For most strategists, hedge fund managers and technical analysts, the past few months have seen an extremely challenging environment, if not the most challenging in a decade from their own reckoning.
From Michael Hartnett of Bank of America to Michael Wilson of Morgan Stanley to Marko Kolanovic of JP Morgan, the best rated equity strategists of the past decade have been taken on the wrong footing this year together with some of the most prominent and best performing hedge fund managers.
It is actually a rare feature historically to have so many strategist and “smart” money managers being wrong on their strategic calls for so long…
It illustrates how challenging the global environment is, with extreme macro-economic uncertainty, extreme speculation and valuations in equities, extreme indebtedness in public and private finances and extreme international polarisation between the US and Russia on one hand and the US and China on the other hand.
But maybe the most head-scratching feature of the past few months for professional strategists that tend to do exhaustive analyses is the extreme disconnect between the behaviour of bond markets on one hand, extended to the global interest rates and liquidity complex, and the behaviour of equity markets both on the bullish side in the Western economies and on the bearish side in China. Never in history have we seen such wide disconnects…
There seems to be two things broken in the analytical framework …
From a fundamental standpoint, most of the historical correlations between asset class behaviours and the macro-economic environment have all but broken in the past few months.
Since the beginning of 2022, following the largest monetary tightening campaign since the 1980s, Bond and equities fell sharply in the first 9 months of 2022, leaving traditional 40/60 balanced portfolios with the worst performance in decades.
Since the October 2022 bottom in equities, equity markets have surged, over-extending themselves after March 2023 on the back of the AI craze, with a usually high level of concentration in the technology sector, and an unusually low participation in the real economy companies, while corporate earnings have kept falling.
Bond markets, on the other hand, did not enjoy any significant rebound and are actually trading at the lowest since March 2020 if one uses the TLT long dated US treasury ETFs, leaving pension funds, institutional managers and even private banking clients with significant losses on their traditional bond portfolios accumulated over the years, let alone an extremely fragile making system that is sitting on massive unrealized losses on what is supposed to be the safeties and most liquid part of their balance sheets,
The rally in equities has been powered by hopes that the inflationary burst caused by unorthodox monetary policies to fight the Great Financial crisis of 2008 and the COVID supply and demand shock would end up being tamed without causing economic contractions and that corporate profits would soon recover and end the decline that started in 2022.
Bond investors take a diametrically opposed view. They, together with the FED, and the European Central Bank, see inflation as still their major problem and are not confident that the battle has been won.
To add to the confusion on the macro front, the economic downturn that usually follows sharp monetary tightenings and yield curve inversions – and these two have been extraordinary in the past months – did not materialise yet, boosting the bullish view of some economists and equity bulls.
And this despite real estate markets that have clearly peaked worldwide, mortgage rates at record highs, inflation eating into the consumer’s wallets beyond the Headline CPI as corporations have used inflation to jack-up prices and protect their margins, higher labor costs across the universe and a major government debt issue that is adding pressure on bond markets through the unprecedented level of issuance of new debt by the US Government to compensate for the never-ending increase in budget deficits and the dangerous spiral in the cost of servicing public debts.
Indeed, the strength of the US economy over first two quarters of 2023 comes from two main factors . Significant government spending and social transfers that account for at least 50 % of the growth rates in the two quarters, and an extraordinary resilience of the US consumer that has kept on spending, probably using the remaining of their massive savings accumulated during the COVD period on one hand, and by a propensity to increase their credit cards and auto loans debit balances at times of rising prices to maintain their lifestyle.
But there are signs that things may actually hit a wall in the coming quarters…
Governments may have to reduce their spending due to the sharp mechanical increase in debt servicing and budget deficits ahead and consumers may have to retrench brutally if their savings ratios plunge into negative and their financial costs continue to surge to record highs, let alone the resumption of the repayment of student loans beginning of October.
In Europe, the latest data published for July shows a clear economic slowdown across the Euozone, with production, services and composite PMIs all plunging further into contractions levels.
As inflation remains at sky-high levels on the European continent, it is hard to see the ECB easing monetary policy any time soon and the surprise could – and should in pure economic terms – be for higher rates ahead ion cor inflation does not come back down sharply.
With Germany’s core CPI reaching new record highs in July, the ECB has no choice but to pursue its tightening campaign, regardless of the underlying economic softness as inflation has filtered through the labor markets in a big way, making its both sticky and self-feeding.
So, any rational economist can only conclude from the flow of data coming out of both the US and Europe and the underlying trends in real estate, interest rates and savings rates that we are at the point where the massive campaign of tightening of the past 18 months is about to hit the economies and bring the economies – and therefore corporate earnings – to a choking point.
But the financial markets do not see it yet…
With long term yields at record highs, Bond investors are far more worried by a potential continuation of inflation than by a drastic economic slowdown and equity markets are levitating at historically extreme valuations, discounting in advance a sharp slowdown in inflation, a quick resumption of the downtrend in interest rates and booming corporate profits.
Forty years at managing money and doing macro-economic analysis tell us that a recession is inevitable, even if many economics today believe that Central banks will have achieved what has never been achieved before : Taming inflation without having a recession first.
The real question for us is WHEN will the slowdown start appearing in the macro-economic data and in the job markets. It has been clearly delayed in the past seven months beyond what models would have predicted, but there are signs that it could happen very soon, and maybe rather brutally.
