The Davy Digest - 19th August 2024

US equities finished the week higher than last, supported by positive macroeconomic data through the latter half of the week. Wednesday's inflation print was softer than expected, with the headline reading falling below 3% for the first time since 2021. On Thursday, unexpectedly strong retail sales and jobless claims reports pushed global equity indices higher again, as the US economy continued to demonstrate its ongoing resilience. The dollar broadly strengthened following the news, while US Treasuries fell on diminished hopes of a 50 basis points rate cut in September.

On this side of the Atlantic, European equities followed the lead of the US, also moving higher over the week. It was a positive week in the UK, as inflation came in below forecast, with the services component falling particularly sharp to 5.2%. A welcome sign for the Bank of England following a 25 basis point rate cut at the beginning of the month.

In Japan, GDP data showed that the economy expanded by a much faster-than-expected 3.1% in the second quarter, thanks to a strong rise in consumption. Finally, in China, there were some signs that stimulus targeting households is starting to take effect as retail sales come in above expectations. 

Last week's highlights

	US Inflation (CPI) (14/08) – Came in at 2.9% YoY, vs 3.0% forecast, first sub-3% print since March 2021. US Retail Sales (15/08) - Grew 1.0% last month, vs. 0.3% expected, indicating that US consumers remain resilient.
	Eurozone Q2 GDP (14/08) –Second estimate for Q2 GDP growth unchanged at 0.3%.
	UK Inflation (CPI) (14/08) – Came in at 2.2% YoY, below 2.3% forecast. Services inflation fell sharply to 5.2% from 5.7%.  UK Q2 GDP (15/08) - UK GDP grew by 0.6% in Q2 2024, in line with estimates.
	Japan Q2 GDP (14/08) - Q2 GDP rose 3.1% vs 2.1% expected, supporting the case for further rate hikes. China Industrial Production & Retail Sales (15/08) - Beat expectations on retail sales but missed on industrial production. Stimulus targeting households starting to take effect.

Looking ahead to this week, the Jackson Hole Symposium will be the main event, with central bankers from around the world due to convene for the three-day conference in Wyoming. Federal Reserve Chair Jerome Powell and his peers will likely continue to manage expectations around a September rate cut. Following a week of encouraging data about labour market conditions and the US consumer, traders are only pricing a 30% probability of a 50 basis point decrease in rates.

In the Eurozone, manufacturing and services PMI data will be released on Thursday, with recent surveys indicating weakness in the manufacturing sector, especially in Germany. The People’s Bank of China will make another interest rate decision on Thursday after surprising the market with an interest rate cut in July. 

What's on the radar

	FOMC Minutes (21/08) Federal Reserve’s Jackson Hole Symposium begins (22/08)
	Eurozone HICP (20/08) Manufacturing and Services Flash PMI (22/08) Consumer Confidence (22/08)
	Manufacturing and Services Flash PMI (22/08)
	PBoC Interest Rate Decision (20/08) Japan National Inflation (22/08)

Chart of the moment

US inflation

Source: Bloomberg, 15/08/2024. CPI = Consumer Price Index. LHS = Left Hand Side. RHS = Right Hand Side. 

• US Inflation (CPI) fell to 2.9% for the month of July, coming in below the consensus estimate of 3.0%.
• Shelter – one of the inflation measure’s largest components – remained sticky, accounting for 90% of the monthly increase in prices. 
• The shelter component of CPI is primarily based on rent and consequently lags broader inflation trends. Rent generally only changes when a lease renews or a tenant moves, therefore taking longer to reflect current market prices.
• Alternative measures of shelter inflation, such as the timelier New Tenant Repeat Rent Index, suggest that the worst of housing inflation is likely behind us, and this price deceleration will eventually pass through to official inflation prints.
• The Federal Reserve will be aware that housing inflation should soon cool off, allowing headline inflation to trend closer towards their 2% target.