U.S. bond yields fell, equity markets had mixed performance, oil and gold prices declined, and Bitcoin rose by 0.74% during the week.

U.S. bond yields are declining across the yield curve: the 2-year yield fell to 4.385% and the 10-year yield to 4.200%. This decline occurs amid robust economic growth and falling inflation. The market is now pricing in a 100% probability of a rate cut in September.

Equity markets exhibited mixed performance throughout the week. Small- and micro-cap stocks again outperformed large-caps, with increasing capital flows into funds focused on these companies. Conversely, the S&P 500 and Nasdaq 100 experienced significant declines, primarily due to their heavy reliance on the "Magnificent 7" stocks, which fell by 3.81%.

The U.S. dollar remained relatively stable against the euro, with the USD/EUR exchange rate at 0.9210. WTI crude oil prices declined for the third consecutive week, driven by weaker-than-expected data from China, where oil imports decreased by 10.7% YoY in June, and refined product imports fell by 32% over the same period. Gold prices declined during the week but are expected to perform well if Trump is elected and the Fed reduces interest rates. Meanwhile, Bitcoin saw a 0.74% increase in the cryptocurrency market during the week.

The U.S. economy grew at a 2.8% annualized rate in Q2, surpassing forecasts, driven by strong consumption. Core inflation rose to 2.9%. Despite positive indicators, the market expects a potential Fed rate cut by September.

The U.S. economy expanded at an annualized rate of 2.8% in the second quarter, surpassing the forecast of 2%. This growth was primarily driven by robust personal consumption. Core inflation also exceeded expectations, rising to 2.9%. Despite these positive developments, market participants anticipate a potential rate cut by the Fed; however, the Fed may postpone any decision until after the upcoming election. The market currently assigns a 100% probability to a 25-basis point rate cut by September. Consumer spending increased by 2.3%, while investments in equipment and government expenditures grew by 11.6% and 3.1%, respectively. In contrast, residential investment experienced a decline, and net trade hurt GDP growth. The Fed's preferred measure of inflation showed a 2.5% increase in June, down from 2.6% in May, which could indicate a potential rate cut in September. Consumer sentiment remains stable yet cautious, influenced by high prices and election-related uncertainties. Business activity improved in July, particularly within the service sector, despite a decrease in manufacturing output. The housing market showed signs of weakness, with a significant drop in existing home sales, although building permits increased.

US GDP growth beats expectations, but the market anticipates rate cuts.

The US economy demonstrated a robust growth rate of 2.8% annualized for the second quarter, surpassing the consensus estimate of 2%. Personal consumption was the primary driver of this growth, revealing that despite previous concerns about consumption weakness, it performed well during this period. Core inflation, as measured by the core PCE deflator, also exceeded expectations, rising 2.9% annualized compared to the forecasted 2.7%. Despite this positive economic performance, market sentiment remains optimistic about potential imminent rate cuts by the Fed. However, given this data, the Fed may have the flexibility to maintain current rates until after the upcoming election, as suggested by potential presidential candidate Donald Trump.

Consumer spending increased by 2.3% in the second quarter but remains below the 3% average growth rate projected for the latter half of 2023. Equipment investment rose by 11.6%, and government spending grew by 3.1%, contributing positively to GDP growth. Conversely, residential investment declined, and net trade negatively impacted GDP growth by 0.72 percentage points, as imports exceeded exports. With anticipated declines in consumer spending and investment, alongside a weakening economic outlook, the market continues to anticipate a rate cut by the Fed in September, despite the stronger-than-expected economic indicators.

We project that economic growth will moderate in the latter half of 2024 due to a weakening labour market, which could affect consumer spending in the second half of the year. Currently, the Fed's decision to cut rates will primarily depend on inflation trends.

The Fed's primary inflation gauge rose by 2.5% in June, aligning with expectations. This, coupled with stronger-than-anticipated economic growth and a weakening labour market, may set the stage for a widely anticipated rate cut in September.

