Articles

• Powell at Jackson Hole: The time has come for policy to adjust
• BOE’s Bailey: Market events like two weeks ago will happen, test is whether more triggered
• Fed’s Goolsbee: We want to be careful about the employment side of the mandate
• Goolsbee: The size of Fed cuts isn’t important, it’s the path
• ECB’s Rehn: European growth outlook is looking somewhat weaker than the US
• Canada June retail sales –0.3% vs -0.3% expected
• US new home sales for July 0.739M vs 0.625M expected
• Fed’s Bostic estimates long-run Fed rate at 3%
• Fed’s Bostic: We want a calm, orderly return to normalization
• ECB sources: Broad support starting to form over Sept rate cut

Markets:

• NZD leads, USD lags
• WTI crude up $1.91 to $74.92
• US 10-year yields down 6.5 bps to 3.79%
• Gold up $28 to $2510
• S&P 500 up 1.1%

Powell’s Jackson Hole speech had plenty of hype and often that leads to a let-down but that certainly wasn’t the case this time. Most expected him to at least hint at a rate cut but he laid it out explicitly and then layered on a comment saying the Fed “will do everything we can to support a strong labor market.”

Also notable was what that speech didn’t include and that was a nod to moving gradually or anything along those lines. That means Powell wants to keep his options open around 50 bps either now or later.

In short, he managed to out-dove himself despite a high bar and the market reaction was strong. The US dollar fell hard across the board in a move that sustained itself throughout the day with few pullbacks.

There was some angst about Powell yesterday and that led to USD buying but those moves were wiped out in the initial round of USD moves followed by an extension later.

It was all orderly but I’m going to be carefully watching USD/JPY in Asia-Pac trading at the open. That pair fell nearly 200 pips and finished with the lowest close since January. There’s still 270 pips until the intraday squeeze low from August but those left in the carry trade could be feeling the pinch and there could be another rush to the exits.

Have a great weekend.

This article was written by Adam Button at www.forexlive.com.

Powell offered a lift to US stock markets but there was some mid-day angst along with signs of sector rotation into pro-cyclical small caps.

Closing changes on the day:

• S&P 500 +1.2%
• Nasdaq Comp +1.5%
• DJIA +1.2%
• Russell 2000 +3.1%
• Toronto TSX Comp +1.1% (record high)

On the week:

• S&P 500 +1.4%
• Nasdaq Comp +1.4%
• DJIA +1.3%
• Russell 2000 +3.4%
• Toronto TSX Comp +4.1%

The S&P 500 is now just 0.6% away from the all-time high.

This article was written by Adam Button at www.forexlive.com.

The great stock market turnaround in August was impressive in many ways but when I take a step back, there was one big question being asked and answered: Is the Fed behind the curve?

Within that question is a set of assumptions about the US economy and if you look at the economic data, there was cause for concern. The ISM services index in June fell to the lowest since 2020, global commodity prices have been falling and US unemployment has been rising.

A big boost for US stocks came on strong retail sales data but when I survey the picture of US data over the past two months, there’s no clear trend. What was clear though was corporate America.

Scotia here highlights how rarely ‘recession’ was mentioned on earnings calls:

“So far we aren’t experiencing a weaker consumer
overall,” said Walmart’s CEO. That was backed up by Target and many others.

For sure, there were some pockets of weakness like McDonald’s an anything housing-related but those are looking like outliers. McDonald’s has been getting pushback on pricing (and did say there was a strong response to $5 meals) and housing is very rate-sensitive.

What emerges is a picture of a consumer that’s picky about pricing but not in a recessionary mindset, at least not yet.

On earnings overall, it was a positive picture, according to Scotia:

The U.S. Q2 reporting season is essentially over
with 95% of companies having reported. S&P 500 Q2 EPS is coming in at US$59.86, which is better
than the US$58.64 expected at the start of the reporting season. See Exhibit 3. The beat propelled
the earnings growth rate up to 11% y/y vs. expectations of 9% when the reporting season started.
At the company level, the median earnings beat was 4.4%, which is only slightly below the last two-
year average of 4.6%, but above the five-year pre-pandemic average of 3.8%. Harder to manipulate,
the top line also exceeded expectations, rising +5.7% y/y, the best reading since the final quarter of
2022, as 60% of companies topped Wall Street forecasts. Lastly, the percentage of sectors reporting
a y/y earnings decline was stable at 27% (three reported an EPS decline), but well below levels
registered in 2022 when more than half of sectors suffered earnings contraction.

On top of that:

• Wall Street hasn’t trimmed earnings more than usual going forward
• Revenue forecasts today are slighly above June levels for both 2024 and 2025
• Few one-time charges, impairments or no-cash expenses, which points to earnings quality

Scotia sums it up nicely: “If a steep US macro downturn has indeed started, it’s not yet showing up in
earnings numbers (actual or expected).”

This article was written by Adam Button at www.forexlive.com.

The US dollar has fallen to new lows on the day pretty much across the board (not yet against GBP).