Indeed, in the past couple of months, we have seen the US yield curve re-steepening after a decade long record inversion. And the following chart from the Fed shows that, historically, it is precisely at the time where the curve re-steepens that economic contractions tend to appear.
When economies turn, they do turn… And the whole behaviour of asset classes is impacted by those long term trends…
So the only question for us, and for most macro-economic strategists in whether the slowdown will start to appear in the last two quarters of 2023 or at the beginning of 2024.
The second thing that is broken in the current environment is far more technical.
Over the past decade, the development of passive indexed management through ETF’s, of high frequency algorithmic trading through CTAs, and the arrival of a while new generation of individual investors since the COVID episode trading through low cost online trading platforms and getting their information through social media platform has changed the structure and relative weight of market players.
Short term money trading has taken over form long term fundamental investing, leading to sharp moves in individual stocks and to momentum extension both ways.
The volume of short dated option trading has reached levels that were unimaginable only a few yers ago, illustrating the speculation levels in the markets
…. leading to phenomenal excesses and gyrations in individual stocks such as “meme” stocks or technology stocks…
Once a rarity, stocks seeing 100 to 400 price appreciations in a matter off a few months are happening because individual speculators are teaming up through social media to bid up the prices of their targets through call options, forcing market makers to buy relentlessly to cove their risks, in turn forcing short sellers to cut their fundamental short positions, and finally leading ETF’s and long term managers to buy the stocks as well by fear of underperforming the market indices or being blamed for not having benefitted from those spectacular rises.
This herd sentiment-driven flow of funds situation creates a massive disconnect between stock prices valuations and the underlying fundamentals on one hand, and a massive divergences within the markets with money flowing into only a few stocks on the back of sentiment and speculation while the rest of the market remains driven by long term investors and fundamentals.
Suffice to measure the relative performance of the “7 Magnificents”and of the Nasdaq 100 Index against the performance of the SP500 Index or even more of the Russell 2000 that only rose by 11.6 % since its Oct low while the Nasdaq 100 rose by +52 %, Apple Inc by + 58 % despite declining earnings and NDIVIA by 344 % with its bumper earrings growing by 88 % year on year in the last quarter.
Heavy concentration, extreme overvaluation and oversized weight in the indexes work wonders on the indexes in rising phases, BUT THEY ALSO WORK IN REVERSE when the chosen few start rolling over.
More importantly perhaps, this heavy sentiment and speculation-driven tide in a very limited number of stocks has led to the most extreme valuation metrics of that small group of over hyped stocks in history, as shown by the following graph plotting the US tech stocks against the world on investable equities.
We are now at standard deviations from their long term trends that dwarf the speculative bubbles of the past with the Nifty Fifty stocks in the 1950s and the internet Dotcom bubble of 1999.
Considering the exceptional disconnect between bonds and equities, a highly uncertain economic environment and the massive excesses generated by this new structure of equity markets, it is no surprise that the best strategists get confused and have got it wrong in the past few months.
However, speculative bubbles are speculative bubbles and they reach their climax at a certain point in time, and if history is any guide, the subsequent fall is devastating for the holders of these stocks, for the markets in general, and in fact, also for the underlying economies through the negative wealth effect.
But speculative bubbles can also last and extend irrationally for much longer than most expect, until a macro, political, or financial event rings the end of the party.
We are, and have clearly in that challenging environment for the past few months…
And it is full of risks and stock markets tend to take the speed elevator down when they turn from unsustainable levels with massive long positions…
As the above chart shows, as well as the chart of the main technology culprits show, we may have reached that stage in August 2023 and a significant peak was marked. The failure of NVIDIA shares to follow-up to new highs on the publication of more than spectacular results also points to profit taking in the AI bubble.
From here on,
Either the top is confirmed by further weakness in September and the Sp500 breaking down below 4200, opening the way to the second leg ion the secular bear market that started in January 2022 with an ultimate target of 2800/ 3200 by the 4th quarter of 2023 or the first quarter of 2024,
Or, the markets rebound after a mild correction towards 4200 and breakout above 4500 again, opening the way to a retest of the 4800 all time high of December 2021, in the first quarter of 2024 before collapsing even deeper later on.
Whichever way it unfolds, the main drivers of the next move down will be US technology stocks where we see far more damaging declines than in the rest of the market.
US equity investors are facing a difficult choice : Chasing an overextended rally even higher, something speculators will probably do, or taking money off the table and parking it safely at 5 % yields in T Bills, an attractive proposition for sovereign funds, endowments and pension funds.
The following charts give a sense of the downside risks :
EUROPEAN EQUITY MARKETS are on the edge.
The macro economic conditions in Europe are actually far worse than those of the US with inflation at much higher levels and the economies teetering on the brink of recessions.
European equity markets played catch-up in the past nine months from an extremely lagging position that we highlighted several times. They have been propelled higher mainly by four industrial sectors, three of which are global, luxury goods, large engineering groups, and insurance while the banking sector benefited from higher lending rates on new business while deposit rates remained extremely low.
However, European equities are no longer cheap and some sectors are clearly overvalued going into a global economic slowdown.
As is the case with the US, they may have already peaked in July.
In JAPAN, Abenomics have done marvel pulling inflation out of its deflationary cycle, sending asset prices soaring, wages increasing and economic growth reaching levels not seen in decades with a spectacular 6 % yoy advance in the second quarter of 2023.
However, this is coming at a price that will eventually have to be paid by both investors and households.
