August 2022

The most highly antipated economic reports of this month, if not this quarter was released on Wednesday and showed U.S inflation steadied for the first time since May 2020. In the middle of a growingly-uncertain economic environment, there was one piece of semi-good news this week with the closely watched U.S inflation report showing consumer prices didn't rise at all in July compared with June. That’s largely thanks to a significant drop in gasoline prices, which are finally approaching $4 a gallon on average after rising above $5 in June. While many economists and policymakers have held back from jumping to any big conclusions from this month's data, President Joe Biden definitely wasn't one of them. “While the price of some things went up, the price of other things went down by the same amount. The result: zero inflation last month,” Biden victoriously declared following the data release on Wednesday. As traders very well know – one month's data does not make a trend. And it certainly doesn't mean an era of rapidly surging prices – or Fed rate hikes – is over. In response, several key Fed officials left no doubt they will continue to tighten monetary policy until price pressures are fully broken.… Read More »Has inflation peaked? Here’s what commodity prices are saying [Video]

Outlook: It will be nice to see import prices down, but trade has a lesser effect on the dollar with every passing year. What will get attention is the University of Michigan consumer sentiment index, expected to rise to 52.5 in Aug from 51.5 in July (and 50 in May). Ho hum. The data gets far more attention than it deserves because the survey covers only about 500 people and regular people don’t know much, anyway. That applies to the one-year inflation expectations, too, forecast down to 5.1% from 5.2%, barely enough to mention. The 5-10-year survey forecast is seen slipping to 2.8% from 2.9%. This would put in back to April 2021, according to Bloomberg., Big deal. Bloomberg also notes “The two-year breakeven (difference between the conventional yield and the inflation-protected security) peaked in March near 5% and this week reached 2.70%, its lowest since last October. It is near 2.80% now.” Again, this is more wishful thinking than based upon any professional economics modelling or even common sense, especially now that we have several outpfits, including various regional Feds, delivering “sticky” inflation estimates. That means the drop in the probability of the 75% Sept rate hike from 75%… Read More »Must the Fed simply stick to its plan?

S&P 500 did another daily reversal, but the bears haven‘t yet won. The risk-on in stocks hasn‘t been broken as value demonstrates, but bonds are getting the macro picture right, as they often do – the Fed is to remain hawkish as Daly reaffirmed, which would help keep real assets in check while that lasts. Precious metals proved their sensitivity to sharp increases in yields – this recognition of the tightening reality played out on the long end of the curve, not affecting the continued rate raising expectations for Sep FOMC really (regardless of the inconsistent market interpretations of both CPI and PPI). S&P 500 and Nasdaq outlook Even if S&P 500 pushes higher today on better-than-expected consumer sentiment data (relief at the pump), the bears are likely to break below the 4,212 support next week (if not later today already). Credit markets HYG is likely to retrace a part of yesterday‘s reversal – a proper reversal as the volume confirms while quality debt instruments would play a lesser role in moving stocks today. Clearly, bonds aren‘t bullish here, and the deterioration is to continue over the weeks ahead. Bitcoin and Ethereum Similarly in cryptos, no game-changer happened, and the… Read More »Bonds get it right

EUR/USD topside yesterday was set against targets at 1.0256 and 1.0259. Both extraordinary moves for the day and both targets achieved for big profits yet EUR/USD breaks vital 1.0285 and trades another 82 pips to 1.0367. Note the location of 1.0285 as dead center of the hourly candle. The break of 1.0285 then placed EUR/USD from 1.0285 to 1.0350. What allowed EUR/USD to travel higher was the ECB at 10:00 then EUR/USD was good until 1.0304. The BOE at 11 am stopped EUR/USD to begin the long slide lower to 1.0320. The Fed at 12:30 then settled EUR/USD at 1.0296 from 1.0367 highs or71 pips. EUR/USD yesterday traded for the day overall 167 pips and about 67 more than normal. On the surface appears as just another EUR/USD trade day but 1.0285 set EUR/USD off 82 of the 167 pips or 1/2 of its total 167 pip range. The 2 most vital points to traded markets are overall ranges and range points such as 1.0285. How much was 1.0285 respected was seen in the weekly trade target at 1.0283. Friends and subscribers profits were 130 ish pips but the pips were easy and guaranteed. And the trade duration was 4… Read More »Currency market: FX next week

Europe It’s been another positive week for markets in Europe with the DAX briefly rising to a two-month high before slipping back. Despite the slow drip feed of negative headlines of rising gas prices, and the supply chain challenges thrown up by the heatwave in Europe there’s been little appetite to drive stocks lower. The news that the Rhine River had fallen to a critical 40cm depth level which would require it be closed to freight barely registered a response. This is probably because smaller barges can still operate at a lower minimum depth level of 30cm. The resilience of US markets may be helping here as receding inflation is tempering expectations that the Federal Reserve will be as aggressive as originally supposed when it comes to raising rates. The FTSE100 also hit a two month high earlier this week as it also closes higher for the fourth week in succession.   Having seen positive numbers from Entain yesterday, Paddy Power owner Flutter Entertainment has posted a similarly positive update, putting a bow on a week of strong gains. Group revenues in H1 increased by 11% to £3.39bn, although losses came in at £112m, up from an £86m loss a… Read More »FTSE100 flutters to its fourth successive weekly gain

