What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures were selling off yesterday but reversed before hitting the first natural support level at the 15,235 level and are now trading higher in early European trading hours at the 15,327 level. We expect little action until news breaks from the Jackson Hole event.
EURUSD – a marginal new high yesterday in EURUSD was brushed back lower before 1.1780 traded as risk sentiment deteriorated and as we await today’s Fed Chair Powell speech and whether it drives any shift in the market’s view on the US dollar and possibly on US yields. A more hawkish than expected performance or other factors (risk sentiment deterioration, for example) could push the price action back toward and below 1.1700 after the break below that level was rejected at the start of this week. Otherwise, a strong close back above 1.1800 today would offer bulls encouragement for the view that a cycle low is in place.
AUDUSD – no surprise to see the Australian retail sales release overnight showing a sharp decline as the latest Covid outbreak there was worsening sharply already then, and the August data is likely also to prove weak. The dip in risk sentiment overnight was also felt in the Aussie, if modestly, as AUDUSD trades in a tactical limbo ahead of the Fed Chair Powell speech later today, with AUDUSD more firmly in a downtrend relative to other USD pairs unless the 0.7300-50 area is reattained into early next week.
Bitcoin (BITCOIN_XBTE:xome) and Ethereum (ETHEREUM_XBTE:xome) - Bitcoin has settled lower again and the 200-day moving average is now in focus near 46k, as some $2 billion in options contracts on Bitcoin are set to expire this morning at 0800 GMT, with Coindesk.com suggesting the 44k area is interesting on that account. Price action in Ethereum was directionally sympathetic with Bitcoin as 3,000 looks to be the range support for now.
Gold (XAUUSD) - gold is back on the bid and trades above 1,800 this morning after failing to maintain that level on the prior attempt at the start of the week. The 200-day moving average is dipping down close to recent highs near 1,810 now, and the prominent and well-defined range high from July is 1,834.
Jackson Hole begins with a fragile bond market (IEF:xnas, TLT:xnas). Ten-year yields surged 10bps this week trying resistance at 1.37% on Thursday. Yesterday’s 7-year auction was solid despite yields rising before the auction amid higher revised Q2 readings and hawkish interviews from Bullard, Kaplan and George. If yields break above 1.37%, we expect them to rise to try their next resistance at 1.42%. 10-year yields’ monthly standard deviation is of 6bps, but rates have risen even 15bps daily in February, pointing that any surprise could lead to a sudden surge. We acknowledge that liquidity in the RRP remains high and should continue to compress yields, particularly amid a dovish Powell.
Money-market starts to price the risk arising from debt ceiling negotiations (SHY:xnas). Yesterday’s 4- and 8-weeks T-Bills were sold at a yield of 0.035% and 0.06% respectively pricing 2.5bps apart at the auctions. Last week the spread between the two was only 1.5bps. It shows that the closer we approach November the more uncertainty around the debt ceiling, pushing rates above the RRP rate. If a solution is not reached in the next few weeks, we could see volatility spurring from the front part of the yield curve starting from October.
What is going on?
Peloton shares slide down 6% in extended trading post FY21 Q4 earnings. FY21 Q4 revenue and subscribers were in line with estimates, but the big stories were the price cut of $400 on the original bike across all markets and the announcing of weakness in internal controls over some aspects of its accounting. It looks like Peloton is moving to the old ‘printing business model’ of selling hardware just above costs and improve margins on the input (ink toners and in this case subscriptions with stable revenue stream). The FY22 Q1 revenue forecast was $800mn vs est. $1bn and the company is forecasting an EBITDA loss of $325mn for the current fiscal year.
PBOC signals possible reserve ratio cut - in a fresh sign of possibly bringing support for the economy, the PBOC has signaled this week that may reduce the so-called RRR requirement for banks, with the spin from the central bank suggesting that any easing will be aimed at “rural development” as China carries out its regulatory push to reduce inequality. This was likely behind the sentiment boost, for a time at least, in Chinese markets overnight.
ECB minutes from 21-22 July were out yesterday. There is clearly some optimism in the air: “Risks to the outlook remained broadly balanced. [...] the possibility of a faster than expected draw-down of savings represented some upside risks to the outlook”. In our view, the ECB will revise upwards its macroeconomic projections at its upcoming meeting of 9 September. But it will refrain from discussing what might come next after the PEPP expires in March 2022, for the moment.
The Fed’s preferred quarterly inflation measure revised to its highest level since 1983. Core CPE for Q2 was steady at 6.1% (same as initial estimate and as expected). This inflation measure only gauges prices for final goods and services that are 1) bought by consumers 2) produced in the US or 3) imported to the US. It excludes goods and services that are bought by businesses and government and/or exported from the US.
Other U.S. data are just fine. Q2 GDP was revised up to 6.6% from 6.5% in the preliminary estimate. It reflects upward revisions to business investment and exports that were partly offset by downward revisions to government spending and private inventory investment. Regarding the labor market, jobless claims edged slightly up by 4,000 to 353,000 from a pandemic low of 349,000. The four-week average of claims, which smooths out week-to-week volatility, is back to its lowest level since mid-March 2020 at 366,500. We are not worried about the little increase in jobless claims. It was largely expected after months of impressive progress.
What are we watching next?
Speech from Fed Chair Powell at Jackson Hole today - the expectations heading into the meeting today appear quite muted as the annual Fed symposium is not the platform for indicating anything too specific, for example, on the specific timing of the coming Fed asset purchase (QE) taper. Rather, any sense from Powell’s speech about the desired pace of an eventual taper or where the Fed focus is from here, or even any new realizations it has made over the course of the response to the pandemic, whether explicit or between the lines, could grab the market’s attention. In any case, for investors intent on taking a position in markets, this event risk is one to “get out of the way” before committing capital to trades and can spark volatility irrespective of outcomes.
US PCE inflation up today. The latest PCE inflation data, the Fed’s preferred inflation measure, is out later today and expected to show still high, if slightly lower month-on-month rates of inflation relative to the prior month, with core “deflator” expected at 0.3% month-on-month and 0.4% for the headline number vs. 0.4%/0.5%, respectively in June. The year-on-year number that gets more attention is expected at 3.6% for the core and 4.1% for the headline, both 0.1% higher than in June.
US final Aug. University of Michigan sentiment – not normally a survey that creates great anticipation, but the huge, 11-point drop in sentiment in the initial reading for August suggests consumers are very concerned about something new – most likely the risk of new disruptions to their lives from the delta outbreak of Covid. We’ll look for any adjustment to this reading – also for the long term inflation expectations that are 10-year highs as a lead into the August data cycle and whether the Conference Board US consumer confidence survey next Tuesday corroborates the U of M survey.
Earnings to watch today. Today’s earnings focus is on BYD, one of the leading EV-makers in China, and Trip.com that is still suffering from China’s strict mobility policy during the pandemic.
- Today: China Construction Bank, BYD, Great Wall Motor, CNOOC, Trip.com
Economic calendar highlights for today (times GMT)
- 0730 – Sweden Q2 GDP Estimate
- 0730 – Sweden Jul. Retail Sales
- 1230 – US Jul. Advance Goods Trade Balance
- 1230 – US Jul. PCE Inflation (Deflator/Core Deflator)
- 1400 – US Aug. Final University of Michigan Sentiment survey
- 1400 – US Fed Chair Powell to speak at Jackson Hole symposium
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