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Summary United States: The Housing Market Begins to “Reset” Fed Chair Powell presented the Federal Reserve's semiannual Monetary Policy report to Congress this week. In his testimony, he acknowledged that tightening monetary policy in order to reduce inflation may result in a recession. Higher mortgage rates are weighing on home sales. During May, existing home sales fell 3.4%, the fourth straight decline. New home sales rose 10.7% in May, although are down 5.9% year-to-year. Next week: Durable Goods (Mon), Personal Income & Spending (Thu), ISM Manufacturing (Fri) International: Global Trends of Slowing Growth, Elevated Inflation and Rising Rates Continue The Eurozone services PMI fell noticeably in June, signaling slower growth ahead. However, as inflation pressures intensify, we still expect the European Central Bank to raise interest rates in July. The Norges Bank delivered a hawkish surprise, raising its policy rate by 50 bps to 1.25% this week. Meanwhile, in Canada, solid retail sales and rapid inflation mean we now expect the Bank of Canada to hike rates 75 bps at its July monetary policy meeting. Next week: China PMIs (Thu), Japan Tankan Survey (Fri), Eurozone CPI (Fri) Interest Rate Watch: SOMA Starts Up Quantitative Tightening This month, the Federal Reserve… Read More »Weekly economic and financial commentary

Bear market, what bear market as equities stage a strong rally to end the week. Powell still talks tough but equities brush off rate worries. Bond markets see fresh buying as yields fall on recession probabilities rising. Equity markets rallied into the end of the week as positioning finally got the boost it needed from a reduction in bond yields. This was enough to send equity markets higher and help the riskier side of the market receover more ground lost this year. Worries though can not be totally put to one side as the risk barometer for this generation, Bitcoin, failed to participate and held onto the $20,000 for dear life. The weekend has been a harsh environment for Bitcoin previously so we will have to keep an eye on screens over the weekend. Why should we bother you ask? Well correlations? Since the start of the year Bitcoin has been highly correlated to the main indices, Nasdaq and S&P 500 (SPX), see below. Bitcoin has begun to break away and move significantly lower so it remains to be seen if it is still a leading indicator for risk sentiment. Bitcoin (blue) versus S&P 500 (red) and Nasdaq (green) The situation remains… Read More »Week Ahead on Wall Street (SPY) (QQQ): Bear market rally is on but are the bears really gone?

US Core PCE (May) – 30/06 – the Federal Reserve’s unexpected pivot on rate hikes in the wake of the latest CPI data appears to suggest that the central bank is becoming less concerned about its primary targeting measure of core PCE and is more concerned about inflation expectations. While the jump in headline CPI in May to 8.6% is unwelcome, there has been evidence in other inflation indicators that we could be near a peak. The recent trend in PPI numbers has seen inflation pressures slowing down, while core Deflator peaked in February at 5.3%, falling to 4.9% in April. It’s been a similar story in core PCE which slipped back to 6.3% in April from 6.6% in March. A further softening in this week’s May numbers could signal a shift in market thinking about the timing and substance of further Fed tightening beyond the July meeting. Expectations are for PCE Core Deflator to fall to 4.8%.     EU CPI (Jun) – 01/07 – with surging inflation already front of mind in Europe and the ECB yet to get started on its own rate hiking cycle, this week’s flash CPI for June will once again focus attention on… Read More »The Week Ahead: US Core PCE, Q1 GDP, EU CPI, B&M, AO World and Nike earnings

Deterioration, that is – be it in S&P 500 market breadth or the jobs data. More to come, obviously, the disappearing liquidity is making itself felt broadly, and the real economy weakness hasn‘t yet arrived in earnest. This is still the environment of relatively fine but perceptibly slowing growth where technical recession can be declared as in, literally any moment (thanks to monetary tightening). Notably, we never escaped manufacturing recession in similar circumstances, and I had been clear on the hard landing realities recognition to spread like wildfire in the mainstream over the months to come. So far, no signs of systemic risk – but real estate and commodities are feeling the pinch seriously already. VIX is also trending higher rather continuously – the 25 level was indeed vigorously defended by the bears. That has all facilitated yesterday‘s sharp turn in my calls, namely in putting the spread trades to rest. Gold is treading patiently while cryptos can‘t obviously take off. Forces of short-term gravity are taking over…. Let‘s move right into the charts. S&P 500 and Nasdaq outlook Promising upper knot, very promising. Maybe the 3,830s zone wouldn‘t be even tested – all that‘s needed, is for bonds to… Read More »Creeping in

Outlook: Fed chief Powell made it clear yesterday that clamping down on demand is the only path for the Fed when supply shortages/blockages can’t be addressed by monetary policy. This is actually a cruel approach from the human point of view because it means imposing financial suffering on the lowest earners and dashing the hopes of the rising and younger middle class. The Fed doesn’t care and can’t care, because chopping demand through higher prices is The Tool—but we will soon be hearing from the lefty left. Powell points out the three channels of squashing demand—first, anything involving an interest rate, notably housing and autos. Second, letting asset prices dip if that’s where the market wants them to go, without concern from the Fed. The Fed “put” is a thing of the past. Powell also spoke of the dollar, pointing out that a strong dollar fights inflation in the form of import prices. You have to tell Congress this because they are all lawyers and missed Econ 101. At a guess, Powell was warning some in Congress not to talk about managing the currency because “a strong dollar is the best policy” and we like it that way, anyway. We… Read More »The Fed doesn’t care and can’t care