US CPI offered the first positive surprise on inflation in a long time being flat on the month of July versus consensus expectations of 0.2% m/m. And it was not all due to lower gasoline prices as core inflation also undershot expectations rising 0.3% m/m versus consensus of 0.5% m/m. The good news is that there are clear signs that pressure on goods prices are easing: commodity prices have come down, freight costs are lower, supply chains are easing and pricing power is weaker as demand has softened and inventories are high. We also see tentative signs that inflation expectations have peaked. However, it is too early to declare victory over US inflation as several Fed speakers also highlighted afterwards. The labour market is still very tight and employment growth has not yet cooled down suggesting that wage growth will continue to run high. It is currently close to 6%, which is much too high to bring inflation back to 2% on a sustained way. Hence, we still look for the Fed to hike 75bp on 21 September to get rates quickly back to neutral and into restrictive area. Admittedly the probability of only 50bp has increased and the decision… Read More »Weekly Focus: A hot summer adds to Euro area stagflation challenge

After July’s central bank meeting, the RBNZ hinted at concerns about slowing growth. Even heading into July’s meeting the Bank of New Zealand head of research warned that the latest ANZ Bank survey of business opinion was ’littered with indicators that fit with our view that the economy is headed into recession. There are now more reasons for the RBNZ to take a dovish tilt next week on August 17. Here is some of the recent data from New Zealand: New Zealand business PMI This missed expectations and fell into the contractionary territory of 49.7 down from the forecast reading of 54. This supported the negative outlook from BNZ’s head of research after the survey of business opinion. New Zealand labour data The unemployment rate was up to the highest estimate at 3.3%. The QoQ change was down to 0% from 0.4% expected and the participation rate fell too at 70.8% vs 71% expected. New Zealand electronic card spending The New Zealand consumer was spending less with retail card spending down y/y in July to -0.5% vs 0.8% expected and down from 2.9% prior. Goldman Sachs sees recession risk for New Zealand Goldman’s model sees a 30-35% chance of a New… Read More »The reasons why the RBNZ should take a more dovish tilt next week

Gold closed the fourth straight week in positive territory. Despite the soft US inflation data, the greenback managed to stage a recovery. XAU/USD needs to flip $1,800 into support to target $1,830. Gold started the week on a bullish note and climbed above $1,800 for the first time since early July mid-week before losing its traction. With the dollar staying surprisingly resilient against its rivals despite the soft inflation data, XAU/USD stayed under modest bearish pressure in the second half of the week. The Federal Reserve will release its July policy meeting minutes next week and market participants will look for fresh clues regarding the size of the US central bank’s next rate increase. What happened last week? The dollar rally that was fueled by the impressive jobs report on Friday lost its steam at the beginning of the week as investors booked their profits ahead of the highly-anticipated US inflation data. Gold gained nearly 1% on Monday and closed the day near $1,790. In an appearance before the Kansas Bankers Association over the weekend, Fed Governor Michelle Bowman said that she strongly supports super-sized rate increases to fight inflation but market participants refrained from further betting on a 75… Read More »Gold Weekly Forecast: Next direction depends on September Fed hike bets

The Consumer Sentiment is expected to have improved further in August.  Market players turned optimistic amid signs of receding US inflation.  USD will likely react to sentiment instead of to the Michigan report. The Michigan Consumer Sentiment Index is expected to have improved further in August after plummeting to a record low of 50 in June 2022. It managed to bounce to 51.1 in July, a  figure later revised to 51.5. Market analysts are expecting this August’s preliminary estimate to print at 52.5. Such an improvement should add to the ongoing relief brought by US inflation figures. Inflation eases, optimism raises  Last month, and according to the aforementioned survey, consumers were worried about the falling standard of living due to continued price pressures. At the same time, inflation expectations cooled in July, somehow confirmed by the Consumer Price Index, which remained flat in the month, and increased by 8.5% YoY, much better than the previous 9.5%. Expectations that inflation has begun subsiding will likely boost consumption, moreover considering that the Federal Reserve is now seen decelerating its pace of quantitative tightening. The downside is that inflation would need to shrink at least for two more months in a row to… Read More »Michigan Consumer Sentiment Index Preview: Good news for the dollar but not for households

European markets finished at their highest level in 2 months yesterday after US CPI surprised to the downside, and oil flows in the southern part of the Druzhba pipeline restarted after being closed down at the end of last week.   US markets also underwent a strong session with the Nasdaq 100 leading the way higher, after US CPI fell to 8.5% in July, while core prices remained steady at 5.9%, a trend that has continued with strong gains in Asia markets, which look set to translate into a higher European open. The bigger than expected fall in the headline number, along with the weaker than expected core reading, has prompted the hope that the Federal Reserve may not need to be as aggressive on rate hikes when it meets to raise rates in September. Consequently, rate rise expectations have fallen from 75bps to 50bps, prompting a decline in US 2-year yields, though some of the fall in yields was pared back after Chicago Fed President Charles Evans played down the importance of a single CPI reading. He said he still expects to see the Fed Funds rate at 3.75% to 4% by the end of 2023. By contrast Minneapolis Fed President Neel… Read More »Will US PPI confirm downward trend for inflation?