Weekly Outlook: Fed's Key Inflation Data & Middle East Tensions

Last week, international markets experienced significant fluctuations.

The Federal Reserve's interest rate cut has been implemented, while the Bank of England and the Bank of Japan remained on hold.

U.S. stocks rose across the board, with the Dow Jones Industrial Average up 1.61% for the week, the Nasdaq Composite up 1.49%, and the S&P 500 up 1.36%.

European stock indices saw mixed performances, with the UK's FTSE 100 down 0.52% for the week, Germany's DAX 30 up 0.11%, and France's CAC 40 up 0.47%.

This week has many highlights, with the Middle East situation once again becoming a focal point, the inflation indicator most closely watched by the Federal Reserve will be revealed, and several Federal Reserve officials will deliver routine speeches.

The September PMI of the European and American economies will test economic resilience.

Many central banks will hold interest rate meetings, with Australia expected to remain on hold, but easing inflationary pressures may pave the way for a change in policy stance.

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The Swiss National Bank (SNB) will be the last major central bank to announce policy decisions in September, and like the Federal Reserve, there is a great deal of uncertainty about the extent of the Swiss central bank's interest rate cut, with the market estimating a 60% chance of a 25 basis point cut.

Since the Swiss Franc surged against the U.S. dollar and the Euro in early August, market expectations for a more substantial rate cut have increased.

The U.S. will release a major inflation indicator as the Federal Reserve last week began the interest rate cut cycle with 50 basis points, and the job market is under scrutiny.

However, the FOMC is not expected to further significantly cut interest rates, with the interest rate dot plot and the latest interest rate futures pricing showing a higher likelihood of a 25 basis point cut in November.

This week, several Federal Reserve officials will deliver speeches, and their latest statements and clues on the economy and monetary policy are drawing attention.

In terms of data, the August U.S.

Personal Consumption Expenditure Price Index (PCE) is the most closely watched.

In July, the overall PCE remained unchanged at 2.5%, not far from the Federal Reserve's 2% target.

Looking at the annualized data over six months, this indicator may further decline in the coming months, which is even considered one of the factors for the Federal Reserve's decision to cut rates by 50 basis points.

In addition, the performance of the Conference Board's Consumer Confidence Index for September will be an important reference for economic momentum, and investors will also pay attention to a series of housing indicators, including the recent trend of mortgage rates that have fallen back, new home sales, and the Case-Shiller House Price Index.

The performance of August durable goods orders and the second quarter GDP final value is also crucial.

As the deadline for the U.S. government shutdown approaches again, the Republican split leads to the failure of the House proposal, and the initial proposal by House Speaker Johnson was rejected.

The corporate earnings reports worth watching this week include Micron Technology, Costco, Accenture, BlackBerry, and others.

Crude oil and gold prices rebounded sharply internationally, with the Middle East tensions escalating again and the Federal Reserve's interest rate cut boosting market sentiment.

The near-month contract of WTI crude oil rose 4.76% for the week, to $71.72 a barrel, and the near-month contract of Brent crude oil rose 4.02%, to $74.49 a barrel.

In a report, Commerzbank commodity analyst Barbara Lambrecht said, "Oil prices are driven by two factors: on the one hand, the Federal Reserve's cut in key interest rates exceeded many people's expectations, which increased the hope of avoiding a significant decline in the largest market oil demand.

On the other hand, the continuous escalation of the situation in the Middle East has led to an increase in geopolitical risk premiums.

There is no doubt that further deterioration of the situation may push up prices."

She said.

Helima Croft, head of global commodities strategy at RBC Capital Markets, believes that Iran is still an unknown, "Tehran may wait for the right time."

Driven by the Federal Reserve's interest rate cut, the international gold price has reached a historical high.

The December delivery of COMEX gold futures on the New York Mercantile Exchange rose 1.41% for the week, to $2,647.4 per ounce.

Some analysts say that gold prices may rise further.

CityIndex analyst Fawad Razaqzada said in a report that geopolitical risks, such as ongoing conflicts in Gaza, Ukraine, and elsewhere, will ensure the demand for gold as a safe-haven asset.

Meanwhile, the continued weakness of the U.S. dollar has made gold cheaper for holders of other currencies, bringing additional benefits.

TD Securities commodity strategist Daniel Ghali is a bit more cautious.

"It is clear that the Federal Reserve has decided to start an easing cycle with a significant interest rate cut, and there is still some buying activity.

However, given the relatively low inflow of ETFs (Exchange Traded Funds) and Asian buyers still waiting, all signs indicate extreme positioning."

He said.

The Eurozone PMI will test economic resilience, although the European Central Bank announced an interest rate cut this month, it remains cautious about the pace of future easing.

After a slight rebound in the spring, the Eurozone economy seems to have lost momentum again - especially Germany, the largest economy in the EU.

However, inflation is almost under control, so the European Central Bank can respond accordingly to further deterioration in the growth outlook.

The September Eurozone PMI will be watched this week.

The regional composite PMI rose slightly in August, mainly due to the rebound in the service sector, but the manufacturing purchasing managers' index is still in the contraction range.

As long as the service sector continues to support the broader economy, the European Central Bank may maintain a cautious stance until it is more confident that inflation has been fully controlled.

The Bank of England last week maintained its key interest rate unchanged, taking a more cautious attitude towards policy easing than the Federal Reserve.

The Bank of England said that it expects the inflation rate to fall to the 2% target by the end of next year.

Although it may follow up with interest rate cuts in the next few months, it also expressed concerns about the slow rise in service prices and wages.

The Bank of England did not commit to a specific easing policy in advance.

Bank of England Governor Andrew Bailey said that policy makers still have differences over the speed at which long-term inflationary pressures will dissipate, as wage growth seems to be too high and disturbing.

He said, "Maintaining low inflation is crucial, so we need to be careful not to cut too fast or too much."

He is "optimistic" that interest rates will fall further, but the Bank of England first needs more evidence to prove that price pressures are cooling down.

The UK PMI has climbed for the second consecutive month, highlighting a brighter economic outlook for 2024.

Further improvement in September may reduce the urgency for the Bank of England to move towards a faster pace of interest rate cuts.

Luke Bartholomew, deputy chief economist at asset management firm Aberdeen, said, "The underlying inflationary pressures in the UK are still high, and the labor market sends mixed signals about the health of the economy."

This week's highlights (from First Financial Daily)