August 2022

The equity rally ran out of steam on Friday as options-related selling hit. Momentum also stalled as investor sentiment moved to more neutral readings. Short covering also slowed the latest data showed. The equity rally ran out of steam on Friday with all main indices closing in the red. The S&P 500 finished down a little over 1% while the Nasdaq lost close to 2%. The major forces at play were a stall in recent short covering and equity purchases from fund managers and hedge funds as well as a shift in sentiment readings from overly bearish to neutral. The rally has led to some strong gains across the big tech space and investors began to once more reassess the valuations. Yields have remained pretty calm which helped the rally but bets were also removed following the release of the Fed minutes and upcoming symposium at Jackson Hole.  Oil prices have continued to remain under pressure as fears over a global slowdown weigh as well as a surprising large drag from US inventories last week. Bitcoin too came under pressure as the risk-off narrative hit one of the more speculative risk assets. Bitcoin fell 10% on Friday and is now down… Read More »Week Ahead on Wall Street (SPY) (QQQ): Rally stalls as meme stocks crater and Tesla goes to $300 or lower

Europe After four weeks of gains, European markets appear to have run out of puff this week, spooked in some part perhaps by the big jumps in inflation we’ve seen in UK CPI this week, as well as this morning’s eye-watering surge in German PPI for July.   This has been another week that has seen European and UK gas prices trade at record highs, and the penny appears to have dropped that central banks’ are likely to have to go much harder on rates if they are to have any chance of getting on top of the inflation genie.   The FTSE100 is outperforming largely due to the weakness of the pound which is helping the big US dollar earners on the index, as well as a strong showing from the more defensive areas of the index, notably health care and GSK and AstraZeneca. With Just Eat shares down at 5-year lows and down over 80% from their October peaks last year the air has been slowly coming out of the online delivery sector, as higher costs and more competition eat into its margins. In April the company announced that it was considering offloading its US GrubHub business, less… Read More »Rising inflation and rate hike bets push US dollar and yields higher

Macroeconomic indicators this week pointed to further headwinds for the global economy. In the US, the New York Empire Manufacturing Index slumped to -31.3 (from 11.1) in August, the lowest level since slump after the first Covid-19 lockdown. The sharp drop was driven by weaker current conditions, while the expectations index improved slightly. The current Empire level implies US Manufacturing PMI clearly below 50, in line with what the new orders index predicted already in July. Also in Europe, there were weak indicators with the German ZEW expectations diving further during August to the lowest level since October 2008. The ZEW signals further declines in PMI ahead and increasing recession risk in the German economy, which is also our base case for the second half of this year, see Research Germany – Zeitenwende, 25 July. Our forward looking macroeconomic model, Macroscope, this week also pointed to further weakening momentum in the global economy across regions over the next six months, 18 August. On the inflation front, UK CPI inflation surprised to the upside creeping above 10% in July. The UK is thereby joining the “club” of countries, mostly in Eastern Europe and emerging markets, with double digit inflation rate. We think… Read More »UK joins the “10% inflation club”

Daily market outlook on major Update Time: 19 Aug 2022 09:30GMT. USD/JPY – 136.51 Dollar's intra-day rally in tandem with U.S. yields to a 2-week high of 135.49 in New York suggests re-test of Aug's 135.57 high would be forthcoming next, above would extend upmove from Aug's 130.41 7-week trough at 130.41 towards 135.96 before prospect of decline later. On the downside, only a daily close below 134.68 would prolong choppy swings and risk weakness towards 134.43, break would head to 133.92/97. Data to be released on Friday U.K. Gfk consumer confidence, Germany producer prices, U.K. PSNB GBP, PSNCR GBP, retail sales, Swiss industrial production, EU current account. Canada retail sales.

The Canadian dollar is lower for a third straight day. In the European session, USD/CAD is trading at 1.2984, up 0.29% on the day. Markets brace for soft Canadian Retail Sales The US dollar has rebounded this week against the majors, including the Canadian dollar. USD/CAD is on the verge of breaking above the 1.30 line, which has held firm since July 18th. A weak Canadian retail sales report later today could send the Canadian dollar into 130-territory. Retail sales for July is expected to slow to 0.3% MoM, down sharply from the 2.2% gain in June. Core retail sales is projected to drop to 0.9% MoM, down from 1.9%. Canadian consumers have been hit hard by the cost-of-living crisis, and a natural response has been to cut down on spending. This could prove a major headache for the economy, as domestic demand is a key driver of growth. Canada’s inflation has been heading toward double-digits, but as in the US, inflation dropped in July. Canada’s CPI slowed to 7.6% YoY, down from 8.1% in June, which marked a 40-year high. However, CPI common, a core CPI indicator, rose to 5.5% YoY in July, up from 5.3% in June. This is… Read More »USD/CAD eyes 130, Retail Sales next

