Morning Brew August 25 2023

Good Morning,

We are heading into the Jackson Hole conference on nervous footing.

Equities fell yesterday, yields rose after the selloff and the USD gained in value. Main causes were “good” unemployment numbers and hawkish comments by Patrick Harker who said he sees rates higher for longer.

The Dow closed up 1.1% at 34.099, the S&P 500 lost 1.35% to 4376 and the Nasdaq -1.9% to 13463.Tech was a large loser and the expected boost from Nvidia fell flat as the company gave back virtually all of the gains and closed up 0.1%.

Yields were under pressure yesterday but rebounded quite strongly, the 10 year came from 4.35 early in the week to 4.17 yesterday and now 4.24, the curve behaved similarly across the durations.

The USD Index rose almost a full point to 104.25 from testing the 200d moving average at 103.40 yesterday. EURUSD fell to below 1.08 to trade at 1.0780 – below the 200 day line.

USDJPY rose to 146 again and GBPUSD fell to 1.2570. Move of the day came from the Turkish Central Bank which was expected to hike to 20% from 17.5% but actually hiked three times the expected to 25%. The Lira gained from 27.20 Lira per USD to 26.

Gold and Silver give up some ground on the strong USD and fall to 1913 and 24.05. Holdings in the GLD Gold Trust – the largest gold ETF fell to the lowest since January 2020.

Driving the market today will Powells speech at Jackson Hole starting at 16:00 CET , also bear in mind that Christine Lagarde will be speaking 5 hours later at 21:00 CET. The ECB likes to announce important adaptations outside the normal rate decisions so there is a chance she will take markets by surprise. While that is unlikely, any significant remark would hit a very thin market.

Here again the three scenarios our head of Strats sees for Powells remarks at Jackson Hole below on the risk of repeating. I am reading several comments to the effect that the US Economy is fairly strong, Inflation is falling and unemployment low, Powell may try to avoid rocking the boat – making surprises more significant.

Last year, the S&P lost 3.4% on Powells remarks and while I would not necessarily expect such a move, take it into consideration in your risk management.

Until Powells remarks, there is little of great significance. German GDP at 8:00 and the IFO index could move the Dax and the EUR on a surprise. at 16:00 the Final University of Michigan needs to be a massive deviation fromt he expected 71.2 to be noticed. 

John Hardy wrote up Jackson Hole Scenarios:

1. The ”boring” scenario would be a discussion of the above without any solid takeaways or hints on either longer term implications or what the Fed is set to deliver at the September FOMC meeting. Market outcomes: the US dollar and other currencies will revert to their usual correlations with risk sentiment/China and yield direction.
2. Lowering interest on bank reserves to zero would help stave off a rising rate spiral by forcing banks to pay less on deposits, thus both lowering bank earnings and effectively taxing depositors with “real losses” via an inflation tax as banks can’t offer attractive yields on deposits. This would be likely very bad for banks and possibly economic growth, but could also mean lower long yields – so most bullish for the yen?
3. The Fed could take its longer run Fed policy rate projections higher, The hawkish surprise on this front would be language hinting that the September FOMC meeting will deliver a bump in the longer run rate projections. Market outcomes: A rise in the longer run rate projectionswould be the scenario most likely to deliver USD strength and risk-off.

Friday August 25

Data: Japan CPI; PPI, DE GDP & IFO, University of Michigan

Earnings: China Merchants Bank China Petroleum & Chemical Zijin Mining Group

Trade safely.