EUR/USD staged a solid intraday bounce on Wednesday amid the emergence of some USD selling. Aggressive Fed rate hike bets, recession fears acted as a tailwind for the USD and capped the pair. Investors now look forward to the flash PMIs from the Eurozone and the US for fresh impetus. The EUR/USD pair witnessed an intraday turnaround on Wednesday and rallied nearly 140 pips from the 1.0470-1.0465 region, or the weekly low. The momentum – marking the third straight day of a positive move – pushed spot prices to a one-and-half-week high and was sponsored by modest US dollar weakness. The Fed last week forecasted the rate to decline to 3.4% in 2024 and 2.5% over the long run from 3.8% in 2023. This, along with the global flight to safety led by concerns over a possible recession, dragged the US Treasury bond yields lower, which, in turn, acted as a headwind for the USD. Adding to this, less hawkish remarks by Philadelphia Fed President Patrick Harker exerted some downward pressure on the greenback. In an interview with Yahoo Finance Harker said that if demand softens quicker than expected, a 50 bps rate hike for July may be good. The shared… Read More »EUR/USD Analysis: Struggles to find acceptance above 1.0600, Eurozone/US PMIs eyed

Sentiment has continued to ebb and flow this week, as stock markets continue to get buffeted by concerns about recession against a backdrop of central banks who appear determined to squeeze inflation out of the global economy. European markets gave back their early week gains, while US markets after initially opening lower, managed to reverse their early losses to push into the green, before closing marginally lower. One notable takeaway from yesterday’s price action was a bid into the bond market, which sent 10-year yields sharply lower in a sign that bond investors might be looking to generate a little recession insurance. A slide in oil and base metals prices speaks to a general concern about waning global demand, even against a backdrop of tighter supply due to Russia’s war against Ukraine. Brent crude prices hit a one month low of just above $107 a barrel, before recovering back above $110 a barrel, but have remained under pressure in Asia trading. As we look ahead to today’s European open the main focus is set to be on the latest flash PMIs for June from France, Germany, UK and the US with further weakness expected across the board in the face… Read More »Flash PMIs set to point to further economic weakness

AUD/USD Current Price: 0.6937 Australian consumer sentiment deteriorated in May, according to the Westpac Leading Index. Fed chair Powell's comments revived concerns about inflation and a potential recession. AUD/USD has room to weaken on renewed selling pressure below 0.6910. The AUD/USD pair fell on Wednesday and bottomed at 0.6880 but managed to trim most of its intraday losses to end the day at around 0.6930. A worsening market mood at the beginning of the day pushed the greenback higher, although demand receded ahead of US Federal Reserve Chair Powell. Powell testified on monetary policy before Congress, repeating the central bank is focused on taming inflation. Australia data did not help, as the May Westpac Leading Index resulted at -0.06%, signaling a significant economic slowdown amid a deterioration in consumer sentiment. On a positive note, higher commodity prices offset the sentiment's slide. Early on Thursday, the focus will be on the preliminary estimate of the Australian S&P Global PMIs. The services index is expected to have plunged into contraction territory to 49.1, while the manufacturing index is seen down to 54.7 from 55.7 in May. AUD/USD short-term technical outlook The AUD/USD pair is at risk of extending its slide, according to… Read More »AUD/USD Forecast: Risk-related sentiment to take its toll on the aussie

MARKETS US stocks scrounged out gains on the back of lower yields as investors continued to flip flop between recession and inflation fears. For today, however, given how early we are in the rate hike cycle, investors are seemingly giving the benefit of the doubt to the Fed after Chair Powell suggested he can bring down inflation without levelling the economy. But lower oil prices also appear to be providing the ultimate inflationary soothing balm and possibly triggered hopes of a soft landing parachute amid pervasive bearishness among equity investors.  On a less hawkish note, Fed Chair Powell walked back the emphasis on headline inflation, acknowledging the Fed cannot impact food and oil, and core inflation is a better indicator of future headline inflation. When you plug headline vs core into the black box, things look incredibly more rate hike stormy on the horizon, so this is good news for risk markets.   Still, having listened to Powell's lengthy Senate testimony today, it is clear that inflation is the domestic issue at the top of the political agenda. Powell consistently bobbed and weaved his way through commenting on anything of fiscal nature but was focused on deploying the tools within… Read More »US stocks scrounge out gains on lower yields, what does the WTI-Brent spread tell us?

Markets US equities were stronger Tuesday, S&P up 2.4%, recovering after the steep losses last week. US10yr yields up 5bps to 3.28% The overnight calm would suggest that investors are giving the benefit of the doubt to the Fed, believing front-loaded monetary policy will be just that – providing scope for the looser policy later in the year if demand conditions subside. While selling pressures from last week have eased, it is hard for investors to shake the recession obsession vibes and the thought of more front-loaded rate hikes. With oil prices bouncing again, investors become increasingly jittery that the Fed will feel compelled to respond forcefully to high headline inflation and consumer inflation expectations if energy prices rise further.  Even more worryingly from a policy perspective is that virtually every recession in the past three decades has been a function of a demand shock, but this is a supply shock; hence monetary policy is less potent. Despite the uptick in risk sentiment, it still feels we are eons away from shaking the event-driven bear market blues due to prevailing recession obsession headwinds.  Indeed, with both the market and Fed in data-dependent mode, another slide in US home sales could… Read More »Recession is only the begging of “ the summer of discontent”