Today we have quite a few top-tier economic releases. In the European session we just have the German ZEW which is expected at 17.1 vs. 19.2 prior. The most important releases will be in the American session when we will get the Canadian CPI, the US Retail Sales and the US Industrial Production.
The timing of the Fed’s first interest rate cut of the cycle has been the dominant market theme all year, but since the summer, the narrative has changed to the size of the cut, with expectations of a larger-than-expected cut driving the US dollar lower. The Canadian CPI, due out this morning, is expected to show a slowdown in inflation, while the US retail sales, due out later this afternoon, are likely to show a slight slowdown in consumer spending. These releases will provide further insight into the health of the US economy and the outlook for the Federal Reserve. However, it is unlikely that these data will be able to sway the Federal Reserve’s decision on interest rates, which is widely expected to cut rates by 50 basis points at its meeting this week.
Canadian CPI: Inflation Slowdown Expected
Statistics Canada is set to release inflation numbers for August on Tuesday morning and most economists believe the annual rate likely dropped significantly, pushed by lower gasoline prices, which fell sharply in the month. The Canadian CPI Y/Y is expected at 2.1% vs. 2.5% prior, while the M/M measure is seen at 0.0% vs. 0.4% prior. As always, focus will be on the underlying inflation measures. The Trimmed Mean CPI Y/Y is expected at 2.5% vs. 2.7% prior and the Median CPI Y/Y is seen at 2.3% vs. 2.4% prior.
The BoC’s Outlook: Rate Cuts Likely
The BoC is expected to cut rates by 25 bps at both the last two meetings left for this year, but there’s also a chance that the central bank delivers bigger rate cuts if growth and inflation were weaker than projected as Governor Macklem mentioned last week. The Bank of Canada has been signaling its intention to cut interest rates, and a slowdown in inflation would provide further justification for this action. However, the Bank of Canada is likely to remain cautious, given the still-strong labor market and the risk of a rebound in inflation.
US Retail Sales: A Sign of Consumer Spending Strength
The US Retail Sales M/M is expected at 0.2% vs. 1.0% prior, while the Ex-Autos M/M measure is seen at 0.3% vs. 0.4% prior. The focus will be on the Control Group figure which is expected at 0.3% vs. 0.3% prior.
Consumer Spending Continues to Be Resilient
Consumer spending has been stable which is something you would expect given the positive real wage growth and resilient labour market. We’ve also been seeing a steady pickup in the UMich Consumer Sentiment which suggests that consumers’ financial situation is stable/improving.
The Fed’s Decision: A Rate Cut is Expected
The focus for this week is around the Fed which is set to conclude its monetary policy meeting on Wednesday and any action it takes is likely to set the tone for the weeks to come. Additional monetary policy meetings are scheduled from the Bank of Japan and the Bank of England this week, where no changes to interest rates are anticipated from either. In the US, aside from the long awaited FOMC statement, data on US retail sales and industrial production are due.
The US data is unlikely to change the market's pricing much as in the worst case scenario (strong US data), we could just see a move back to 50/50 chance between 25 and 50 bps cut. I continue to expect a 50 bps “insurance cut” to start the easing cycle and then 25 bps in November and December (barring a quick deterioration in the economy). The Fed’s decision is expected to have a significant impact on the US dollar, gold prices, and global equity markets. A larger-than-expected rate cut is likely to weaken the US dollar, drive up gold prices, and boost global equity markets. A smaller-than-expected rate cut is likely to have the opposite effect.
What This Means for the Market
The Canadian CPI and US Retail Sales are two key economic releases that will be closely watched by investors this week. These data will provide further insight into the health of the US economy and the outlook for the Federal Reserve. The Fed’s decision on interest rates is expected to have a significant impact on the US dollar, gold prices, and global equity markets.
The US Dollar Falls Deeper into Negative Territory
The US dollar fell deeper into negative territory on Monday, with the dollar index (USDX) down by another 0.36% for the session and down by around 1.4% from weekly highs. Gold prices surged to an all-time high of $2,589.97 per ounce on Monday, fueled by growing expectations that the Federal Reserve would implement a significant interest rate reduction at its upcoming meeting.
Traders Bet on a 50 Basis Point Rate Cut
Traders were increasingly confident that a 50 basis point rate cut was more likely than a 25 basis point cut, according to data from CME's Fedwatch tool. According to the CME's FedWatch tool, the market is currently pricing in a 67% chance of a 0.50% interest rate reduction by the Federal Reserve in September. A smaller cut of 0.25% is now seen as less likely at 33%.
Mixed Performance in US Markets
Ahead of the Federal Reserve's highly anticipated policy meeting, U.S. markets traded in a mixed fashion on Monday. The US 30 reached a new high, while the US 500 gained slightly. However, the US Tech 100 fell, reflecting some investor concerns regarding the impact of a less aggressive rate cut than the 50 bps. Markets were also somewhat nervous following reports of a second attempted assassination attempt on Republican presidential candidate Donald Trump.