With the bank of Japan having soaked up on its balance sheet the bulk of the Japanese Government debt in existence to keep bond yields artificially low, and large portion of its domestic equity markets, at some point the Bank of Japan will have to downsize its own balance sheet, potentially leading to a collapse in asset prices and significant losses for itself.
It also came at the cost of the wildest currency depreciation since 203, enticing Japanese savers to flee the Yen and invest almost USD 2 Trillion of their savings in the overvalued western equity markets.
The risks of a global systemic risk have increase sharply as the Bank of Japan will ultimately have to allow its bond market to reprice itself, potentially sending JGBs in a tailspin and sending the Japanese Yen roaring again.
That in turn could lead Japanese savers to sell foreign assets and repatriate their savings into Japanese assets.
Weekly Market Review 27 August 2023
Fed Prepared to Raise Rates Further to Combat Inflation: Powell
Federal Reserve Chair Jerome Powell, speaking at the Jackson Hole Symposium, emphasized the potential necessity for the US Federal Reserve to implement additional interest rate hikes in order to effectively manage inflation, as policymakers carefully evaluate indications of diminishing inflation alongside the robust performance of the economy and labor market. At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September, as officials assess the incoming data and the evolving outlook and risks. Powell has also reaffirmed the commitment of the central bank to maintain a monetary policy stance that is appropriately stringent to steer inflation towards the targeted 2 percent, while underscoring policymakers’ cautious approach in determining whether to continue tightening or instead keep the policy rate stable while awaiting more data.
US Mortgage Rates Rise to 22-Year High
The average rate on a 30-year fixed mortgage surged by 14bps from the previous week to 7.23% as of August 24th, the highest since 2001, as the hawkish outlook for the Federal Reserve underpinned expensive mortgage rates for American consumers. A year ago, the 30-year fixed mortgage rate was at 5.55%. “This week, the 30-year fixed-rate mortgage reached its highest level since 2001 and indications of ongoing economic strength will likely continue to keep upward pressure on rates in the short-term,” said Sam Khater, Freddie Mac’s Chief Economist. “As rates remain high and supply of unsold homes woefully low, incoming data shows that existing homes sales continue to fall. However, there are slightly more new homes available, and sales of these new homes continue to rise, helping provide modest relief to the unyielding housing inventory predicament.”
US Durable Goods Orders Fall the Most in Over 3 Years
New orders for manufactured durable goods in the US plummeted by 5.2% in July 2023, following a downwardly revised growth of 4.4% in June and exceeding market expectations for a 4.0% decline. It was the sharpest decrease in durable goods orders since the aftermath of the COVID-19 outbreak in April 2020, driven by a significant drop in demand for transport equipment. Orders for transport equipment saw a decline of 14.3%, following four consecutive months of increases, due to reduced demand for both civilian aircraft (-43.6% vs 71.1% in June) and defense aircraft (-10.9% vs 2.0%). Orders also decreased for computers and electronic products (-0.1% vs 1.2%), while they increased for machinery (1.1% vs -0.6%), electrical equipment, appliances, and components (1.0% vs 0.4%), fabricated metal products (0.7% vs 1.0%), and primary metals (0.1% vs 0.2%). Meanwhile, orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, edged up 0.1% in July.
US New Home Sales Jump to 17-Month High
Sales of new single-family houses in the United States climbed 4.4 percent to a seasonally adjusted annualized rate of 714 thousand in July 2023, reaching the highest level since February 2022 and surpassing the market consensus of 705 thousand. Sales in the West were up 21.5 percent to a rate of 181 thousand, while those in the Midwest surged 47.4 percent to 84 thousand. On the other hand, sales in the South declined by 6.3 percent to 416 thousand, and those in the Northeast dropped 2.9 percent to 33 thousand. The median price of new houses sold was $436,700, while the average sales price was $513,000, as opposed to $478,200 and $564,900 respectively a year ago. There were 437 thousand houses left to sell at the end of July, corresponding to 7.3 months of supply at the current sales rate.
Canada New Home Prices Decline in July
New home prices in Canada edged down by 0.1% mom in July 2023, following two periods of growth and missing the market forecasts of 0.1% rise. The cost decreased in 8 of the 27 census metropolitan areas and remained unchanged in the other 12. The largest declines were noted for Victoria (-0.8%), Greater Sudbury (-0.7%), Regina (-0.5%) and Ottawa (-0.5%), as builders highlighted weakened market conditions after the latest interest rate hike by country’s central bank. On the other hand, prices grew in Sherbrooke (+1.2%) and St. John’s (+1.0%) Year-on-year, cost of new home fell by 0.9% in July 2023, the fourth consecutive drop since November 2019.
UK Private Sector Output Falls Most in 2-1/2 Years
The S&P Global/CIPS United Kingdom PMI dropped to 47.9 in August 2023 from 50.8 in July, falling below the market consensus of 50.3, a preliminary estimate showed. The latest reading pointed to the deepest pace of contraction in the country’s private sector since January 2021, as service sector output contracted at the joint-fastest pace in 31 months and the manufacturing output downturn accelerated, extending the current period of decline to six months. Inflows of new business declined the most since November 2022, and backlogs of work dropped at the fastest pace since June 2020. Meanwhile, private sector employment rose only slightly and at the slowest pace since March. On the pricing front, average cost burdens increased at the slowest pace since February 2021, and the inflation of prices charged moderated to its lowest level in two and a half years. Finally, business confidence regarding year-ahead growth prospects slipped to its weakest since December 2022.
