ORLANDO, Florida, Aug 18 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Many world markets took a breather on Monday as investors

awaited the outcome of U.S. President Donald Trump's

extraordinary meetings with Ukraine's Volodymyr Zelenskiy and

many European leaders, and looked ahead to Fed Chair Jerome

Powell's keynote speech in Jackson Hole later in the week.

More on that below. In my column today I ask whether U.S.

consumer spending can be sustained, which would keep the economy

growing and steer it away from recession. Much will depend on

how the rich feel about their finances.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Powell has used Jackson Hole to battle inflation

and

buoy jobs; he's now caught between both

2. What US stagflation risks mean for world markets

3. Eerily calm credit markets face pockets of

concern: Mike

Dolan

4. Japan says US is not pressuring BOJ for rate

hikes,

markets not so sure

5. China's half-cooked growth plan is going cold

Today's Key Market Moves

* STOCKS: Australian stocks hit new highs and

Chinese

stocks hit 10-year peaks, but otherwise it's quiet. Wall

Street's big three indices close essentially flat.

* SHARES/SECTORS: HR management software firm

Dayforce

jumps 26% on news it is the subject of a private equity bid.

Intel down 3.7% on a report the Trump administration is in talks

to take a 10% stake in it.

* FX: Very quiet in G10 FX, with the yen the biggest

decliner. Beijing fixes the yuan at 7.1322/$, its strongest

since Nov. 6. Brazil's real is among the worst-performing

currencies in the world, down 0.6%.

* BONDS: 30-year yields rise around the world - US

2-week

high, Japan 3-week high, Germany 14-year high. Meanwhile, all

seems calm in U.S. credit - corporate bond spreads tightest

since 1988.

* COMMODITIES: Oil prices rise around 1%. Brent

crude

futures settle at $66.60/bbl, WTI crude at $63.42/bbl.

Today's Talking Points:

* Europe goes to Washington. U.S. President Donald Trump's

intense, hastily-arranged summitry continued on Monday as he

welcomed Ukraine's President Volodymyr Zelenskiy to the White

House to discuss how to end the Ukraine-Russia war. This follows

Trump's meeting with Vladimir Putin in Alaska on Friday, which

was a success for the Russian president but yielded little for

Trump.

And that meant little for Ukraine or Europe, which explains

the extraordinary sight of Zelenskiy being backed in Washington

on Monday by many of Europe's most powerful leaders, including

Germany's Friedrich Merz, France's Emanuel Macron, Britain's

Keir Starmer and NATO's Mark Rutte.

Trump's appearance with Zelenskiy before the cameras was

cordial and even friendly, in stark contrast to their

acrimonious meeting in February. Trump said the U.S. would help

Europe in providing security for Ukraine as part of any deal,

but also suggested to reporters that he no longer believed a

ceasefire was a necessary prerequisite for striking a peace

agreement.

* Jackson Hole. Attention is now turning to the annual

Kansas City Fed's symposium in Jackson Hole, Wyoming, which

gathers Fed officials, central bankers and leading economists

from around the world to discuss the challenges facing the

global economy. Fed Chair Jerome Powell's speech on Friday is

the keynote event.

Leaving aside any possible long-term policy steers, such as

changes to QT or tolerating slightly higher inflation, the main

focus is whether he leans toward a rate cut in September or not.

Rates traders still think he will, but their conviction is

ebbing by the day. They are now attaching an 82% probability of

a quarter-point cut next month, the lowest likelihood since the

unexpectedly weak employment data on August 1.

* Long-end bond blues. Yields on 30-year sovereign bonds in

major countries around the world continue to rise. In some

cases, like that of Germany, they are now the highest in many

years as investors begin to fret again about inflation and

fiscal spending plans.

Many investors are also questioning the wisdom of the Fed

resuming its easing cycle next month, which is what's currently

priced into rates futures markets, with inflation above target,

unemployment at a historical low, stocks at record highs and

financial conditions the loosest in years.