The market is continuing to digest the Powell comments and it’s the front end of the yield curve where the strongest buying remains. US 2s are down 9 bps to 3.92% and near the lows of the day as the longer end has come off the extremes.

Much of the talk in the market is about 25 vs 50 bps or where Fed funds will be at the end of the year but what matters is the terminal rate. Fed officials have been talking about 3% this week or something else around ‘neutral’ but doing “everything we can” to support the labor market doesn’t mean stopping at 3% (if necessary).

David Rosenberg also picked up on something from Powell and wrote:

Powell let the cat out of the bag when he said that the jobs market is looser now than it was in 2019. What we know about 2019 was that the Fed was cutting and went all the way down to 1.75%. So, let’s just say that it’s nice to know the destination point, which the Treasury market, as strong as it has been, has yet to fully reflect.

Now I don’t really think there is a signal from Powell about going below 3%, and that decision isn’t coming for awhile but if we’re at the point where the inflation debate is over (I think it is for now), then we need to re-visit the idea about where the bottom of Fed funds is.

That’s what I think this dollar selloff is getting at. A month ago, there was a good argument that other central banks would be cutting more than the Fed simply because growth is weaker elsewhere. The sentiment about growth is true but now we’re finding out that the Fed might not care and could be determined to keep unemployment here and growth well-above 2%.

Now you could argue that’s stoking inflation but maybe not and what was assumed about US rates being materially higher — than say AUD — isn’t a given. With that, we now have AUD/USD at the highs of the day and threatening the July high.

Now I’m not fully on board with this thinking as I think it’s way too early to price in 1.75% Fed funds. There’s also the thorny question about the election, fiscal policy and who will be Fed chair after Powell.

So the question is: How crowded is the USD trade and how much money is waiting to exit and pile into pro-cyclical trades like emerging markets? That’s a tough one to answer but it’s probably the way the wind will blow until/unless we start to see some really weak economic data and global growth.

This article was written by Adam Button at www.forexlive.com.

Bank of America highlights that historically, the US Dollar Index (DXY) tends to rise from August through US election day in November, suggesting potential USD strength leading into the upcoming election.

Key Points:

• Seasonal Trends: Since 1970, the DXY typically shows strength in August, weakness from September to mid-October, and then regains strength into late November before declining towards year-end. This trend has been consistent, with the DXY often peaking by August.

• Impact of the Euro: Since the euro began trading in 1999, the DXY has shown a tendency to rise from early August through late November, with a subsequent decline into year-end.

• Election Year Trends: In the last 13 US election years, the DXY has generally trended higher from 70 trading days before election day up until the day itself. This pattern was observed in 10 out of 13 election years, with the DXY rising as much as 77% of the time during this period.

Conclusion:

Bank of America observes a historical pattern where the USD tends to strengthen from August through US election day. This seasonality suggests a potential for the USD to trend higher as markets approach the upcoming election in November.

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This article was written by Adam Button at www.forexlive.com.

There is a good battle going on in the S&P 500 today.

The initial Powell pop staleld at yesterday’s high and then pulled back to 5595. It rebounded from there in another push at the highs but the bulls couldn’t break out.

Now another round of profit taking has hit. That’s something of an ominous sign but watch the lows of the day very closely.

This article was written by Adam Button at www.forexlive.com.

recently on twitter

here is how this does play out in reality
(more…)

European stock markets have recouped all the declines from the early-August rout with another strong rally today. It’s the fourth gain in five days this week.

On the day:

• Stoxx 600 +0.5%
• German DAX +0.8%
• France CAC +0.7%
• UK’s FTSE 100 +0.5%
• Spain’s IBEX +1.1%
• Italy’s FTSE MIB +1.0%

On the week:

• Stoxx 600 +1.4%
• German DAX +1.7%
• France CAC +1.7%
• UK’s FTSE 100 +0.2%
• Spain’s IBEX +3.0%
• Italy’s FTSE MIB +1.8%

This article was written by Adam Button at www.forexlive.com.

The S&P 500 pulled back in a round of profit taking after initially failing to break yesterday’s high but the FX market isn’t having any doubts. EUR/USD is at the highest in a year, up 78 pips to 1.1190.

It’s not just the euro either as the US dollar falls to the lows of the day across the board.

This article was written by Adam Button at www.forexlive.com.

Here is the state of play after Powell’s speech at Jackson Hole in equity markets:

• S&P 500 up 1.3%
• Nasdaq Comp up 1.8%
• Russell 2000 up 2.2%
• DJIA +1.0%

There is some resistance in the S&P 500 right now as it challenges yesterday’s opening high. If that doesn’t crack, then watch out for profit taking despite a dovish speech.

You can argue that markets did sniff out much of this with gains in 9 of 11 days leading up to the speech. That said, there is going to be more dip buying with a Fed put in place.

Fed pricing is now 32% for 50 bps from 25% prior to the speech.

This article was written by Adam Button at www.forexlive.com.