UK Consumer Confidence Improves in August
The GfK Consumer Confidence indicator in the United Kingdom rose to -25 in August 2023 from -30 in July, beating forecasts for a slight improvement to -29 as easing inflation reduced pressure on household spending. The headline inflation in the country slowed to 6.8% in July from 7.9% in June, while core inflation remained flat. All five components measured in the survey improved this month, including respondents’ feelings about their personal financial situation and the wider economy for the next 12 months. Joe Staton, client strategy director at GfK said: “Consumer confidence regained momentum this month with a welcome five-point improvement. While the financial pulse of the nation is still weak, these signs of optimism are welcome during this challenging time for consumers across the UK.”
German Business Morale Hits 10-Month Low
The Ifo Business Climate indicator for Germany declined for the fourth consecutive month to 85.7 in August 2023, reaching the lowest level since October 2022 and falling short of market expectations of 86.7. The significant deterioration in business morale suggested that Europe’s largest economy was not yet overcoming its challenges, grappling with persistent high inflation, escalating interest rates, and weakening demand due to the global economic slowdown. Notably, firms’ assessments of their current situations dropped to the lowest point since August 2020 (89.0 vs 91.4 in July), while expectations for the upcoming months also turned more negative (82.6 vs 83.6). Breaking down the data by industry, sentiment worsened among manufacturers (-16.6 vs -13.9), service providers (-4.2 vs 1.0), traders (-25.6 vs -23.7), and constructors (-29.3 vs -24.6).
German Economy Stagnates in Q2 After Recession
The German economy stagnated in the second quarter of 2023 compared to the previous three months, following two consecutive periods of contraction. Household consumption stabilized after a decline in the previous winter half-year, and government spending increased by 0.1 percent, marking the end of a year-long recessionary period. However, the growth in gross fixed capital formation decelerated sharply to 0.4 percent from the first quarter’s 1.7 percent, amid cooling investments in both construction (0.2 percent vs. 2.7 percent) and machinery and equipment (0.6 percent vs. 2.1 percent). Inventory changes contributed 0.4 percentage points to GDP growth, while external demand subtracted 0.6 percentage points due to a decline in exports. On a yearly basis, Europe’s largest economy contracted by 0.2 percent in the second quarter.
Italy Current Account Surplus Largest Since July 2021
Italy’s current account surplus expanded to EUR 5.995 billion in June 2023 from EUR 0.938 billion in the same month of the previous year, as energy prices continued to ease, limiting imports in the Italian economy. The goods account switched to a surplus of EUR 8.102 billion from a deficit of EUR 0.744 billion, prompted by a 0.6% rise in credits and a 16.3% plunge in debits. The secondary income shortfall also lowered to EUR 1.837 billion from EUR 1.996 billion. On the other hand, the primary income account turned negative (EUR -0.818 billion vs EUR 1.034 billion in the corresponding period of 2022) and the services surplus narrowed to EUR 0.548 billion (vs EUR 0.768).
Spain Producer Prices Drop for 5th Month
Producer prices in Spain slipped by 8.4% from a year ago in July 2023, after a downwardly revised 8% drop in the prior month and compared with market forecasts of a 10.1% slump. It marks the fifth consecutive month of producer deflation, the most pronounced since May 2020, led by energy prices (-26.2% vs -25.8% in June) and intermediate goods (-5.7% vs -5.3%). On the other hand, prices increased for consumer goods (10.1% vs 10.3%) and capital goods (2.6% vs 3%). Excluding energy, the producer price inflation slowed to 1.9% in July, from June’s revised 2.1%. On a monthly basis, producer prices edged up by 0.1% in July, after a 0.9% increase in the previous month.
French Unemployment Rises the Most in 2 Years
The number of people registered as out of work in mainland France jumped by 23.8 thousand people from the previous month to 2.817 million in July of 2023, the fastest increase since April 2021. The sharp increase took unemployment levels to their highest year-to-date, suggesting that the European labor market may be giving in to higher interest rates from the ECB following a period of stubborn tightness. The rise was attributed to a 16.5 thousand increase in core-aged working individuals, while joblessness rose by 8.9 thousand for those aged less than 25 years old. On the other hand, unemployment edged lower by 1.6 thousand for those aged 50 years or older. Compared to the same month of the previous year, the number of registered unemployed individuals decreased by 129.2 thousand, the smallest yearly decrease since pandemic base effects were yet to be felt in March 2021.
French Industry Confidence Lowest Since 2021
The manufacturing climate indicator in France edged down to 96 in August 2023, from an upwardly revised 101 in the previous month and below market expectations of 99. This latest reading pointed to the lowest level of confidence among manufacturers since January 2021, primarily attributed to declines in the balances for past production (-5 vs 9) and overall order books (-21 vs -15), with foreign order books (-15 vs -5). A deterioration was also observed in the expected trend in selling prices (3 vs 7). On a positive note, manufacturers’ evaluation improved regarding finished-goods inventory (18 vs 16) and expectations for general production (1 vs -4). Additionally, the indicator measuring perceived economic uncertainty significantly dropped (25 vs 31).
