US bond yields were mixed, equities saw large caps rise and small caps fall, the USD strengthened against the Euro, oil prices declined, gold rose, and Bitcoin dropped by 7.30%.

US bond yields exhibited mixed performance over the past week, with short-term yields declining while long-term yields increased. The yield on the 2-year bond settled at 3.923%, whereas the 10-year yield stood at 3.908%. Such movements are typical as expectations for interest rate cuts intensify. The bond market is signalling a rate cut.

Equity markets had a mixed week, with large-cap stocks closing in positive territory while small-cap stocks saw a slight decline. The "Magnificent 7" group of stocks dropped by around 2%. The market broadly anticipates interest rate cuts in September, a sentiment echoed by the Fed, which is generally viewed as favourable for the markets.

The US dollar strengthened against the Euro, with the USD/EUR exchange rate reaching 0.904705. WTI crude oil prices fell, as OPEC+ plans to begin a gradual increase in oil production in October. This, combined with reduced expectations for a sharp US interest rate cut next month—amid strong consumer spending and economic growth data—contributed to the decline. Conversely, gold prices increased over the week. In the cryptocurrency market, Bitcoin declined by 7.30%.

U.S. GDP grew 3% annualized, driven by strong consumer spending. With inflation nearing 2%, a Fed rate cut is likely. The housing market faces affordability challenges while prices continue to reach new records.

In Q2, the GDP grew at an annualized rate of 3%, driven by a 2.9% increase in consumer spending, indicating economic resilience despite recession fears. The Fed is expected to cut rates by 25 basis points (bp) in September, as inflation nears its 2% target and labour market conditions weaken. Consumer sentiment has improved, with better economic outlooks and reduced inflation expectations. However, the housing market faces challenges: while the S&P Case-Shiller Index reached a record high, home price growth has slowed to 5.4%, and pending sales have dropped, highlighting ongoing affordability issues. The mixed economic signals suggest cautious optimism for a soft landing. We expect a 25-bp rate cut in September.

The U.S. GDP grew at 3% annualized in Q2, with consumer spending up 2.9%, signalling economic resilience and hope for a soft landing, despite ongoing uncertainties.

Despite ongoing fears of a looming recession in the U.S., the economy grew at a slightly faster rate than initially reported in Q2, driven by a significant increase in consumer spending, which offset slower growth in other sectors. The U.S. GDP rose at an annualized rate of 3% from April to June, up from the previous estimate of 2.8%, while consumer spending, which accounts for two-thirds of GDP, increased by 2.9% rather than the earlier reported 2.3%. This upward revision indicates that American consumers are still resilient, at least for now. Although these figures do not eliminate all concerns about a recession, they provide hope for those advocating for a "soft landing" for the economy—a scenario where inflation returns to target levels without severe economic downturns. The Fed, led by Jerome Powell, remains focused on managing inflation and labour market conditions, with indications of potential rate cuts shortly as inflation cools. This resilience of the U.S. economy offers investors some reassurance, despite lingering uncertainties. Less inflation plus decent growth does not equal stagflation, suggesting a more optimistic outlook than previously feared.

We anticipate the Fed will enact an interest rate cut in September. Although the economy remains resilient, weakening labour market conditions and declining inflation necessitate action to uphold the Fed's dual mandate.

Inflation is nearing the 2% target, with July’s core PCE rising 0.2%. Given strong spending and subdued income, a rate cut by the Fed in September appears likely.

Inflation is anticipated to approach the 2% target early next year, with the core PCE deflator for July showing a 0.2% MoM increase, aligning with expectations and keeping annual inflation at 2.6%, slightly below the projected 2.7%. The annualized 3-month trend has been below the target for three consecutive months, indicating a probable rate cut in September; however, the magnitude of the cut will be influenced by the upcoming jobs report. Personal spending rose by 0.5% MoM, surpassing the forecasted 0.3% increase and leading to upward revisions for April through June. This strong spending trend, with an expected annualized rate of 3.4% for Q3, may lead the Fed to approach rate cuts with caution. On the other hand, household disposable real income increased by only 0.1% MoM, matching June’s rise, which raises concerns about the sustainability of elevated spending amidst a declining savings rate of 2.9%, reminiscent of pre-Great Financial Crisis levels. If the forthcoming employment data is weaker than anticipated, it could heighten the probability of a 50-bp rate cut on September, as expected by the market.

We anticipate that inflation is trending toward the 2% target, but we expect a 25-bp rate cut at the September meeting. Given the current robust economic growth, we believe the Fed will proceed cautiously and avoid more aggressive rate cuts.

Consumer sentiment rose, long-term outlooks improved, and inflation expectations decreased, with shifting electoral predictions favouring Harris.

Consumer sentiment has maintained its early-month gains, rising by 1.5 index points from July and now standing 36% above the historic low recorded in June 2022. Both short- and long-term economic outlooks have improved, reaching their highest levels since April 2024. Long-term expectations have increased by a notable 10% across all age and income groups. This month, sentiment among Independents saw a modest increase, while Democrats and Republicans balanced each other out. Specifically, Democratic sentiment rose by 10%, whereas Republican sentiment experienced a corresponding decline. These changes are largely attributed to a significant shift in electoral expectations, with Kamala Harris emerging as the Democratic presidential candidate. In July, 51% of consumers anticipated a Trump victory, whereas in August, 54% now predict a win for Harris, with only 36% forecasting Trump’s success. Both economic and electoral outlooks remain dynamic as election day approaches. Additionally, 1-year inflation expectations have been revised down to 2.8% from 2.9%, marking the lowest level since 2020. The 5-year inflation expectations for August remain steady at 3.0%, matching the previous figure.

We anticipate that consumer confidence may improve in the last quarter of the year due to reduced interest rates and lower inflation expectations.

The S&P Case-Shiller Index hit a record high, but price growth slowed to 5.4%. Pending sales and mortgage applications fell, reflecting ongoing affordability issues and market challenges.

The National S&P Case-Shiller Home Price Index has experienced its 17th consecutive month of growth, reaching an all-time high. However, the annual growth rate of home prices has moderated to 5.4%, marking four consecutive months of deceleration. Within the 20-City Composite Index, which saw a 6.5% YoY increase, New York led with a notable 9.0% rise, followed by San Diego and Las Vegas with increases of 8.7% and 8.5%, respectively. In contrast, Portland recorded the smallest increase at 0.8%.

The ongoing rise in housing supply has contributed to a deceleration in price appreciation. Although the slowing price growth may provide some relief to prospective buyers, it has not yet significantly improved overall affordability. Homes remain considerably less affordable compared to pre-pandemic levels, with national affordability 92% lower than in February 2020. As the U.S. approaches the election season, inflation and housing prices remain critical political issues.

Pending home sales declined by 5.5% from the previous month and are down 8.5% YoY, with contract signings reaching a historic low in July. These figures, along with the decrease in mortgage purchase applications observed in July and August—despite lower mortgage rates and increased housing inventory—underscore persistent challenges in the housing market. The modest improvements in affordability have not significantly bolstered demand, as household incomes continue to be constrained relative to mortgage payments. A substantial recovery in homebuying activity is unlikely until income growth exceeds home price increases and mortgage rates decline.

We anticipate that the housing market will not show significant improvement until the Fed reduces interest rates and mortgage rates decrease. Additionally, major price declines are unlikely until the housing supply increases further.