A major selloff in US Equity markets. US employment showed that the labour market was softening, which raises questions as to the size of this month’s interest rate cut in the US. Federal Reserve (FED) Governor Christopher Waller’s comments heightened expectations of a larger rate cut in September. He emphasised rising risks in the labour market and expressed openness to a more substantial rate cut if necessary. The FOMC meeting starts on the 17th of September for two days, so it’s still a fair way off. Our expectations are for 25bpts. The FED has always said that data will dictate its direction on monetary policy, with recent JOLTS and official employment data on the soft side of forecasts leading the call for a more significant cut. This week's key data point will be US CPI data, due on Wednesday. MoM forecasts are for a continual decline in price pressures, while YoY data suggests no real change, albeit we have seen a steady decline since March 24. The annual inflation rate, for the first time since March 21, has dropped below 3%. The current rate is 2.9%. In China, the economy continues to splutter, and traders hope this week's inflation data will indicate a lift in price pressures, signalling to many that there is some demand in the economy. Inflation data is due today with a YoY consensus of around 0.7%, which is a small but progressive uptick. The MoM is expected to hold onto recent gains made last week and come in 0.5%. 

But first, let’s examine the selloff in US equity markets as we have been short in the market for some time, taking the view that valuations are elevated. Last week, the S&P 500 lost about 4%, heading for its worst week since March 2023. The Nasdaq sank 5.5%, on pace for its worst start to September since 2001, and the Dow slipped 2.5%, its steepest early-September decline since 2008. Has the route in equities started? The selloff was primarily driven by concerns surrounding the labour market and other softer, broader economic indicators. The stock market often acts as a barometer for investor sentiment, and the recent selloff suggests that investors are growing increasingly cautious about the near-term outlook for the U.S. economy. 

 The U.S. employment report indicated a softening labour market, critical for consumer spending and overall economic growth. When employment numbers weaken, they tend to signal reduced consumer confidence and spending power, essential components of a healthy economy. For businesses, a weak labour market can translate into lower demand for goods and services, putting downward pressure on corporate earnings and affecting stock valuations.

 The current condition of the labour market raises several vital questions about the Fed's next moves regarding interest rate policy. Investors are particularly focused on how they will respond and whether it will prompt a larger-than-expected rate cut. Federal Reserve Governor Christopher Waller commented that a more substantial rate cut in September heightened expectations. Waller emphasised that the risks in the labour market are rising and indicated that the Federal Reserve is open to more aggressive rate cuts if necessary to support the economy. His remarks have led to increased speculation that the Federal Reserve may opt for a larger rate cut than the previously expected 25 basis points.

 On Wednesday this week, we get US CPI, Month-over-month (MoM) forecasts for CPI suggest a continued decline in price pressures, reflecting easing inflationary trends. This decline is particularly important, as inflation has been one of the primary concerns for the Federal Reserve in recent months. High inflation erodes purchasing power and can lead to increased borrowing costs, which in turn can slow economic growth. A continued decline in inflation would provide the Fed with more room to ease monetary policy, as it would reduce the need for aggressive measures to combat rising prices.

 Year-over-year (YoY) inflation data, on the other hand, suggests little change from recent months, although there has been a steady decline since March 24. The annual inflation rate, for the first time since March 2021, has dropped below 3%, currently sitting at 2.9%. This is a significant development, as it signals that the Fed's efforts to curb inflation through rate hikes may be yielding results. A stable or declining inflation rate would allow the Fed to focus more on supporting growth rather than worrying about runaway inflation.   A lower read on both could give way for more aggressive cut rates, as Waller suggested.

What can we expect this week? On Monday, we have Chinese inflation data. This will be key to helping us understand that stimulus measures are contributing to economic growth. A YoY read of +0.5% should be positive for equities. On Tuesday in Australia, we get Westpac and NAB consumer confidence data. The previous print for WBC consumer confidence was 2.8%; a similar number would support a no-change in official rates from the RBA. Then, on Wednesday, important CPI data in the US. This is a major focus for the market as mentioned above. On Thursday, rate decisions for the ECB. Traders are expecting a .25% reduction to 4%. In The US we have PPI. Then, finally on Saturday, we get Important Data from China by way of Industrial Production, Retail Sails and House Prices.

 On the position front, we remain … both SP500 and SPI. Both indexes have been consolidating at record … before the … last week. We didn’t get a breach, so holding fast to our positions. The key will be in how traders perceive what a rate cut in the US means. A larger than …% suggests the economy is weaker than expected. The checky short at … is looking ok. We need to see a break below US… to conclude a top in place. Stops can go in at … AUDUSD, we have a small short with a target of US…  The wheat position is added to our wheat position and remains long crude.

Trade Focus:

S+P 500

Fundamentals:

Over the last few months, we have thought that US Equity markets have been overvalued. A good correction is needed before we can trade through to historic … and beyond. We outlined a few reasons for this correction to continue above. The key will be how traders and investors see the reasons for the rate cuts…

Technical Analysis:

Technically, the picture needs to be more clear. Major tops are in at … so if going … stop loss orders need to be above this level. It is ok for the market to trade close to these levels, but a break sees the potential for new record … Momentum indicators are tricky on a daily basis...

Support              …

Resistance         …

Momentum        …