• Improved market sentiment, Nasdaq 100 records weekly increase

• Yen holds recent strong gains as euro/dollar trades sideways today

• Rich data calendar this week, US CPI to dictate Fedspeak

• Gold and oil rally as Iran is expected to attack Israel

Despite the massively negative market sentiment at the beginning of last week, most stock indices managed to cover their weekly losses with the Nasdaq 100 actually closing in the green on a weekly basis. The Nikkei 225 index was the outlier with a 2.5% weekly loss. The yen continues to hover around 9% above its recent low and thus preserving most of its recent BoJ-provoked and intervention-assisted gains.

This improved market sentiment has not significantly dented the ballooning central banks’ easing expectations. More specifically, the Fed is seen cutting rates by 100bps by year-end with lots of market talk about a 50bps move in September.

The Fed is seen cutting rates by 100bps by year-end

However, the pressure for aggressive rate cuts is getting a frosty reaction from most Fed members. Bowman, Schmid and Collins, all voting in 2025, were on the wires on Friday with the key message being that they are ready to cut rates if the data justifies it. This does not sound like a central bank on the brink of announcing a 50bps either in anticipation of a recession or to protect the financial stability of the US banking system.

Having said that, the Fedspeak might adapt this week if both Wednesday's inflation report and Thursday’s retail sales manage to surprise to the downside. While an emergency rate cut remains an outlier, a very weak set of data could increase exponentially the chances of a proper dovish shift at the August 22-24 Jackson Hole Fed symposium.

A very weak set of data this week could increase exponentially the chances of a proper dovish shift at the Jackson Hole Fed symposium.

The week is generally busy with data releases with lots of focus expected to fall on the UK data. Tomorrow’s labour market data, Wednesday’s CPI print and Friday’s retail sales could offer sufficient evidence in support of the recent, partly unexpected, BoE rate cut and potentially boost market expectations for further significant easing during 2024.

Interestingly, during tomorrow’s Asian session, business and consumer data from Australia along with the wage price index for the second quarter of 2024 will be published. It would be interesting to see the impact on Australian economic sentiment from the Chinese authorities’ failure to tackle the housing sector problem, and if a sizeable deceleration in labour costs could gradually open the door for a more balanced RBA going forward.

In the meantime, both gold and oil prices are on the rise today and trying to retest the early August highs. There are growing expectations that Iran is preparing for a direct attack on Israel, on top of Hamas launching missiles against northern Israel almost on a daily basis. Should this move take place, it would constitute a proper escalation of the conflict.