Tokyo Inflation Slows in August
The core consumer price index for the Ku-area of Tokyo in Japan rose 2.8% year-on-year in August 2023, slowing from a 3% gain in July and coming in below forecasts of 2.9%. Still, Tokyo’s core inflation rate, a leading indicator for nationwide price trends, surpassed the Bank of Japan’s 2% target for the 15th consecutive month in a sign of broadening inflationary pressure. It also keeps policymakers under pressure to phase out decades of massive monetary stimulus. However, BOJ Governor Kazuo Ueda has ruled out the chance of an early exit from ultra-easy monetary policy, saying that it needs to wait until wages rise enough to keep inflation sustainably around 2%.
Japan Factory Activity Contracts at Softer Pace
The au Jibun Bank Japan Manufacturing PMI edged up to 49.7 in August 2023 from 49.6 in July, slightly above the market forecast of 49.5, flash data showed. The reading indicates the third consecutive month of contraction in factory activity, albeit at a slowed pace of decline. Output, new orders, and export sales all decreased at softer rates, while employment was unchanged, ending a 28-month sequence of job creation. Meanwhile, a fall in backlogs of work accelerated and suppliers’ delivery times lengthened for the first time in four months. On the price front, input costs increased the most in three months, with a number of firms reporting higher costs for crude oil, while the rate of output price inflation eased to its lowest in over two years. Finally, sentiment weakened but remained positive.
China Industrial Profits Drop 15.5% in Jan-July of 2023
Profits earned by China’s industrial firms fell by 15.5% from a year earlier to CNY 3,943.98 billion in the first seven months of 2023 amid weakening economic recovery, feeble demand, and persisting margin pressures. The decrease followed a 16.8 % slump in the prior period and a 4% fall in 2022, with profits shrinking in both state-owned firms (-20.3 vs -21.15% in Jan-June) and the private sector (-10.7% vs -13.5%). Among the 41 industries surveyed, 28 saw losses, namely ferrous metal smelting and rolling processing (-90.5%), petroleum, coal and other fuel (-87.0%), chemical products (-54.3%), non-ferrous metal smelting and rolling processing (-36.7%), agricultural and food processing (-32.6%), non-metallic mineral products (-28.8%), computer, communication, & electronic equipment (-26.4%), textile (-20.3%), coal mining and washing industry (-26.2%), and oil and natural gas extraction (-11.4%). In July alone, industrial profits shrank by 6.7%.
China Cuts 1-Year LPR Rates to Record Low
The People’s Bank of China (PBoC) slashed its 1-year loan prime rate (LPR) by 10bps to a record low of 3.45% while unexpectedly holding steady the 5-year rate, a reference for mortgages, at 4.2%. Monday’s decision followed a surprising reduction in both short-term loan rates and the medium-term policy rate by the central bank last week, as it seeks to strike a balance between helping the faltering Chinese economy and stemming further weakness in the yuan. The PBoC has repeatedly vowed to release more liquidity for the economy, amid slowing business activity, a growing deflationary outlook, and weak trade performance. Premier Li Qiang recently mentioned that meeting China’s annual economic targets was not optional and highlighted the need to expand domestic demand, support private companies, and attract foreign investment.
Russia Industrial Output Rises Less than Expected
Industrial production in Russia rose 4.9 percent year-on-year in July 2023, easing from a downwardly revised 5.8 percent advance in the previous month and compared with market expectations for a 5.1 percent increase. Output eased for manufacturing (9.5 percent vs 11.8 percent) and continued to fall for extraction of raw materials (-1.5 percent vs -2 percent). On the other hand, production rose faster for electricity, steam, and air conditioning (2.7 percent vs 2.2 percent) and water supply, wastewater disposal, and the collection and organization of waste (8 percent vs. 3.1 percent). Considering the January-July period, industrial activity rose 2.6 percent.
The Week Ahead
The US economy is projected to have added around 170,000 jobs in August, marking the lowest addition since a loss of 268,000 jobs in December 2020. Meanwhile, the unemployment rate is expected to remain steady at 3.5%. The Core PCE prices, which are the Federal Reserve’s preferred measure of inflation, are anticipated to increase by 0.2% month over month in July, mirroring the rise seen in June. Concurrently, personal income is predicted to grow by 0.3%, and personal spending is expected to see a 0.6% increase. Several other significant releases to monitor include JOLTs job openings, the ISM Manufacturing PMI, the second estimate of Q2 GDP, Case-Shiller home price data, pending home sales figures, and the CB Consumer Confidence Index. Additionally, attention will be on the advance estimates of the goods trade balance and wholesale inventories. Regional industry indicators such as the Dallas Fed Manufacturing Index and the Chicago PMI will also contribute to the broader economic picture. Elsewhere in Americas, Q2 GDP growth rates, manufacturing PMI’s and jobless rates will be reported for Canada and Brazil.
In Europe, investors will be awaiting the ECB monetary policy meeting minutes, in an attempt to gauge whether the central bank will raise or maintain rates in September, particularly given Europe’s sluggish economic performance. Also, the focus will be on the release of flash inflation figures from the Eurozone, Germany, France, Italy, and Spain. The annual inflation rate in the Euro Area is expected to slow for the fourth consecutive month to 5.1% in August, the lowest since early 2022 but still well above the ECB’s 2% target. Additionally, the key jobs report will be published for the Euro Area, Germany, and Italy, and S&P Global will update manufacturing PMIs for the region. In Germany, retail sales in July are forecasted to rebound following an unexpected decline, while the Gfk consumer confidence indicator is anticipated to remain relatively stable. Other data to follow includes the Euro Area’s business survey; France and Italy’s final GDP figures and business and consumer surveys; Switzerland’s CPI data, KOF Leading indicators, and retail sales; and Turkey’s Q2 GDP. Meanwhile, it will be a quiet week in the United Kingdom, with only the final manufacturing PMI survey, Bank of England’s monetary indicators, and Nationwide house prices set to be released.
