Stocks Rebound as Recession Fears Eased; Key Inflation Data and Central Bank Decisions Awaited | Daily Market Analysis

Key events:

• USA - OPEC Monthly Report
• Canada - Building Permits (MoM) (Jun)
• USA - Federal Budget Balance (Jul)

The S&P 500 closed Friday higher, led by gains in the tech sector, as stocks continued to recover from a sharp selloff earlier in the week, which was driven by recession fears.

The Dow Jones Industrial Average added 51 points, or 0.1%, the S&P 500 rose 0.5%, and the NASDAQ Composite also gained 0.5%. On Monday, the S&P 500 had dropped 3%, marking its worst day since 2022, as weak July payroll data stoked fears of an impending recession. However, those concerns eased as more positive economic data emerged later in the week.

Gold prices struggled to build on the gains made over the previous two days, trading within a narrow range during the Asian session on Monday. A generally positive sentiment in the equity markets acted as a headwind for the safe-haven asset, but several factors are likely to limit any significant downside. The potential for escalating geopolitical tensions in the Middle East could curb market optimism, while dovish expectations for the Federal Reserve's policy keep US Dollar bulls in check, providing some support for gold.

The Japanese Yen gave back some of its recent gains against the US Dollar, with lower trading volumes expected due to Japan’s Mountain Day holiday. The USD/JPY pair found support from stronger-than-expected US economic data released last week, prompting traders to reduce expectations of imminent interest rate cuts by the Fed.

On Sunday, Federal Reserve Governor Michelle Bowman highlighted the ongoing risks of inflation and the strong labor market, suggesting that the Fed may not be ready to cut rates at its September meeting, as reported by Bloomberg. The CME FedWatch Tool now indicates a 46.5% chance of a 50-basis point rate cut by the Fed in September, down from a 74.0% probability just a week ago.

In Japan, last week’s monetary policy outlook revealed that Bank of Japan officials are open to raising rates further, though they have become more cautious due to increased market volatility. Japan's Finance Minister Shunichi Suzuki reiterated that monetary policy decisions rest with the BoJ, while the government continues to monitor market developments closely, according to Reuters.

The Australian Dollar rebounded against the US Dollar on Monday, driven by a hawkish sentiment surrounding the Reserve Bank of Australia. The AUD/USD pair saw gains, bolstered by positive inflation data from China, Australia's close trading partner, which likely provided additional support to the Aussie Dollar.

RBA Governor Michele Bullock emphasized the need to remain vigilant about inflation risks last week, stating that the central bank would not hesitate to raise interest rates again if necessary to combat rising prices. Her comments came shortly after the RBA decided to keep rates steady at 4.35% for the sixth consecutive meeting.

Meanwhile, the USD/CAD pair continued to consolidate its price movement at the start of the week, influenced by a mix of factors. The pair traded with a slight positive bias around the 1.3735 region, staying close to the multi-week low reached on Friday.

Mixed Canadian employment data from Friday weighed on the domestic currency, while a modest uptick in the US Dollar provided some support for the USD/CAD pair. Statistics Canada reported a decrease of 2.8K in employment for July, with the Unemployment Rate holding steady at 6.4% and Average Hourly Wages increasing by 5.2% year-over-year. This data reinforced market expectations for a 25 basis point rate cut by the Bank of Canada in September, putting pressure on the Canadian Dollar .

With no significant economic releases from the US or Canada on Monday, traders are advised to exercise caution before making any substantial moves.

The New Zealand Dollar strengthened above the 0.6000 psychological level on Monday, gaining momentum as markets reduced expectations for a rate cut by the Reserve Bank of New Zealand at its upcoming meeting on Wednesday, following a stronger-than-expected employment report. Additionally, hotter-than-expected Chinese July Consumer Price Index data supported the NZD, given China's status as New Zealand's largest trading partner.

Traders are now looking ahead to the RBNZ interest rate decision on Wednesday for further direction.

In the broader market, investors will be focused on upcoming US inflation data, with producer inflation figures set for release on Tuesday and consumer inflation data on Wednesday, as they seek confirmation that price growth remains stable.