The Federal Reserve (Fed) Chair Jerome Powell’s Jackson Hole speech was boring, wasn’t it? Powell repeated that inflation risks remain to the upside despite recent easing and pointed at resilient US growth and tight US jobs market, and reiterated the Fed’s will to keep the interest rates at restrictive levels for longer. The US 2-year pushed above 5%, as Powell’s comments kept the idea of another 25bp hike on the table before the year end, but the rate hike will probably be skipped in September meeting and could be announced in the November meeting instead, according to activity on Fed funds futures. The US 10-year yield is steady between the 4.20/4.30%. The S&P500 gained a meagre 0.8% last week, yet managed to close the week above the 4400 mark and above its ascending trend base building since last October, while Nasdaq 100 gained 2.3% over the week, although Nvidia’s stunning results failed to keep the share price above the $500 mark, even though that level was hit after the results were announced last week. And the disappointing jump in Nvidia despite beating its $11bn sales forecast and despite boosting its sales forecast for this quarter to $16bn, was a sign that the AI rally is now close to exhaustion.
What’s up this week?
This week will be busy with some important economic data from the US. We will watch JOLTS job openings tomorrow, Australian and German CPIs and US ADP and GDP reports on Wednesday, to see if the US economy continues to be strong, and the jobs market continues to be tight. On Thursday, Chinese PMI numbers, the Eurozone’s CPI estimate and the US core PCE will hit the wire, and on Friday, we will watch the US jobs report and ISM numbers. Note that the US dollar index pushed to the highest levels since May after Powell’s Jackson Hole speech. The EURUSD is now trading a touch below its 200-DMA, even though the European Central Bank (ECB) chief Lagarde repeated that the ECB will push the rates as high as needed. Yet, the worsening business climate, and expectations in Germany somehow prevent the euro bulls from getting back to the market lightheartedly, while the yen shorts are comforted by the Bank of Japan (BoJ) governor’s relaxed view on price growth – which remains slower than the BoJ’s goal, but the possibility of a direct FX intervention to limit the USDJPY’s upside potential keeps the yen shorts reasonably on the sidelines, despite the temptation to sell the heck out of the yen with the BoJ’s incredible policy divergence versus the rest of the developed nations.
Here, get more stimulus
The week started upbeat in China and in Hong Kong, after the government announced measures to boost appetite for Chinese equities. Beijing halved the stamp duty on stock trades, while Hong Kong said it plans a task force to boost liquidity. The CSI 300 rallied more than 2% and HSI jumped more than 1.5%. But gains remain vulnerable as data released yesterday showed that Chinese company profits fell 6.7% last month from a year earlier. That’s lower than 8.3% printed in June, but note that for the first seven months of 2023, profits declined 15.5%, and that is highly disquieting given the slowing economic growth and rising deflation risks, along with the default risks for some of the country’s biggest companies. Evergrande, for example, posted a $4.5 billion loss in the H1.
Therefore, energy traders remain little impressed with China stimulus measures. The barrel of US crude trades around the $80pb level, yet the failure to break below a major Fibonacci support last week – major 38.2% Fibonacci retracement on the latest rally, keeps oil bulls timidly in charge of the market despite the weak China sentiment. Oil trading volumes show an unusual fall since July when compared to volumes traded in the past two years. That’s partly due to weakening demand fears and falling gasoline inventories, but also due to tightening oil markets as a result of lower OPEC supply. We know that the demand will advance toward fresh records despite weak Chinese demand. We also know that OPEC will keep supply limited to push prices higher. Consequently, we are in a structurally positive price setting, although any excessive rally in oil prices would further fuel inflation expectations, rate hike expectations and keep the topside limited in the medium run.