In Asia, Chinese PMI figures for August will likely show the extend of recent economic slowdown, possibly offering clues on whether the Politburo may engage in a greater extent of economic support to prevent a further slide in property prices. PMI data will also be updated for India and South Korea, with the former also unveiling its June-quarter GDP, while the latter will release its trade balance for August. In Japan, a batch of economic data includes consumer confidence for August, in addition to industrial production, retail sales, and housing starts for July.
In Australia, a series of releases will be headlined by July’s CPI, the last bit of price data before September’s RBA decision. Other Aussie releases include retail sales, building permits, and a cluster of housing credit data. Across the Tasman Sea, New Zealand is set to unveil August business confidence.
US Bond Yields Hold Following Jackson Hole
The yield on the 10-year US Treasury note held near the 4.25% mark, remaining slightly below the 15-year high of 4.34% touched on August 21st as credit markets continued to assess the monetary policy outlook for the Fed and gauge the impact that higher bond supply may have on their bidding levels. During the Fed’s Jackson Hole Symposium, Chairman Powell stated that current borrowing costs are well above the mainstream estimates of neutrality, while uncertainty over the duration of lags for policy transmission supported bets that the Fed will exhort caution against overtightening. Still, Powell emphasized that another rate hike could be warranted should above-trend growth patterns persist, after underscoring the priority to bring inflation down to the 2% level. In the meantime, risks remain for bond prices in the secondary market due to concerns about higher long-dated debt issuance from the Treasury this month.
US 10-Year Government Bond
US 2-Year Government Bond
US 30-Year Government Bond
German 10Y Bond Yield Rebounds from 2-Week Low
The yield on the German 10-year Bund has rebounded to approximately 2.6%, rising from the recent two-week low of 2.448% recorded on August 24, following Federal Reserve Chair Jerome Powell’s statement indicating the US central bank’s readiness to increase rates in response to inflation. However, Powell also stressed a cautious approach to the decision of whether to initiate another rate hike or maintain the current level. On a different note, data reflecting weaker-than-anticipated German business morale and private sector activity has heightened expectations that the European Central Bank might consider a pause in its tightening cycle as soon as September.
Italy 10-Year Bund Yield Up from Over 3-Week Lows
The yield on the Italian 10-year BTP edged higher to the 4.2% mark, rising from the over three-week low of 4.09% hit on August 24th, after Federal Reserve Chair Jerome Powell told the Jackson Hole symposium that the US central bank was ready to raise rates further if appropriate. He said that inflation remains too high, and the process of bringing down inflation still has a long way to go, even with more favorable recent readings. However, Powell emphasized the Fed’s cautious approach in determining whether to implement another hike or maintain the current stance. Meanwhile, ongoing subdued economic data from Europe has intensified expectations that the ECB might pause its rate hikes.
French 10Y Bond Yield Rebounds from 2-Week Lows
The yield on the French 10-year OAT has rebounded to around the 4.1% level, up from a near two-week low of 2.97% hit on August 24th, as investors reacted to the latest remarks from Federal Reserve Chair Jerome Powell pointing to the possibility of further interest rate hikes given the U.S. economy’s unexpected strength. Meanwhile, Powel said that the Fed’s officials “will proceed carefully as we decide whether to tighten further or, instead, to hold the policy rate constant and await further data,”.Concurrently, sluggish economic data from Europe has strengthened the likelihood that the ECB might swiftly halt its ongoing series of rate hikes.
DXY Firms at 11-Week High
The dollar index rose above 104.2 on Friday, reaching its highest levels in eleven weeks and on track to advance for the sixth straight week as investors digested Federal Reserve Chair Jerome Powell’s Jackson Hole speech. Powell’s statement emphasized the US Federal Reserve’s commitment to bringing inflation back to 2% and stated that the central bank is ready to hike rates if needed. At the same time, Powell suggested the Fed could hold rates steady at its next meeting in September to assess the incoming data and the evolving outlook and risks.
Japanese Yen Hits 9-Month Low
The Japanese yen weakened past the 146 per USD threshold, reaching its most vulnerable level since November 2022, as investors flocked to the dollar following Federal Reserve Chair Jerome Powell’s announcement of the US central bank’s readiness to employ additional rate hikes in response to inflation. Simultaneously, Powell conveyed a note of caution, indicating that policymakers would exercise prudence in deciding whether to proceed with more rate hikes or maintain stability. The currency’s depreciation was also influenced by the expansion of yield differentials, driven by the anticipation that the Bank of Japan would uphold its ultra-easy monetary policy throughout 2024, despite the broader trend of heightened global policy tightening. In a separate context, it’s notable that BOJ Governor Kazuo Ueda recently engaged in discussions with Prime Minister Fumio Kishida regarding economic developments.