Corporate News: Pfizer Surges, Boeing Falls
In corporate news, Pfizer's stock surged 2.7% on Monday after positive results from a mid-stage trial of its experimental drug for cancer-related appetite loss. In contrast, Boeing shares fell 0.7%, extending a decline from the previous week, as a strike by thousands of workers entered its fourth day. Intel stock climbed 6.4% after qualifying for up to $3.5 billion in federal grants to manufacture semiconductors for the U.S. Department of Defense.
The Market Outlook: Uncertainty Prevails
Investors remained cautious as they weighed the potential for a larger-than-expected rate cut from the U.S. Federal Reserve this week. Apple dropped 2.78%, after an analyst from TF International Securities reported weaker-than-expected demand for the latest iPhone 16 models. Among individual stocks, Intel Corp surged 6.41% after reports indicated it could receive up to $3.5 billion in federal grants to produce semiconductors for the U.S. Department of Defense.
Gold Prices Rise on Weakening US Dollar
Gold prices gained 0.17% on Monday supported by a weakening US Dollar as traders look ahead to Wednesday’s Federal Reserve monetary policy decision. A decline in US Treasury yields also provided support for gold, as the 10-year US Treasury note fell by 2.5 bps to 3.631%, benefiting the non-yielding metal.
Geopolitical Risks Add to US Dollar Weakness
In the geopolitical arena, risks of escalating conflict in the Middle East, coupled with an apparent assassination attempt on former US President Donald Trump, added downward pressure on the US Dollar, according to Bloomberg.
Oil Prices Rise Despite China Concerns
Oil prices rose on Monday, buoyed by the continued disruption from Hurricane Francine on production in the U.S. Gulf of Mexico, which offset concerns about weakening Chinese demand ahead of this week’s Federal Reserve interest rate decision. According to the U.S. Bureau of Safety and Environmental Enforcement (BSEE), more than 12% of crude oil production and 16% of natural gas output in the Gulf of Mexico remained offline following the storm. Despite these gains, market caution prevailed as traders looked ahead to Wednesday’s Federal Reserve interest rate decision. Weaker economic data out of China over the weekend dampened market sentiment. The world’s top oil importer saw its industrial output growth slow to a five-month low in August, while retail sales and new home prices also weakened.
Mixed Performance in US Main Indexes
U.S. main indexes posted a mixed picture on Monday with the US 500 and US 30 ending the session higher while the US Tech 100, dragged down by a drop in technology stocks.
EUR/USD Rises on USD Weakness
The EUR/USD pair saw a rise on Monday, buoyed by shorting pressure on the US Dollar, as the pair climbed back above the 1.1100 level, which had previously capped intraday gains at the end of last week. Risk-on sentiment dominated market action as investors turned their attention to anticipated rate cuts from the Federal Reserve (Fed).
European Economic Calendar Offers Little to Shift Market Dynamics
On the European front, the economic calendar offers little to shift market dynamics, with the exception of European Central Bank (ECB) President Christine Lagarde’s scheduled appearance.
US Economic Data Takes Center Stage
As the week unfolds, US economic data takes center stage, with today's Retail Sales update being closely watched. Investor consensus points toward the Fed beginning a rate-cutting cycle on Wednesday.
Bitcoin Continues Upward Momentum
The upward momentum in gold continues as buyers push the price to new record highs nearly every day, driven by expectations of a Federal Reserve rate cut. Gold reached an all-time high of $2,589 last week and is up another 0.3% today. With the Federal Reserve’s meeting on the horizon, the precious metal is likely to maintain its bullish trend, benefiting from its role as a safe-haven asset while the US dollar weakens under rate drop forecasts.
EUR/USD Recovers After Falling to August Peak
After falling two cents from its August peak, EUR/USD has recovered as sellers failed to break the critical 1.10 level. The 100 SMA on the H4 chart provided a major support zone where the pair consolidated for several sessions. Despite recent rate cuts, the Euro has remained resilient, supported by ECB policymakers’ commitment to a gradual monetary easing approach. The rise in EUR/USD is primarily driven by the expectation that the Federal Reserve will aggressively loosen its monetary policy, weakening the USD.
Bitcoin Faces Resistance at Previous Support Levels
Bitcoin, which soared from over $20,000 in October 2023 to more than $70,000 by April, has been trending downward with lower highs and lows. Concerns over a potential US recession triggered a global sell-off in early August, pushing Bitcoin below $50,000. However, the 50-day SMA has provided vital support during these declines. Although buyers stepped in to slow the drop, Bitcoin has encountered resistance at previous support levels and failed to break above $60,000, leading to a reversal yesterday.
Ethereum Shows Signs of a Potential Reversal
Ethereum has been in a persistent downtrend since March. After a sharp fall from $3,830 to below $3,000 in June, the cryptocurrency briefly rallied above its 50-day moving average before facing renewed selling pressure that pushed it below $2,200. Despite this, strong support emerged at that level, and last week Ethereum bounced off the 100-week SMA, producing a bullish candlestick. This suggests renewed buyer interest and hints at the potential for a reversal in the ongoing bearish trend.
