Weekly Analysis: Key Economic Factors to Watch September 9 - 13

٩ سبتمبر

Welcome to a new week. This week, aside from the United States, which remains a key focus for global investors, we should also watch other major economies—namely Germany, China, the United Kingdom, and the broader Eurozone region. These economies are interconnected, and shifts in their performance can have far-reaching implications for global markets.

In this article, we will outline the crucial economic factors to watch this week and explain why they matter for your investment strategy.

Key Points

• - Shift from Labor Market to US Inflation Concerns: Rising wage pressures and inflation risks are now at the forefront.
  
• - China's Economic Impact on the Eurozone: Trade imbalances and liquidity in China could dampen European growth.
  
• - European Central Bank (ECB) Interest Rate Decision: Possible rate cuts to support the struggling Eurozone economy, particularly in manufacturing.
  
• - The UK Economy: Persistent challenges due to political and economic uncertainty.
  

Economic Data to Watch
1. US CPI/PPI: Inflation data to gauge future Federal Reserve policy.
2. Prelim UoM Inflation Expectations: Market expectations for inflation.
3. Prelim UoM Consumer Sentiment: Consumer confidence, which drives spending.
4. US 30-year Bond Auction: An indicator of market sentiment on long-term US economic stability.
5. China Trade Balance: Indicator of China’s international trade and demand for European goods.
6. China M2 Money Supply y/y: Measurement of cash flow and liquidity within China.
7. German Final CPI m/m: Inflation data to assess price stability.
8. German WPI m/m: Wholesale price index, relevant for manufacturing.
9. French Final CPI m/m: Inflation in France, impacting the Eurozone outlook.
10. ECB Main Refinancing Rate: Key interest rate decision by the ECB.
11. UK Claimant Count Change: A look at the UK labor market.
12. UK GDP m/m: A measure of monthly GDP growth in the UK.

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Shifting Focus from Labor Market Conditions to U.S. Inflation Concerns

Last week, the US labor market took center stage with the non-farm payrolls report, which showed a modest increase of 142,000 jobs, below analysts' expectations but a significant rise from the previous month’s 89,000. The unemployment rate dropped by 0.1% to 4.2%, aligning with market expectations.

However, the most concerning data point was the jump in average hourly earnings, which rose by 0.4% from 0.2% in the previous month. According to wage-push inflation theory, increases in wages can lead to higher inflation as businesses pass these costs on to consumers (Fisher, 1930). This has dampened expectations of a Federal Reserve interest rate cut, as inflation risks have become more prominent. The link between wage growth and inflation is critical here because persistent inflation could force the Fed to maintain a more hawkish stance at its upcoming FOMC meeting (September 17-18, 2024).

Hypothesis: Stronger-than-expected wage growth will push inflationary pressures higher, leading the Federal Reserve to delay any potential rate cuts. Based on the Phillips Curve, which explains the inverse relationship between unemployment and inflation (Blanchard & Johnson, 2017), the Fed may be more concerned about keeping inflation under control rather than stimulating the labor market further.

As a result, last week saw a sell-off in risk assets such as the NASDAQ and S&P 500, as inflation fears led to concerns about tighter monetary policy. Investors should watch the US CPI data set to be released on September 11 for further insights into inflationary pressures.

In addition to the CPI data, we recommend monitoring the Prelim UoM Inflation Expectations and Consumer Sentiment data on September 13. These indicators provide forward-looking views of inflation and consumer financial security, which are critical to assessing potential shifts in economic growth and inflation dynamics. Moreover, the US 30-year bond auction will give us a sense of investor sentiment regarding long-term inflation risks and the broader US economic outlook.

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China’s Economic Impact on the Eurozone

China, as a major trading partner for Europe, plays a pivotal role in shaping the Eurozone’s economic health. A slowdown in China’s trade activity could hurt European exports, particularly in sectors like automobiles and industrial machinery, which rely heavily on Chinese demand (Krugman & Obstfeld, 2009). For instance, Germany, Europe’s largest economy, is highly dependent on exports to China, and any disruption here could spell trouble for the Eurozone.

Hypothesis: A declining trade balance in China will reduce European export demand, particularly in the automotive and industrial sectors. Weakening Chinese trade figures could lead to a slowdown in German manufacturing, further exacerbating the already fragile Eurozone economy.

This week, the China Trade Balance data and M2 Money Supply y/y will be crucial. The trade balance will give us insight into China’s external demand, while M2 will indicate liquidity conditions within China. If liquidity is tightening, this could also signal weaker consumer demand within China, compounding the global trade slowdown.

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European Central Bank (ECB) Interest Rate Decisions

On September 12, the European Central Bank (ECB) is expected to announce its policy interest rate. With inflation remaining below target and key sectors like manufacturing still struggling, a rate cut is on the table. Germany’s industrial sector, in particular, has been grappling with energy cost shocks, exacerbated by the loss of cheap energy from the Nord Stream pipeline bombing.

Hypothesis: The ECB may cut rates to support economic growth in the Eurozone, especially in countries like Germany where manufacturing has been hit hard by energy shortages. This is consistent with monetary policy theory, where central banks cut rates to stimulate investment and spending when growth is weak (Friedman & Schwartz, 1963).

However, investors should be mindful that a rate cut could weaken the euro in the short term, though it could stimulate economic activity over the long term. Watch German Final CPI m/m and German WPI m/m data this week for further insights into the health of Germany’s manufacturing sector and how inflation is evolving. These indicators will help assess whether the ECB’s rate cut could provide the necessary stimulus.

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The British Economy

Despite the UK’s political and economic challenges, the pound sterling remains one of the world’s major currencies. Changes in the UK economy can still influence global currency markets and trade. This week, labor market data (UK Claimant Count Change) and GDP growth will be key indicators to watch. Labor market weakness could signal broader economic stagnation, which, combined with political instability, could put downward pressure on the pound.

Hypothesis: A weaker-than-expected labor market report could push the UK closer to stagflation, pressuring the Bank of England to keep rates lower for longer. This would weaken the pound as investors seek higher yields elsewhere (Campbell & Shiller, 1998).

Additionally, UK GDP m/m will offer insights into whether the economy is growing despite these challenges. If growth is stagnant, it will reinforce the view that the UK’s economic recovery is faltering, further complicating policy decisions.

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Conclusion

This week, inflation concerns dominate the global economic outlook. The US is grappling with rising wages, China’s trade balance is critical for Europe’s prospects, and the ECB’s decision could set the tone for the Eurozone’s economic recovery. In the UK, weak labor market data and sluggish growth could spell trouble for the pound.

As always, investors should remain cautious and stay updated on economic data releases to adjust their portfolios accordingly.