Next week, the primary focus will be on the Bank of Canada’s (BoC) interest rate decision, where the market is largely anticipating a rate cut from 4.75% to 4.5%. In the United States, stronger GDP data and a 0.2% month-on-month core PCE deflator print are expected, which should maintain the current Fed rate cut expectations. Additionally, the Michigan Consumer Sentiment and Expectations indices are projected to show a slight decline compared to last month, reflecting an anticipated economic cooldown and potential downturn.

The article will also include a technical analysis of AMD in the tech sector, particularly in light of recent stock market volatility attributed to increased election chances for former President Trump.

Canada

Source: Fred and BoC

Bank of Canada Interest Rate Decision (Wednesday):

The Bank of Canada (BoC) is set to announce its interest rate decision on July 24, 2024. Analysts and economic reports provide several insights and expectations for this decision.

• Current Expectations:
  • Rate Cut Likely: The consensus among economists is that the BoC will likely implement another rate cut. This follows the previous 25 basis points cut in June 2024. The recent increase in the unemployment rate to 6.4% and softer-than-expected inflation data support the case for a reduction in the policy rate​.

• Economic Indicators:
  • Inflation: June’s inflation data showed a decline to 2.7% year-over-year, down from 2.9% in May. This indicates easing price pressures, which aligns with the BoC’s objective to bring inflation within its target range of 1-3%​ .
  • Business Outlook Survey (BOS): The BoC’s latest BOS suggests a softening economic backdrop, which further justifies the need for a rate cut to support economic activity​ .
  • Market Pricing: Financial markets have largely priced in a 25 basis points cut for the July meeting. There is also speculation about further cuts later in the year, depending on economic developments​.
• Policy Outlook:
  • The BoC has signalled its commitment to reducing inflation and supporting economic growth. Governor Tiff Macklem has indicated that the central bank will continue to monitor economic data closely and adjust policies as necessary to achieve its objectives​.

Source: TradingView

• Implications:
  • Currency Impact:
    • Fed Rate Expectations: The dovish shift in Fed rate expectations negatively impacts USD/CAD, as lower U.S. rates typically weaken the USD.
    • CAD Performance: Historically, the CAD underperforms most G10 currencies when USD rates decline. However, with the potential re-election of Donald Trump and his protectionist policies, the CAD might be less vulnerable than other high-beta currencies.
    • BoC’s Role: The Bank of Canada’s focus on disinflation implies significant rate cuts, which would typically reduce the attractiveness of the CAD from a carry perspective. Despite this, the recent shift towards the “Trump trade” makes the CAD less negatively viewed compared to other commodity currencies.

Economic Growth: Lower interest rates are expected to support household spending and business investment, helping to cushion the economy against further slowdowns.

United States

GDP (Thursday):

The advanced estimate of second-quarter GDP growth and the June core personal consumer expenditure (PCE) deflator will be key data points to watch next week. The first quarter saw a modest annualised growth of 1.4%, with consumer spending at a subdued 1.5%. This time, we expect a stronger outcome, closer to 2%, versus the current consensus forecast of 1.7%. This reflects improved consumer spending, rising inventories, and slightly stronger investment readings. Despite these positive indicators, challenges remain, and we anticipate weaker growth in the second half of 2024, prompting the Federal Reserve to cut rates starting in September.

• Stock Market Impact: A stronger GDP growth figure could boost investor confidence, leading to potential gains in the stock market. However, the anticipation of future rate cuts might temper these gains.
• Dollar Impact: A robust GDP figure could strengthen the dollar initially, but expectations of rate cuts later in the year might lead to a more nuanced reaction.

Inflation (Friday):

The core PCE deflator is anticipated to come in at 0.2% month-on-month, with risks skewed towards the downside. The core CPI print was just 0.1% MoM, but some PPI inputs into the PCE deflator, such as portfolio fees and transport costs, suggest a 0.2% print. This rate aligns with the necessary run rate to achieve 2% year-on-year inflation over time, which should support ongoing interest rate cut expectations.

• Stock Market Impact: A steady inflation rate in line with expectations could reinforce the likelihood of future Fed rate cuts, which generally supports higher stock prices.
• Dollar Impact: Controlled inflation at expected levels could lead to a stable dollar in the short term, but ongoing rate cut expectations might weaken it over time.

Michigan Consumer Sentiment and Expectations (Friday):

Source: U.S. Bureau of Economic Analysis and University of Michigan

The University of Michigan’s Consumer Sentiment Index for July 2024 dropped to 66.0 from 68.2 in June, surpassing the forecasted value of 68.5 and signalling a decline in consumer confidence. The index of consumer expectations also decreased from 69.6 to 67.2 during this period.

• Key Points:
  • Current Economic Conditions: Fell from 65.9 in June to 64.1 in July.
  • Inflation Expectations: Year-ahead inflation expectations declined slightly to 2.9% from 3.0% in June, indicating a slight increase in consumer optimism regarding future inflation trends.
• Stock Market Impact: Lower consumer sentiment can dampen consumer spending expectations, potentially leading to bearish market sentiments.
• Dollar Impact: Weaker consumer sentiment might contribute to a softer dollar as it reflects potential economic challenges ahead, influencing Fed policy decisions.

This index is a leading economic indicator, typically predicting economic trends 3 to 6 months in advance, making it a critical factor for forecasting future economic conditions.

Technical Analysis: AMD

Recent Performance:

AMD’s recent stock decline can be attributed to a few key factors. Firstly, despite high expectations, AMD’s latest earnings report showed mixed results, with particular weakness in the PC market and flat revenue projections for the next quarter. Secondly, concerns over valuation have emerged, as AMD’s forward-looking valuation is currently higher than its competitor Nvidia, despite facing similar market challenges. Lastly, broader market conditions and profit-taking following significant run-ups in AI-related stocks have also played a role in the decline.

Chart Analysis:

• Current Trend: AMD’s price has been on a decline since March 2024.
• Recent Movement: The stock has declined sharply to the downside since July 11, 2024.
• Support Level: Our analysis indicates that the price may potentially decline to around $130, which is just over a 16% decline from current levels.
• Time Frame: This decline is expected within the next 1 to 3 months.