CRYPTO – CURRENCIES
US Stocks Ends Higher after Powell Speech
Major US indexes closed higher on Friday, as traders weighed the remarks from Fed Chair Powell at the Jackson Hole Summit. The Dow Jones rose 247 points, while the S&P 500 and the Nasdaq added 0.7% and 0.9%, respectively. Powell addressed the string of more resilient than expected economic data all summer long while stating that the Federal Reserve is prepared to raise rates further to bring inflation back to its 2% target. At the same time, Powell suggested that in September, interest rates would remain unchanged to evaluate incoming data, as well as the evolving outlook and potential risks. Among stock, Affirm soared 28.8% and Workday jumped 5.4% on the back of upbeat earnings and revenues. Gap gained 7.1% after delivering mixed quarterly results while Nordstrom slid 7.7% even after posting upbeat results. Marvell Tech sank 6.6% after giving a wary future outlook. On the week, the Dow lost 0.4% while S&P 500 and Nasdaq added 0.2% and 1.1%.
Canadian Stocks Finish Week Flat
The S&P/TSX Composite index added 0.3% to close at the 19,830 mark on Friday, while finishing the week slightly higher as markets digested remarks from Fed Chair Powell. The Federal Reserve Chairman reiterated the central bank’s priority of bringing down inflation to 2%, while emphasizing that robust growth may warrant another rate hike. Energy producers led the gains adding 1.3%, as Canadian Natural Resources and Suncor Energy added 1.5% to 1.3% taking advantage of higher crude oil prices. Tech companies also outperformed, rising 1% on average. On the other hand, banks finished 0.4% lower after the nation’s two biggest lenders, RBC and TD Bank, delivered mixed earnings for the June quarter as larger interest incomes clashed with smaller demand for loans. Investors positioned for key earnings next week.
Ibovespa Ends Below 116,000 Mark
The Ibovespa stock index finished 0.9% lower at the 115,923 level, extending losses from the previous session as the market reacted to fresh inflation data that exceeded expectations, registering a rise of 0.28% in mid-month August. Also, Fed Chair Jerome Powell reiterated their commitment to bring inflation down to the 2% target, mentioning that there will be no rate cuts in the near future as they continue to analyze data closely for certainty that inflation has subsided. As a result, this stance has notably impacted the services sector, with Localiza experiencing a significant loss of 3.7% and Rumo declined 2.2%. Ambev was grappling with the effects of the inflation data, and ended up losing 1.2%. As inflation persists, the index maintains its downward trajectory, suggesting that elevated borrowing costs could endure for an extended period. Pao Acucar led the losses of session shedding 6.6% followed by a 5.7% drop in shares of CVC BRASIL. On the week the index was up 0.4%.
European Shares Slightly Down After Powell Remarks
European equity markets are set to close Friday’s session with slight losses, prompted by Federal Reserve Chair Jerome Powell’s indication of preparedness to implement further interest rate hikes to counteract inflation. However, Powell also emphasized that the central bank would adopt a cautious approach in upcoming meetings. Additionally, ECB President Christine Lagarde’s upcoming remarks, set to occur after the close of the European market, are anticipated to offer insights into the future trajectory of ECB interest rates. Shifting focus to economic data, it was confirmed that the German economy stagnated in the second quarter, following a winter recession. German business morale deteriorated further in August for the fourth month in a row, reaching the lowest level since last October. Both Frankfurt’s DAX 40 and the pan-European STOXX 600 inched 0.1% lower on Friday. Looking at the week as a whole, the DAX gained 0.2% and the STOXX 600 added about 0.6%.
French Stocks Rise 1% On the Week
The CAC 40 index closed 0.27% higher at 7234 on Friday, as traders digested Federal Reserve Chair Jerome Powell’s speech, which emphasized the potential implementation of additional interest rate hikes to effectively control inflation, given the unexpectedly robust performance of the economy and the labor market. Powell acknowledged the data-dependent nature of the monetary policy path and did not rule out keeping rates steady in September, while still underscoring the Fed’s commitment to a 2% target inflation rate. Additionally, investors are awaiting ECB President Christine Lagarde’s upcoming remarks on the future trajectory of ECB interest rates, especially considering Europe’s sluggish economic performance. Among individual stocks, Stellantis NV, Vinci, and Sanofi were the top performers, rising 1.1%, 0.8%, and 0.6% respectively. Conversely, Alstom (-0.9%) and Worldline (-0.8%) experienced the largest losses. For the week, the CAC 40 rose 1%.
Spanish Stocks Close Above Flatline
The IBEX 35 edged up to 9,338 on Friday, following its European peers, as investors digested Powell’s key remarks at Jackson Hole Symposium. The policymaker advocated for caution in the upcoming Fed’s decisions but also reiterated the readiness to hike rates further should such need occur. The energy sector was the best performer, led by Repsol (1.6%) and Solaria Energia (1.2%). Conversely, the heaviest losses came from IAG (-1.6%), Grifols (-1.6%), and Melia Hotels (-1.6%). Weekly, the index ended 0.8% higher.
Italian Shares Surge 1.6% on Week
The FTSE MIB index rose by 0.49% to 28,208 on Friday, paring back some of its early gains, as traders evaluated the intervention of Federal Reserve Chair Jerome Powell at the Jackson Hole Symposium. During his speech, Powell reiterated that inflation remains too high, and therefore the central bank remains determined to raise rates again if needed. Swap contracts referencing the November Fed meeting suggested odds of around 60% that the US central bank would raise its policy rate to a range of 5.5% to 5.75%. Iveco Group surged by 4.2%, recovering from losses seen yesterday due to Deutsche Bank’s hedging on the company. The banking sector had an overall positive day, with lending giant UniCredit rising by 1.3%. Additionally, Eni edged up 0.2% after the oil giant began considering the sale of a minority stake in the capital of Plenitude. In contrast, Nexi and Banca Monte dei Paschi Siena were among the worst performers (-0.85%). Over the week, the index rose around 1.6%.
