The much-anticipated CPI data from the US delivered mixed emotions, albeit the equity market took it as a sign that rate cuts are imminent and have been on a tear. Other data, such as MoM Industrial Production, Capacity Utilization, and Manufacturing, all came in weaker than expected, promoting signs that the economy is heading into a recession. However, regardless of the negative news, the market thinks it will take just one cut to revive the prospects of stability and the basis for economic growth. Hence the rebound in equities. We tend to differ on this view as it takes time for cuts to come through the economy and talk of a recession will dampen spending expectations, so a softer outlook for equity markets should prevail. Further, newly found support due to changing fortunes in the US presidential race could also help equities, as Harris is gaining on Trump and passing in some states. A Democratic win will provide more stability, which investors like. Trump’s campaign antics are causing concern within the Republican camp as Trump is presenting no natural substance to his campaign other than mocking Harris. The Debate on 10 Sept will be good. This Friday sees the start of the annual Jackson Hole Symposium; the title of the symposium is “Reassessing the Effectiveness and Transmission of Monetary Policy”. Federal Reserve Governor Powell will be talking Saturday, so this will be a focal for the market. Inflation data in China is picking up. The stimulus program seems to be working. In Australia, there is no change to official rates, and, given the recent data sets, this status could be maintained until mid-next year. This doesn’t bode well for equity markets, albeit the AUD benefits from it.
But first, let’s look at the recent data sets from the US. The much-anticipated Consumer Price Index (CPI) data from the United States recently delivered results that stirred mixed emotions across financial markets and economic observers. The YoY core CPI, a crucial measure of inflation, came in at 3.2%, the lowest since inflation peaked in 2022 at 6.6%. A good trend. However, the MoM print bucked the trend and rose by 0.2% after four quarters of decline. It will be an alarming trend if it continues. However, given the other data sets, it feels unlikely.
Upon release, the data presented a complex picture. Inflationary pressures appeared to fluctuate, leading to divergent interpretations. For those in the equity markets, the data was largely perceived as a sign that interest rate cuts by the Federal Reserve are imminent. This expectation sparked significant enthusiasm within the equity market, propelling it into an upward trajectory. Traders and investors seized on the prospect of lower borrowing costs, potentially enhancing corporate profitability and economic activity by making credit more affordable for businesses and consumers.
However, the broader economic data painted a less optimistic outlook. Month-over-month industrial production MoM came in at -0.6% expected was -0.2%, capacity utilization at 77.8% verse an expected 78.6%, and manufacturing output MoM -0.3% verses an expected -0.1% all fell short of expectations. These indicators collectively serve as a gauge of economic vitality, reflecting the health of key industrial sectors. Their weaker-than-anticipated performance suggested that the economy might be losing momentum, fuelling concerns about a possible recession. A recession, characterized by a decline in economic activity across the board, can lead to job losses, reduced consumer spending, and lower business investments.
Despite this negative backdrop, the equity market remained buoyant, buoyed by the belief that it would take just one interest rate cut to revive the economy's prospects, stabilizing markets and establishing a foundation for renewed growth. The optimism was rooted in the perception that lower rates would boost spending and investment by reducing the cost of borrowing. Yet, only some people shared this upbeat sentiment. Some analysts and market participants, myself included, tend to differ on the view that a single rate cut could swiftly restore economic stability and vigor. Historical patterns suggest that monetary policy changes take time to ripple through the economy. The impact of a rate cut isn't instantaneous; it unfolds gradually as adjustments are made in corporate strategies and consumer spending habits. With ongoing recessionary talks likely to dampen spending expectations, a more tempered outlook for the equity markets should be anticipated.
On a global scale, attention is also turning toward the upcoming Jackson Hole Economic Symposium, an annual gathering of central bankers, economists, and policymakers from around the world. Scheduled to commence this Friday, the symposium this year carries the theme “Reassessing the Effectiveness and Transmission of Monetary Policy.” Federal Reserve Chair Jerome Powell is slated to deliver a keynote address on Saturday, which is set to become a focal point for market observers. His remarks will be scrutinized for any indications of future policy directions, potential interest rate adjustments, and the broader outlook on inflation and economic growth.
Simultaneously, China's inflation data shows an upward trend. The Chinese government's stimulus program, designed to inject liquidity into the economy and support growth, appears to be yielding results. Rising inflation suggests that consumer demand is recovering, a positive sign for the world's second-largest economy. This development has significant implications for global trade and investment, as China's economic health influences markets across the globe.
In contrast, Australia's central bank, in its monthly report, has opted to maintain its official interest rates at 4.35% current levels, despite the evolving economic data. Given the latest economic reports, this rate status could persist until the middle of next year. While stable rates might provide some certainty, the level doesn’t necessarily bode well for the Australian economy and equity markets. Investors often favor environments where monetary policy is more dynamic, as rate cuts can stimulate economic activity, whereas stable rates may indicate a more cautious approach.
Nevertheless, the Australian dollar (AUD) is benefitting from these conditions, experiencing a degree of strength in currency markets. A stable interest rate environment coupled with global economic uncertainties may lead investors to view the AUD as a relative safe haven, bolstering its exchange value.
What can we expect this week? The focus in the US will be on FOMC meeting minutes on Thursday, then Jackson Hole Symposium and how Fed Powell will address the reporters on Saturday. There is little major economic news from the US this week, so expect the market to range unless we get the news out of the Middle East concerning Israel and Palestine. In Australia, we have some PMI data on Thursday, a highlight of a quiet week.
On the position front, it has been a volatile week. We made some profits on the … S+P position, albeit we still have a … core position in place. This position is back underwater, and we have taken another … at US… The re-entered … SPI position is also underwater, but we are looking to hold; … is a … level, and given the reading of the local economic conditions, it should not be at this level. The … USD/JPY at … was scratched. The … AUD/USD (US…) is improving after we took positions at US… The … Gold (…) and Silver (…) positions are doing well, and we expect this trend to continue for the time being. We remain … Dec Wheat.
Trade Focus:
Gold
Fundamentals:
Gold traded around $… per ounce on Monday, hovering at an all-time high, driven by strong demand for safe-haven assets while markets evaluated the Federal Reserve's policy outlook. Reports indicated that US Secretary of State Antony Blinken is in the Middle East to broker ceasefire negotiations with Gaza…
Technical Analysis:
Technically, as we are at record …, we can expect the trend to continue. Momentum indicators will be hard to follow as they are at the higher end of the range. Expect a …
Support …
Resistance …
Momentum …