Even the long end of China's bond market is feeling the

squeeze. The 30-year yield spiked 8 basis points to 2.12% on

Monday, the highest in five months and biggest one-day rise

since October. And this is in China, where the deflationary

pressures of the last few years are showing no sign of lifting.

Can the rich continue to prop up US consumer spending?

U.S. consumer spending's surprising resilience is the main

reason the economy has not only avoided recession, but continued

to grow at a solid clip. The big question now is whether

American households can keep that going, especially with higher,

tariff-fueled prices coming down the pike.

In the U.S., "the consumer" is king. Consumer spending

accounts for around 70% of total economic output, so changes in

people's propensity to spend have a direct, outsized influence

on the health of the economy.

But "the consumer" is, of course, actually millions of

people. And when you split them into groups based on income and

wealth, it becomes clear that total spending disproportionately

comes from the rich.

Mark Zandi, chief economist at Moody's Analytics, said

earlier this year that the richest 10% of Americans, those

earning at least $250,000 a year, now account for half of all

consumer spending. That's a record. Thirty years ago, the

richest 10% accounted for 36% of all consumer spending.

A Boston Fed paper last week backed up Zandi's findings,

concluding that the strength of aggregate consumer spending in

the last three years is due to high-income earners. But the

authors suggest high-income consumers have a reasonable cushion

because they haven't maxed out their credit cards.

While the lower-income and middle-income cohorts both saw

their credit card debt soar past pre-pandemic totals in the last

few years, wealthier Americans' credit card debt remains below

the 2019 high and well below the level implied by the

pre-pandemic trend. So, if necessary, they still have room to

borrow to fund their spending.

EARNING POWER

Spending across the income deciles could also be supported

by enhanced earning power.

While some indicators show that the U.S. labor market may be

softening, annual average earnings growth still rose in July to

3.9%, meaning real wage growth is running at a 1.3% annual pace,

depending on what slice of inflation you use. Real annual wage

growth has been between 1.0% and 1.8% for over two years, above

the average for the decade leading into the COVID-19 health

crisis.

And overall workers' income may be growing at an even faster

rate, according to economists at Bank of America. They calculate

that aggregate labor income - number of jobs multiplied by wages

multiplied by number of hours worked - increased 5.5% in July on

a six-month annualized basis. Most of that growth was driven by

higher wages.

With household delinquency rates, excluding student loans,

cooling off this year, strength in labor income should continue

to support consumer spending, they argue. This, in turn, should

help the U.S. avoid the recessionary spiral of lower spending

begetting layoffs, begetting even lower spending, begetting more

job cuts.

This is one of the reasons BofA economists retain their

out-of-consensus call that the Federal Reserve won't cut

interest rates at all this year.

FLASHING AMBER?

Others are less confident.

Zandi at Moody's Analytics warns that a correction on Wall

Street would hit the rich hard via the negative wealth effects,

"and, given how weak the economy is, push it into recession."

The concentration of equity ownership at the top of the U.S.

wealth ladder is extreme - the richest 1% in the country owns

50% of stock market assets and the top 10% holds around 90%.

Some measures of household spending are already flashing

amber. Inflation-adjusted spending as measured by personal

consumption expenditures flat lined in the first half of this

year.

Yet figures on Friday showed that retail sales rose 0.5% in

July after an upwardly revised 0.9% gain in June.

But then there are tariffs. Companies, not consumers, have

borne the brunt of these levies so far. Economists at Goldman

Sachs estimate that consumers absorbed only 22% of tariff costs

through June, but they reckon that figure could rise to 67% in

the months ahead if the Trump administration's expected tariffs

are implemented.

So there are grounds for both caution and optimism. Much

will depend on whether the rich draw in their horns.

What could move markets tomorrow?

* Australia consumer sentiment (August)

* Euro zone current account (June)

* Canada inflation (July)

* Federal Reserve Vice Chair for Supervision Michelle Bowman

speaks

* U.S. earnings - Home Depot, Palo Alto Networks

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