Wishful Thinking?

America had another ‘bad news is good news’ moment yesterday; softer-than-expected ADP and growth data further fueled expectations that the Federal Reserve (Fed) is – maybe – good for a pause. The ADP report, released yesterday, showed that the US economy added 177K new private jobs in August, lower than expected and more than half the number printed a month earlier, while the US GDP was revised from 2% to 2.1% instead of 2.4%, due to lower business investment than initially reported and to downside revisions in inventory and nonresidential fixed investment. Household spending, however, continued leading the US economy higher; it was revised up to 1.7%. All in all, the data was certainly weaker than expected but the numbers remain strong, in absolute terms.

The S&P500 gained for the 4th consecutive session yesterday, the index is now above the 4500 level and has around 85 points to go before recovering to July highs. The US 2-year yield settles below the 5% level on expectation that the Fed has no reason to push hard to hike rates; it could just wait and see the impact of its latest (and aggressive) tightening campaign.

In the FX, the softening Fed expectations are weighing on the US dollar. The dollar index fell to its 200-DMA and could sink back to its March to August descending channel. But the seasonality is on the dollar’s side in September. Empirical data shows that the US dollar performed better than its peers for six Septembers in a row since 2017, and it gained 1.2% on average, thanks to increased quarter-end dollar buying, and an increased safe haven flows before October – which is seasonally a bad month for stocks, according to Bloomberg.

But the dollar’s relative performance is also much influenced by the growth and price dynamics elsewhere. Looking at the latest Euro-area CPI numbers, the picture in Europe is much less dovish despite morose business and consumer sentiment in Europe and weak PMI numbers printed recently. Despite the dark clouds on the European skies, the latest inflation numbers showed that inflation in both Spain and Germany ticked higher in August for the second month – a U-turn that could be explained by the re-surge in oil prices since the end of June. This morning, the aggregate CPI number may not confirm a fall to 5.1% in headline inflation. And a stronger-than-expected CPI print will likely boost the ECB hawks and get the euro bulls to test the 50-DMA, near 1.0970, to the upside.

Later today, investors will focus on the US core PCE data, which has a heavier weight on the international platform. Therefore, the strength of the US core PCE will say the last word before tomorrow’s jobs data. Analysts expect a steady 0.2% advance on a monthly basis, and a slight advance from 4.1% to 4.2% on a yearly basis. A bad surprise on the topside could eventually wash out the past days’ optimism regarding the future of the Fed policy. So, fingers crossed, we really need the US inflation to fall, and to stay low.

But looking at energy prices, a sustainable fall in headline inflation could be wishful thinking for the upcoming months. US crude remains upbeat near the $82pb, as the latest EIA data showed that crude inventories fall more than 10mio barrel last week, as separate data showed that crude stored on ships at sea fell to the lowest levels in a year – a clear indication that OPEC’s supply cuts are taking effect. Plus, Russia is discussing with OPEC to extend oil-export cuts and Saudi is expected to prolong its supply cuts.