Japanese Shares Drop Ahead of Powell Remarks
The Nikkei 225 Index dropped 2.05% to close at 31,624 while the broader Topix Index lost 0.88% to 2,266 on Friday, snapping a four-day advance and tracking losses on Wall Street overnight as investors turned cautious ahead of Federal Reserve Chair Jerome Powell’s Jackson Hole speech. Strong quarterly numbers from Nvidia which initially pushed the market higher also failed to sustain the recent run-up in stocks. Meanwhile, investors digested data showing the core inflation rate in Japan’s capital city of Tokyo slowed to 2.8% in August from 3% in July, but remained above the Bank of Japan’s 2% target for the 15th consecutive month. Technology stocks led the selloff, with sharp losses from Advantest (-10%), Tokyo Electron (-5.9%), SoftBank Group (-3.1%), Lasertec (-6.9%), Disco Corp (-6%) and Socionext (-5.3%).
China Stocks Fall Ahead of Powell Remarks
The Shanghai Composite fell 0.59% to close at 3,064 while the Shenzhen Component dropped 1.23% to 10,130 on Friday, hitting their lowest levels in at least eight months and tracking losses on Wall Street overnight as investors turned cautious ahead of Federal Reserve Chair Jerome Powell’s Jackson Hole speech. Strong quarterly numbers from Nvidia which initially pushed the market higher also failed to sustain the recent run-up in stocks. Technology stocks led the decline, with sharp losses from Zhongji Innolight (-11.6%), Inspur Electronic (-10%), Foxconn Industrial (-9.4%), iFLYTEK (-3.6%) and Eoptolink Technology (-6.6%). Other heavyweight firms also declined, including Hongbo Co (-10%), ZTE Corp (-3.6%) and China Tourism Group (-4%).
Hong Kong Shares End Week on Muted Note
The Hang Seng slumped 255.79 points or 1.40% to close at 17,956.38 on Friday, snapping three-day gains while heading back to near its lowest level in nine months hit earlier in the week, as news that Beijing would ease mortgage rules was unable to lift sentiment. Simultaneously, traders were increasingly uneasy ahead of the annual gathering of top central bankers in Jackson Hole, Wyoming, later today where higher-for-longer interest rate talk may dominate the event. Locally, exports and imports in Hong Kong continued their downward momentum in July amid weak demand from abroad and at home. The tech sector sank over 2% following a plunge on the Nasdaq Thursday as the Nvidia rally was short-lived, while other sectors also fell. Meituan sank 5.6% after flagging headwinds for its core business in the coming quarter. Other biggest laggards were ENN Energy (-16.2%), H World Group (-9.7%), New World Development (-5.5%), and Miniso Group (-4.8%). For the week, the index was almost unchanged.
WTI crude futures rose to trade at $80 per barrel on Friday, as US diesel prices soared after the number of oil rigs dropped and a fire broke out at a refinery in Louisiana. Meanwhile, the greenback strengthened to an 11-week high after Powell’s speech at Jackson Hole summit, who emphasized the US Federal Reserve’s commitment to bringing inflation back to 2%. On the supply side, supply cuts from OPEC+ continue to support the market as Saudi Arabia and Russia said they would extend their additional cuts into September. Rising prices of a Russian crude sold to China should peak soon, with more independent refiners likely to switch to cheaper oil from Iran which ramped up exports to 4-1/2 year highs in August, several trade sources said. Iran’s oil minister said the country’s oil output will reach 3.4 million barrels per day by the end of September despite US sanctions. .
US natural gas futures were little changed at $2.5/MMBtu on Friday, supported by a smaller-than-expected storage build last week when power generators burned lots of gas to keep air conditioners humming during an extreme heat wave. The latest EIA data showed US utilities added 18 billion cubic feet (bcf) of natural gas into storage, less than market expectations of a 33 bcf build. Also, output eased to 101.6 billion cubic feet per day (bcfd) so far in August, down from 101.8 bcfd in July and a monthly record of 102.2 bcfd in May. On the other hand, the flow of gas to US LNG export plants has diminished in August, primarily due to reduced operations at Cheniere Energy’s Sabine Pass in Louisiana and Corpus Christi in Texas. Looking ahead, meteorologists forecast that hotter-than-usual weather will persist through early September. For the week, natural gas prices are down over 2%, following a 7.9% loss in the previous period.
Gold dropped below $1,910 an ounce on Friday, facing pressure from a strong dollar as investors continued to gauge the monetary policy outlook following Federal Reserve Chair Jerome Powell’s Jackson Hole remarks. The banker noted caution is required in next meetings to assess the health of the economy, but further hikes won’t be ruled out since the regulator aims to bring inflation back to the 2% target. At the same time, traders bet on a possible pause in tightening from the ECB due to the weak European data. More insights on that could be provided in Lagarde’s comments later in the day. Previously, two Fed officials indicated that the jump in bond yields could complement the central bank’s effort to slow the economy and reign in price pressures without needing to raise rates. Weekly, the metal is set to gain 0.9% after four consecutive periods of declines.
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