended upwards, recapturing much of the recently lost ground.

Last week's highlights

	ISM Services PMI (05/08) – Came in higher at 51.4 vs 51.0 expected, showing the US service sector rebounded in July. Initial Jobless Claims (08/08) – Jobless claims came in at 233k vs 240k expected, a positive sign for the labour market.
	Eurozone Retail Sales (12/08) – Retail sales data disappointed as retail sales came in at -0.3% vs +0.1% expected.
	UK BRC Retail Sales (05/08) – UK retail sales returned to growth Increasing 0.5% YoY, driven by an increase in food purchases.
	China Caixin Services PMI (05/08) – Came in at 52.1 for July, beating expectations of 51.4 China Inflation (CPI) (09/08) – Increased to 0.5% year-on-year for July, vs. 0.3% expected.

Looking ahead to this week, several data releases will be of interest to investors on both sides of the Atlantic. In the US, Wednesday’s inflation print will be the highlight, with headline inflation expected to fall to 2.9% for July. Thursday’s Retail Sales report as well as the University of Michigan Consumer Sentiment survey will serve as important indicators of US consumer health. Preliminary readings for Q2 GDP will be available for the UK, Europe, and Japan across the week, while Industrial Production and Retail Sales data in China will offer further insight into any economic improvements in the Far East.

What's on the radar

	US Producer Price Index (13/08) US Inflation (CPI) (14/08) US Retail Sales (15/08)
	Eurozone Q2 GDP (14/08)
	UK Inflation (CPI) (14/08) UK Q2 GDP (15/08)
	Japan Q2 GDP (14/08) China Industrial Production & Retail Sales (15/08)

Chart of the moment

Turbulence from Tokyo

Source: Bloomberg, 08/08/2024. BoJ = Bank of Japan

• After reaching multi-decade lows during July, the yen has recently experienced a sharp reversal, appreciating nearly 10% from its trough 5 weeks ago.
• At their July meeting, the Bank of Japan lifted interest rates to 0.25%. Above-target inflation and renewed wage growth allowed for rates to be raised for just the second time since 2007.
• In recent years, the yen has been one of the main funding sources for the carry trade. This trade involves borrowing in a currency with low interest rates (e.g. yen) to invest in higher yielding assets.
• With interest rates beginning to fall in the west, the Bank of Japan are raising rates, narrowing the interest rate differential and lessening the attractiveness of the yen carry trade.
• This move has contributed to the global sell-off in risk assets but could serve as a tailwind for ongoing strength in the yen, as more investors are forced to exit short positions in the currency.