Summary: Markets closed last week on a high note after US Federal Reserve Chair Powell firmly stated the case that the recent bout of high inflation will prove transitory, indicating no rush to begin tapering asset purchases, though he agreed with the majority of Fed members who favour starting a tapering of purchases before year-end. The US dollar was sharply weaker on the news. In energy markets, a huge shutdown of US refinery capacity is in focus on a major hurricane strike in Louisiana.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the dovish Jackson Hole event disappointed the bond bears and sent equities higher with Nasdaq 100 futures posting a new all-time high on the close on Friday. Nasdaq 100 futures are extending the gains in early European trading sitting around the 15,440 level.
EURUSD – the reversal and close near 1.1800 on Friday in the wake of the dovish speech from Fed Chair Powell supports the bullish case as it more firmly reverses the recent attempt below the key 1.1700 area. At the start of this week, it will be important for bulls to see follow through to the upside toward the range high since June just above 1.1900, while a reversal back below 1.1750 would represent a disappointment and keep the tactical outlook in limbo.
AUDUSD – as with other USD pairs, the move into the close on Friday in the wake of the Fed Chair Powell speech and whether it holds is the critical tactical focus at the start of the week. That Friday action took AUDUSD into the key 0.7300+ area that reverses most of the prior sell-off wave, but the price action is not sufficiently clear of the 0.7304 Fib level (61.8% retracement of the wave from the Aug high to recent 0.7106 low) to fully neutralize the latest leg of the down-trend just yet. In fact, a fairly modest move back below 0.7250 could topple last week’s reversal attempt – in either case, we are in a pivotal zone.
Gold (XAUUSD) - Gold cleared the recent high above 1,2800 and the 200-day moving average a bit higher still near 1,810 on Friday in the wake of the dovish speech from Fed Chair Powell, with traders now focusing on the range highs just below 1,835 that were tested three times in July and into early August as the key to unlocking further gains toward the next key zone above 1,900.
Crude Oil (OILUSOCT21 & OILUKOCT21) - oil futures were modestly bid ahead of the weekend on top of the huge snap-back rally from multi-month lows last week. But after gapping higher overnight on the powerful hurricane hitting a region in the US with significant refining capacity (more below), the price action has faded as traders await assessments of any damage done. Some 1.75M barrels/day of US oil production capacity was also shut ahead of the storm impact.
This week’s non-farm payrolls are key for the bond market (IEF:xnas, TLT:xnas). Powell’s speech at Jackson Hole put a lot of focus on this week’s job numbers as they will influence the central bank’s decision regarding when to begin tapering purchases under the QE program. If job figures exceed expectations, we anticipate a tapering announcement already by September’s FOMC and beginning as soon as October. In that case, we will see yields rising and the yield curve steepening with the 10-year yields rising as high as 1.5% ahead of the Fed meeting. In case job numbers disappoint, tapering may be delayed, giving a boost to US Treasuries. In that case, 10-year yields could drop again to test 1.12%. Any rally would be short-lived as we expect a revival of reflation trade in autumn.
What is going on?
Powerful Hurricane Ida goes ashore in the US near New Orleans. The storm is a powerful Category 4 storm packing a stronger punch than the costliest storm in US history that hit the same area – Hurricane Katrina in 2005 ($176 billion). In preparation for the storm, some 1.75M barrels/day of oil production in the Gulf of Mexico and on-shore were shut in, while the path of the storm is near some 12% of total US refining capacity.
US Fed Chair Powell laid out case for transitory inflation in speech on Friday at Jackson Hole symposium on Friday, saying that the rebalancing of the economy in coming quarters is likely to see a reversion to the mean in consumption of durable goods that drove a supply-side crunch and higher prices, while the services side of the economy rebound has been held back by the lingering effects of the pandemic. US rate expectations fell slightly, and the US dollar was weaker in the wake of the speech.
There are already 33 declared candidates for the 2022 French presidential election. Last week, former EU Brexit negotiator Michel Barnier announced he would participate in his centre-right camp's probable primaries for the presidential election. The centre-right primaries are due in October or November. Former Hollande minister of the economy and industrial renewal, Arnaud Montebourg, is expected to confirm his candidacy later this week (see our Guide to the French Presidential Election, July 2022).
What are we watching next?
Does the reaction to Powell’s speech on Friday hold? This is the tactical question at the start of the week and as we enter the last week of the summer, by traditional US measures (the week before Labor Day weekend, with US markets shut next Monday. But as we note below, the economic calendar in the US is heavy this week.
US economic data this week, especially the August jobs & earnings data and ISM Services survey on Friday. The impact of the delta variant in the US may have been behind a massive drop in the August University of Michigan sentiment survey that was noted last week, and possibly in the preliminary Aug. US Markit Services PMI earlier this month. This week, we will watch the US Consumer Confidence survey tomorrow for whether it confirms the Michigan survey, and the August US ISM Services survey out on Friday, as well as the usual focus on payrolls mid-week with the ADP private payrolls number and the Friday nonfarm payrolls change.
Earnings to watch today. The earnings season is tapering off with the four most interesting earnings this week being Meituan and Zoom reporting today, and then Crowdstrike and NetEase on Wednesday.
Economic calendar highlights for today (times GMT)
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