The Personal Consumption Expenditures (PCE) price index increased by 0.1% in June and 2.5% YoY, with the annual rate showing a slight decline from the previous month. Core inflation, which excludes food and energy, rose by 2.6% YoY, surpassing market expectations. These figures for both headline and core inflation indicate that the final reduction in inflation remains challenging. On a three-month annualized basis, topline inflation increased by 1.5% and core inflation increased by 2.3%. This suggests that a forward-looking central banker should be confident that inflation is well on its way to the 2% target, indicating it may be time to cut rates.

Personal income increased by only 0.2%, falling short of the 0.4% estimate, while spending rose by 0.3%, matching the forecast. The personal saving rate declined to 3.4%.

Given the current economic landscape—characterized by sustained growth, declining inflation, and a cooling labour market—the Fed may consider a rate cut in September. This macroeconomic situation resembles what is often referred to in the United States as a "Goldilocks" economy.

We anticipate that inflation will continue its downward trend, and we believe the economy is heading towards a soft landing. We expect inflation to reach 2% by the end of next year.

Consumer sentiment is stable but cautious due to high prices. Election uncertainty may cause volatility. Inflation expectations are decreasing, yet long-term expectations remain slightly above pre-pandemic levels.

Consumer sentiment has remained virtually unchanged over the past three months, with July's reading only 1.8 index points below June's, well within the margin of error. Sentiment has risen 33% from the historic low of June 2022 but remains cautious due to persistently high prices, particularly affecting lower-income individuals. While labour market expectations have been stable, providing support for consumer spending, election uncertainty is likely to cause volatility in economic attitudes in the coming months. Year-ahead inflation expectations fell for the second consecutive month to 2.9%, within the 2.3% to 3.0% range seen in the two years before the pandemic. Long-term inflation expectations stayed at 3.0%, maintaining remarkable stability over the past three years but remaining slightly elevated compared to the pre-pandemic range of 2.2% to 2.6%.

We anticipate volatility in consumer sentiment this year due to a weakening labour market, elevated interest rates, and electoral uncertainty.

July saw strong U.S. business activity growth and service sector gains, but manufacturing declined, and inflation pressures persist amid political uncertainty.

U.S. business activity accelerated to its fastest pace in 27 months, with the Flash PMI Composite Output Index rising to 55.0 from 54.8 in June. The service sector led this growth, reaching a 28-month high at 56.0, while manufacturing output fell to a six-month low of 49.5, reflecting a downturn not seen since January. Despite this strong overall growth, the rate of employment increased more slowly, and business confidence declined for the second consecutive month amid rising political uncertainty. Prices charged for goods and services rose at one of the slowest rates in four years, although input prices increased at the sharpest rate in four months. The divergence between the service and manufacturing sectors was notable, with services expanding robustly while manufacturing contracted. The outlook remains cautious, with input costs rising and concerns about future inflation and political uncertainty affecting sentiment.

We anticipate economic weakness throughout 2024, leading the Fed to lower rates in September, sooner than we expected, due to declining inflation and a slowing economy.

U.S. existing home sales dropped 5.4% in June to a yearly low, with prices rising 4.1%. New home sales fell 0.6%, but building permits increased by 3.9%.

Existing home sales in the U.S. have sharply declined, with a 5.4% drop from the previous month, reaching a seasonally adjusted annual rate of 3.89 million units in June 2024—the largest monthly decrease since 2022 and the lowest sales figure of the year. This marks the fourth consecutive month of falling sales. The only market segment experiencing growth is the luxury sector, with sales of million-dollar-plus homes rising 3.6% YoY. Despite the decrease in sales, home prices continue to climb, with the median price increasing 4.1% to $426,900. Sales of new single-family homes also fell by 0.6% MoM to a seasonally adjusted annual rate of 617,000 in June, the lowest in seven months and below the forecast of 640,000, although May's figures were revised upward to 621,000. On a positive note, building permits rose by 3.9%, suggesting an anticipated increase in housing supply.

The housing market remains notably weak, primarily due to elevated mortgage rates and housing shortages, which continue to drive up costs and prices. We do not expect an improvement in the sector until the Federal Reserve reduces rates and alleviates mortgage rates.