Americans’ savings are critically low, but that hasn't bothered markets yet

Friday saw the release of the last important piece of the inflation puzzle ahead of next week's Fed meeting. The FOMC's preferred measure of inflation, the Core Personal Consumption Expenditures Price Index, rose 0.2% m/m and 2.6% y/y, keeping the annual rate of increase at its lowest level since March 2021.

Alongside the more neutral inflation data, we continue to see alarm bells ringing for US consumer activity. Personal spending rose by 0.3% in June, compared with income growth of 0.2%. Households saved $703bn, or 3.4% of disposable income, the lowest level in 18 months.

Aside from the pandemic in 2022, the only other time in US history that savings were this low was between 2005 and 2008, leading to the Global Financial Crisis. After that, people's desire to save by rebuilding a financial safety cushion severely delayed the economic recovery. At that time, the situation was largely rescued by the huge government spending that has since become the norm. Today, rising debt and chronic deficits severely limit the scope for government stimulus as the economy contracts, and this could be a multi-year problem.

The recent data, which were close to traders' and analysts' average forecasts, did not lead to a significant reassessment of the markets.

At the same time, they kept the Dollar Index above its 200-day moving average, which the DXY has been trying to break daily since the 19th. At the same time, equity indices are seeing increased buying, with the Dow Jones and Russell 2000 posting gains of almost 1.3%. The latter is only 1.35% below its 2.5-year high of 17 July. The Dow Jones is trading above 40,000 but still close to this psychologically significant round level. The S&P500 is hovering around its 50-day average.

Next week promises to be a bellwether for market sentiment. It will be dominated by meetings from the Fed, Bank of Japan, and Bank of England, as well as the monthly NFP employment report.

This concentration of news, coupled with the proximity of key levels, has a good chance of setting the trend for the coming weeks.