By :David Scutt, Market Analyst
- Market focus returns to US economic activity data on Thursday
- US retail sales and jobless claims headline a busy calendar
- Historic patterns suggest they may come in weak
- Data weakness may prompt renewed recession fears, creating risk of renewed USD/JPY carry trade unwinds
US recession fears have eased, helped by stronger-than-expected activity data from the services sector and a sizeable drop in initial jobless claims last week. But the relative calm in markets may not last for long with history pointing to the risk that recession concerns may soon flare again.
Historic trends hint at weak US economic data
After being dominated by inflation updates earlier this week, the focus today returns to US economic activity. Specifically, July retail sales and weekly jobless claims. According to economists, control group retail sales are expected to lift 0.1% with claims rising marginally to 235,000.
One glance at the charts below suggests such benign moves may not play out in reality.
Look at jobless claims over the past month. It resembles a yoyo, moving dramatically from one week to the next. If the pattern is maintained, the risk is we see another big increase today.
Source: Refinitiv
And a modest increase in control group retail sales (which feeds directly into US GDP calculations) is also anything but guaranteed with three consecutive monthly increases not seen since 2018, suggesting we may see a negative print later today.
Source: Refinitiv
If these patterns continue, and the emphasis is on “if”, it carries the risk that recession fears that have temporarily eased may return, creating renewed weakness in risker asset classes. While extrapolating data trends to formulate a particular view on the economy is fraught with danger, that’s exactly what markets have done in August, combining with weak volumes to generate extreme two-way volatility.
Click the website link below to get our exclusive Guide to USD/JPY trading in H2 2024.
https://www.cityindex.com/en-au/market-outlooks-2024/h2-usd-jpy-outlook/
Weak data may see US two-year yields retest recent lows
If we were to see both claims and retail sales spark renewed economic concerns, it would likely see markets move to price in the risk of a 50 basis point rate cut from the Fed in September, creating the risks that US two-year Treasury yields may push back towards the lows hit during the market panic early last week.
As I’ve covered extensively over the past few weeks, when US economic concerns have driven big declines in yields at the front of the US curve, more often than not USD/JPY has moved in the same direction.
USD/JPY looks visually heavy
Despite the rebound over the past week, it’s noteworthy USD/JPY has been unable to reclaim the uptrend it had been in since early 2023, attracting bids below 146.50 but unable to push meaningfully above 148.00. It looks heavy visually, and if we see US yields take another leg lower, who’s to say that carry trade unwinds may not start again? If that does eventuate, it could easily see the lows hit last week revisited.
Of course, such an outcome likely requires the US data to come in weak first. If it doesn’t, this note is largely invalidated. It’s an important moment that could put recession fears to bed or escalate them significantly.
– Written by David Scutt
Follow David on Twitter @scutty
**From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.**