S&P 500 Gains Amid Diminishing Recession Fears: Key Insights Ahead of Fed’s Jackson Hole Symposium | Daily Market Analysis

Key events:

• Eurozone - CPI (YoY) (Jul)
• USA - FOMC Member Bostic Speaks
• USA - Fed Vice Chair for Supervision Barr Speaks

The S&P 500 advanced on Monday as concerns about a potential recession continued to diminish, setting the stage for a significant week with the Federal Reserve's release of July meeting minutes. Investors are also anticipating insights from Fed Chairman Jerome Powell at the Jackson Hole central bank symposium on Friday, which could offer clues on future monetary policy directions.

The Dow Jones Industrial Average rose by 236 points, or 0.6%, while the S&P 500 gained 1%, and the NASDAQ Composite increased by 1.4%.

Goldman Sachs adjusted its 12-month US recession probability downward to 20% from 25%, attributing the change to recent economic data that shows no clear signs of a downturn.

This adjustment places the recession probability midway between the long-term average of 15% - derived from the historical frequency of recessions occurring roughly every seven years - and the 35% estimate during the banking turmoil in early 2023.

The shift in recession fears since August 5th has been driven by improved data, reinforcing the perception of the US economy as robust and resilient.

Gold prices experienced modest declines on Monday, as investors hesitated to make new bullish investments following a recent surge to a record high. Market participants are now awaiting further guidance from the Federal Reserve, with attention focused on the release of the July FOMC meeting minutes on Wednesday and Chairman Powell's speech at the Jackson Hole Symposium on Friday. Powell's comments will be closely analyzed for indications of the future interest rate-cut trajectory, which will significantly impact the US Dollar's short-term dynamics and the next directional move for gold.

Meanwhile, there is growing consensus that the Federal Reserve may begin easing its policy in September, amid signs of cooling inflation. This expectation has led the USD Index, which measures the Greenback against a basket of currencies, to its lowest point since January. Additionally, ongoing geopolitical risks in the Middle East and the extended Russia-Ukraine conflict are providing support for gold prices. However, the prevailing risk-on sentiment and optimism for a potential ceasefire in Gaza may limit significant gains for XAU/USD. Despite these factors, the overall fundamentals remain favorable for gold bulls, suggesting that any significant dip could present a buying opportunity.

The USD/CAD pair experienced a modest recovery from the 1.3625 level, a one-month low touched during the Asian session on Tuesday, temporarily halting its two-day losing streak. However, the pair remains below the mid-1.3600s as traders exercise caution ahead of the release of Canadian consumer inflation data later today.

The Canadian Consumer Price Index (CPI) is anticipated to decline for the second consecutive month, providing further evidence of cooling inflation. This could prompt the Bank of Canada to adopt a more accommodative monetary policy, especially given the current slack in the labor market. Such a shift could exert pressure on the Canadian Dollar, potentially aiding the USD/CAD pair's recovery.

In the lead-up to the key economic data, the ongoing decline in crude oil prices, driven by optimism over a potential ceasefire in Gaza, is weakening the commodity-linked Loonie. Coupled with a modest rebound in the US Dollar from its lowest level since January, this development is contributing to some intraday short-covering around the USD/CAD pair.

Meanwhile, the Japanese Yen fell against the US Dollar on Tuesday, although the downside may be limited by the increasing likelihood of another near-term interest rate hike. Japan's economy grew at an annualized rate of 3.1% in the second quarter, significantly surpassing expectations and recovering from a previous slowdown.

According to Reuters, the Bank of Japan had forecasted that a strong economic recovery would help inflation sustainably reach its 2% target, justifying further interest rate hikes. This follows last month's rate increase, part of the BoJ's strategy to gradually unwind years of extensive monetary stimulus. BoJ Governor Kazuo Ueda is scheduled to discuss last month’s interest rate decision on Friday.

The Australian Dollar paused its winning streak against the US Dollar on Tuesday. However, the AUD/USD pair may find support after the Reserve Bank of Australia released minutes from its August meeting, suggesting that the cash rate could remain steady for an extended period. The RBA considered raising rates but ultimately decided that maintaining the current rate provided a better balance of risks. RBA members also indicated that a rate cut is unlikely in the near future.

Similarly, the New Zealand Dollar continued to trade positively for the third consecutive day on Tuesday. The People’s Bank of China opted to keep the one-year and five-year Loan Prime Rates (LPR) unchanged at 3.35% and 3.85%, respectively. As China is New Zealand's largest trading partner, developments in the Chinese economy typically influence the Kiwi. Moreover, the global risk-on sentiment and easing geopolitical tensions in the Middle East are further undermining the Greenback.

Despite this positive momentum, dovish remarks from the Reserve Bank of New Zealand following a surprise rate cut last week may limit the pair's upside potential. RBNZ Governor Adrian Orr indicated that he is increasingly confident that inflation has returned to the target range of 1-3%, increasing the likelihood of further rate reductions in the future.

Looking ahead, investors will be closely monitoring the People’s Bank of China’s Interest Rate Decision, along with speeches from Fed officials Raphael Bostic and Michael Barr on Tuesday. Additionally, New Zealand’s Retail Sales data and Fed Chair Powell's speech at the Jackson Hole symposium on Friday will be key events to watch.