Following yesterday‘s weak rally and bonds showing, S&P 500 bears have the upper hand (timely announcement). Then, the crypto plunge is adding to downswing‘s credibility – about to spill over into tech. Note it didn‘t and doesn‘t take much of a dollar upswing – continuing the rise is enough. Yesterday‘s positive economic data are to be overshadowed by the Fed pronouncements sinking in. Yes, Daly, Kashkari spoke, even mentioning recession uncertainty… And it‘s clear we‘re likely to face quite some tightening ahead, more so than the markets are discounting – and any swift moves in inflation, are faciliated by economic contraction. The bull trap has been set. Next week won‘t be much better – I‘m looking for grim German PMIs Tuesday, challenged GDP readings on Thursday, and especially the hawkish Jackson Hole. It should be becoming increasingly clear that the risk-on rally is to meet serious reality check, and that lower stock (and other) market data are ahead. The sentiment of my Wednesday‘s recap of deteriorating economy, is to set the tone – and thankfully won‘t be as bad as the German persistently high PPI. Strong dollar to the rescue, a helpful tool in alleviating domestic inflation pressure in the… Read More »It started

Following yesterday‘s weak rally and bonds showing, S&P 500 bears have the upper hand (timely announcement). Then, the crypto plunge is adding to downswing‘s credibility – about to spill over into tech. Note it didn‘t and doesn‘t take much of a dollar upswing – continuing the rise is enough. Yesterday‘s positive economic data are to be overshadowed by the Fed pronouncements sinking in. Yes, Daly, Kashkari spoke, even mentioning recession uncertainty… And it‘s clear we‘re likely to face quite some tightening ahead, more so than the markets are discounting – and any swift moves in inflation, are faciliated by economic contraction. The bull trap has been set. Next week won‘t be much better – I‘m looking for grim German PMIs Tuesday, challenged GDP readings on Thursday, and especially the hawkish Jackson Hole. It should be becoming increasingly clear that the risk-on rally is to meet serious reality check, and that lower stock (and other) market data are ahead. The sentiment of my Wednesday‘s recap of deteriorating economy, is to set the tone – and thankfully won‘t be as bad as the German persistently high PPI. Strong dollar to the rescue, a helpful tool in alleviating domestic inflation pressure in the… Read More »It started

Jackson Hole Symposium – 25/08 – this year’s annual central bank Jackson Hole Symposium is entitled “Reassessing Constraints on the Economy and Policy” and will be closely scrutinised for evidence of a Federal Reserve, and central banks more broadly that might be concerned about the risks of overtightening monetary policy at a time when the challenges facing the global economy are numerous. Markets have been rising for several weeks on the basis that for all the Fed’s hawkish rhetoric the central bank will be forced to adopt a dovish pivot when it becomes apparent that inflation has started to top out. We’ve already seen in recent data that US inflation may well have peaked, however markets appear to be betting that it will somehow fall back quite quickly to the 2% target, at the same time as the Fed signals that rate rises are close to their end game. This seems unlikely given that CPI is still at 8.5% and the Fed Funds rate is between 2.25% and 2.5%. Furthermore, the Fed will want to be sure that inflation is falling at a sustainable enough pace before it signals any sort of dovish shift or pivot, especially if inflation proves… Read More »The Week Ahead: Jackson Hole Symposium, US PCE and Q2 GDP, Harbour Energy, Nvidia and Peloton results

Summary United States: Expansion Not Yet Heading to the Gallows An increase in real retail sales by our estimates and a rebound in industrial production in July offered evidence beyond recent jobs data that the U.S. economy is not yet in a recession. That said, with new orders in the manufacturing sector slowing sharply and housing activity continuing to tumble, data this week did little to change our view that a downturn in the coming quarters will be hard to avoid. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: Diverging Paths for Inflation in Canada and U.K. Headline inflation in Canada may be showing signs of cooling down. Overall CPI decelerated to a 7.6% year-over-year pace in July, driven by falling gasoline and energy prices. While inflation in Canada may have peaked in July, price pressures in the U.K. have not yet abated. Headline inflation surprised to the upside, reaching 10.1% year-over-year. We expect U.K. inflation to remain elevated for longer, as another sizable increase in electricity prices is planned for October. Next week: U.K. PMIs (Tue), Eurozone PMIs (Tue), South Africa CPI (Wed) Interest Rate Watch: The Fed Still Has More Work… Read More »Weekly economic and financial commentary

With the summer coming to a close, Fed officials will head to Jackson Hole for their annual symposium. Financial conditions have loosened lately despite the forceful rate increases, which is counterproductive for the central bank. If they push back, that could spell trouble for risk assets but good news for the dollar.  Fed summer camp The top brass of the Federal Reserve will head to the central bank’s summer retreat in Jackson Hole, Wyoming on Thursday to discuss monetary policy. This venue has been used in the past to signal major policy shifts, so it is seen as an unofficial policy meeting. Fed officials are caught in a bind. Despite raising interest rates at the speed of light, their actions didn’t have the desired effects. Yields on government bonds have pulled back and stock markets have rallied with a vengeance since June, ignoring signals from policymakers that they are far from declaring victory on inflation.  As Chairman Powell pointed out, Fed policy is transmitted mainly through ‘financial conditions’, which is essentially a code phrase for bond yields and stocks. The central bank needs tighter financial conditions to slow down the economy and tame inflation, but they have been loosening instead.  That’s… Read More »Week Ahead – Will the Fed fire back at Jackson Hole?