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The dollar has corrected around 3% from its highs seen last month. This has prompted a few questions about whether the dollar has peaked? Many trading partners would hope that to be the case, but the reality is that the Fed is likely to stay on track with its tightening. We think the dollar is more likely to retest its highs than correct much lower. Driving this view has been consistent rhetoric from the Fed that it will not be blown off target by some softer activity or price data. In fact, it now looks like US activity is accelerating again as lower gasoline prices leave more dollars in the pockets of US consumers. The 2023 US recession narrative looks a tough one to sell near term. And rising energy prices should continue to drive a wedge between the exporters of North America and the importers of Europe, meaning a much greater conviction of a recession in Europe. The ECB’s second 50bp rate hike on 8 September may well conclude its tightening cycle. Rate spreads and the energy income shock make it a very tough environment for the euro. EUR/USD should therefore drift near parity for much of 2H22. Elsewhere… Read More »Curb your peak dollar enthusiasm

Investors embrace the ‘no recession’ story and take stocks higher. Treasuries remain inverted pointing to ‘a recession’. Gold waffles between maybe it is or maybe it isn’t. Oil under pressure as Saudi Aramco hints at upping production. Big week for the retailers – will it be Christmas in September? Try the Parmegiana Crusted Mahi Mahi. Stocks rose on Friday – posting another week of gains – marking the longest stretch since November 2021. The Dow advanced by 424 pts or 1.3%, the S&P up 73 pts or 1.7%, the Nasdaq raced ahead by 270 pts or 2.1%, the Russell up by 42 pts or 2% and the Transports gained 75 pts or 0.5%.  The mood was helped on Wednesday by the recognition that inflation might just be subsiding as Joey tried to make very clear –  Saying that “the CPI for July came in at 0% m/m….let me repeat that 0%”…….now that sounds great, but when you take out food and energy (which they do) the CPI for July rose by 0.3%…and y/y it is still up 8.5% – or near 40 yr. highs……  but this report did give investors a reason to think that the FED will ‘take a… Read More »Big retail week, FOMC mins due on Wednesday

There will be no shortage of data releases in the coming week and the RBNZ is poised to hike rates again. But with investors still undecided about the implications of the latest US inflation report on Fed policy, the FOMC minutes might steal the limelight. Meanwhile, thinning liquidity as more traders head for their holiday destinations increases the likelihood of big knee-jerk reactions as markets obsess about the pace of monetary tightening and the risks of a recession. RBNZ leading the tightening race The Reserve Bank of New Zealand is tipped to lift its official cash rate (OCR) for the seventh straight meeting on Wednesday, becoming the first major central bank to take borrowing costs as high as 3% in this cycle. However, the hawkish posturing may be reaching the end of the line and there are downside risks for the New Zealand dollar from the meeting. Back in May, the Bank had forecast that the OCR would peak just below 4% by September 2023. That means there would only be a 100-basis-point increase remaining if it hikes rates by 50 bps in August as expected. But that is assuming that the rate path doesn’t get revised lower. The RBNZ… Read More »Week Ahead: A plethora of data, an RBNZ meeting, but focus on Fed minutes

Can stock markets continue to rally?  What a difference a week makes. Post last week’s weaker than expected July inflation print for the US, which saw annual headline CPI fall to 8.5% from 9.1% in June, the first positive inflation surprise for quite some time, and the market is in risk-on mode. Stock markets reached another milestone last week when the Nasdaq Composite index rose more than 20% from its mid-June low, to end its longest bear market since 2008. Added to this, the dollar has sold off sharply since its mid-July peak, with the dollar index losing 3%. The dollar had been inversely correlated with US stock markets for most of this year, thus, market bulls are looking for further dollar weakness if the stock markets continue to rally. However, the question now is, will the bull market continue? There seems to be two camps out there right now. On the one hand, those who think that the worst of the year’s market sell-off is behind us, now that US inflation looks like it has peaked, and on the other hand, those that are still concerned that the Fed has not finished its interest rate hiking cycle, that inflation… Read More »Week Ahead: UK inflation and hints about the Fed’s next move

We’ve just had an update on US inflation via July’s Consumer Price Index (CPI). Headline CPI, which includes food and energy, rose 8.5% compared to this time last year. This was below the consensus forecast of +8.7% which was in turn significantly lower than last month’s +9.1%. This was the first indication that inflation may have peaked, and we got another one the following day when Producer Prices also came in below expectations. While this is all good news, one month’s data doesn’t make a trend. Nevertheless, it was enough to give equities a significant boost, while the US dollar fell sharply. The probability of the Federal Reserve raising rates by 75-basis points at their next meeting in September fell from just under 70% to 40%. A 50-basis point increase is currently the most likely outcome, according to the CME FedWatch tool which calculates the odds using the fed funds futures markets. Recession? This CPI release rounds off a recent clutch of important market-moving updates. This began a few weeks ago when the US Federal Reserve raised rates by 75 basis points for the second successive month. That wasn’t a surprise, and the stock market rallied even as Federal Reserve… Read More »Inflation and an economic slowdown

The British pound is in negative territory today, after a contraction in UK GDP. In the European session, GBP/USD is trading at 1.2126, down 0.61% on the day. British economy declines in Q2 The British pound posted dazzling gains on Wednesday, surging 1.19%. The impressive climb was, however, a case of US dollar weakness, rather than any newfound strength in the pound. Inflation in the US was unexpectedly weaker than forecast, which raised market hopes that the Fed will ease policy. This led to the US dollar being less attractive and the currency took a nasty spill against all the majors. Sterling hasn’t fared as well after the UK posted the second-quarter GDP report. The economy fell in July by -0.1% QoQ, following a 0.8% gain in June (-0.2% exp). On an annualized basis, GDP growth slowed to 2.9%, within expectations but sharply down from 8.7% in Q1. The outlook does not look good as we head towards winter, with UK households about to be hit with sharp increases in energy prices. Consumers are already struggling with a nasty cost of living crisis, and as they tighten the purse strings, the spectre of a recession will become that much more… Read More »GBP/USD slips on GDP, US confidence data next

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

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