Author: Wind
In the second trading week of August, the global capital market experienced severe shocks. Looking ahead to this week, the global market is still difficult to calm down.
First, the United States will release July PPI on August 13, July CPI on August 14, and July retail sales data on August 15. Second, as the US election date approaches, the Federal Reserve will be in the center of the storm again. Third, Japan will release its second quarter GDP, and the yen carry trade will surely be in turmoil again.
US to release CPI data
The United States will release the July PPI on August 13 and the July CPI on August 14. This will be the second-to-last CPI report released before the Federal Reserve’s September interest rate decision.
Markets expect U.S. inflation to likely rise modestly in July, but not enough to derail a widely expected interest rate cut by the Federal Reserve next month.
Currently, the market expects that the US CPI in July, both the overall data and the so-called core indicators excluding food and energy, are expected to rise by 0.2% from June.
The Consumer Price Index (CPI) in June fell 0.1% from May. The unadjusted CPI in the United States rose 3.0% year-on-year in June, the lowest level since June last year. The unadjusted core CPI annual rate in June was 3.3%, lower than the market expectation of 3.4%, the lowest level since April 2021.
This week, Home Depot and Wal-Mart will also release retail sales data and earnings reports, allowing investors to cross-check the health of the U.S. consumer, which accounts for two-thirds of the U.S. economy and is sensitive to the job market.
The Fed is in the eye of the storm
On August 9, local time, the Federal Reserve announced a tentative schedule for the Federal Open Market Committee (FOMC) meetings in January 2025, 2026, and 2027. The Federal Reserve sticks to its traditional schedule of eight meetings a year.
Last week, the Federal Reserve was at the center of public opinion. On the one hand, the Federal Reserve has kept interest rates high for more than 12 months . Last week, the market expected the Federal Reserve to cut interest rates urgently, and on the other hand, the Federal Reserve also faced unprecedented political pressure.
Republican presidential candidate Trump said last week that he should have a say when the Fed makes decisions on interest rates.
“I feel like the president should at least have a say in this,” Trump said at a news conference in Florida. “Yeah, I feel strongly about it. I think in my case, I’ve made a lot of money, I’ve been very successful, and I think in many cases my instincts are better than the instincts of the Federal Reserve or the chairman.”
Previously, Trump insisted that he and Powell "get along very well," even as some of the changes his team is considering include firing Powell, or at least not reappointing him when his term as chairman expires in 2026.
Democratic presidential candidate Harris responded in Arizona: "The Federal Reserve is an independent entity, and as president, I will never interfere with the decisions made by the Federal Reserve."
The Fed raised its benchmark interest rate by 5.25 percentage points from March 2022 to July 2023 in an effort to reduce inflation. Trump generally supports lower interest rates and has frequently criticized the Fed for raising rates in 2018.
Fed officials frequently stress the importance of the central bank's independence from political influence, and Powell has repeatedly said criticism from Trump or other officials would not affect monetary policy decisions.
Without political pressure, the Fed’s board can make decisions based solely on whether it promotes the long-term interests of the U.S. economy, not whether voters approve of it.
Japan will continue to influence global markets
The reversal of the yen carry trade is the main reason for the recent market turmoil. The yen carry trade has been a popular trade in recent years because low interest rates in Japan kept the yen cheap against the dollar. But all that changed when the Bank of Japan implemented its second rate hike this year in late July and the yen strengthened.
The carry trade “is huge. No one really knows how big it is,” said Steve Sosnick, chief strategist at Interactive Brokers.
At present, Japan remains the focus of global markets.
On August 15, Japan's GDP deflator for the second quarter was initially estimated at an annual rate. The market expects that Japan's economy will grow by 2.4% in the second quarter.
Japan's first quarter real GDP fell 2.0% year-on-year, compared with expectations of a 1.5% drop; it fell 0.5% month-on-month, compared with expectations of a 0.4% drop; the first quarter nominal GDP rose 0.1% month-on-month, compared with expectations of a 0.2% increase. Japan's first quarter real GDP revised value fell 1.8% year-on-year, compared with expectations of a 1.9% drop and a 2% drop in the initial value.
Shinichi Uchida, Deputy Governor of the Bank of Japan, said that if the economic outlook is realized, the degree of easing will be adjusted, and the current easing policy needs to be firmly maintained; if economic forecasts, risk perceptions and the possibility of achieving expectations change due to market fluctuations, the interest rate path will obviously be adjusted; when the market is unstable, there will be no interest rate hikes.
In short, the second quarter GDP data released by Japan will greatly affect the interest rate decision of the Bank of Japan and affect the direction of the global market.
Additionally, markets tend to be more susceptible to volatility in August as investors take vacations and trading volumes slow.
