Intraday Market Thoughts Archives

Markets are set for a quiet end to the week with SPX and DOW closing at new highs, while Nasdaq remains dragged by higher yields as cyclicals continue to gain favour. A strong US PPI reading helped to lift the US dollar on Thursday, highlighting the focus on price growth. The consumer will be in the spotlight Friday with the UMich consumer sentiment survey. Below is the latest sign of Cardano's resilience against Ethereum as ADA/USD regains $2.00. Ashraf has constantly pointed out over the past 6 weeks how Cardano contine to outperform most major cryptos (showing smaller declines than those seen in BTC and ETH). 

The latest trade in global appears to be based on the belief that inflation is cresting and delta will be cresting soon, at least in the United States.

What's tricky about the trade is that no one knows what's coming next. Both the inflation and covid puzzles will take months to sort out and market participants will be along for the ride.

On Wednesday, the US dollar sold off on flat CPI number but on Thursday it turned higher again as PPI beat expectations at 7.8% compared to 7.3% expected. Core producer prices were similarly strong.

That ebb and flow is likely to be a microcosm of trading in the next year. The multitude of potential skews in pricing data makes it challenging to define how these will finally determine the final headline figure. CPI showed that auto prices are topping but how much of the gains they give back and how soon is a mystery.

Keep in mind that markets aren't just pricing in 2% vs 3.5% inflation or when those levels will be reached. The market has little reason to fear an overshoot in prices. The real risk is that a wage-price spiral puts the Fed behind the curve and leads to a jarring set of surprise hikes and upends the low rate environment. To be sure, that's a tail risk but given new highs in US equities, it's a a risk like no other.

Looking ahead, the UMich consumer sentiment survey will offer some insight on the health of the consumer, but the larger market mover may again be inflation. They survey includes 1-year and 5-10 year views on prices and if those shift even slightly, the market will take note.

A broad decline in the US dollar following a US inflation print that matched consensus highlights market uncertainty around the path of Fed rates. Comments from Evans and Barkin also underscore the rift at the FOMC. The 83 double barrier in USDX coincided with 1.17 support in EURUSD. 

US CPI rose 5.4% y/y compared to 5.3% expected on Wednesday, but clearly Mr Market wasn't expecting the same thing as economists. Rather, it was fearful of a higher print that would tip the FOMC towards tapering in September at a quicker pace. Fed tapering is no longer a question of when, but how much. Thus, the Fed could well start reducing asset purchases in Oct or Nov but at a more modest pace than expected. 

Instead, the CPI report showed plenty of reasons to believe that prices are cresting. Core CPI was in line at 4.3% y/y and a four-month low of +0.3% m/m.. Gasoline contributed a 41.8% y/y rise but oil prices have steadied in the past two months. If crude stays near $70, that contribution will be 0% in less than a year. Used auto prices have been a talking point in this report and rose 0.2% m/m after three months of at least 7.3% m/m rises. Those will eventually put negative pressure on the headline.

The inflation numbers came shortly after two Fed centrists – Evans and Barkin – pushed back against an earlier taper. Both said they wanted to see a few more months of jobs data. Markets had recently been considering a quicker taper starting in September, but Nov/Dec taper at a slower pace is more likely.

With that, the dollar fell sharply on the report, sinking as much as 50 pips initially. That price action highlights just how tuned-in the market is to inflation and the FOMC. This is undoubtedly a fundamentally-driven market at the moment as these numbers an non-farm payrolls prove.

Recent price action in gold, bonds and the US dollar on Monday underscores a shift at the Fed towards an earlier taper. USD lost ground today against most commodity currencies, with CAD, AUD and NZD the strongest while CHF, JPY and EUR lag behind as yields soar. US 10 year yield post their 5th straight daily gain, appearing to eyere their next key target at 1.40% ahead of Wednesday's US CPI. Chicago Fed president Charles Evans, a notable Fed dove speaks today. The Premium trade long EURCAD was stopped out at 1.47 and will be re-assessed later this week. 

Monday's JOLTS data underscored Friday's strong non-farm payrolls report. It pegged June job openings at a record 10.07 million compared to 9.28M expected. The quits rate also climbed to 2.7% from 2.5%. The abundance of jobs available indicates that payrolls will stay strong in the months ahead.

Also on Monday, the Fed's Bostic said another month or two of strong jobs data would be enough for him to start a taper. He also echoed Bullard in saying the taper should be faster than after the financial crisis.

The hawkish shift continues to reverberate in the market. It contributed to Monday's flash crash in precious metals and it's keeping a bid in the dollar and selling in bonds. At the same time, the declines Monday in oil and other commodities show the market is keeping a close eye on delta risks. China in particularly will eventually need to shift away from its strategy of total suppression towards living with the virus. That could be a messy process.

Looking ahead, the commentary regarding tapering has been centered around known doves: Bullard, Kaplan and Waller predominantly. The dots and Powell's comments suggest that's still a minority but on Tuesday evening, we'll hear from Chicago Fed president Evans. He often aligns himself with the core of the FOMC and a shift from him would be a strong hint that Powell will tee-up a September taper announcement at Jackson Hole on Aug 26.

 

Nearly 365 days after hitting its $2075 high, gold gets a double punch by strong US figures on Friday and an Asia-style flash crash in early Monday trade. Thin liquidity conditions, exaggerated by light summertime staff played a big part. The fact that bond yields and USD were relatively muted, highlights the liquidity nature of the $70 collapse within less than 10 mins. But Friday's stellar US jobs report will likely trigger fresh selling bouts in metals in the days ahead. +900K NFP combined with larger than expected fall in the unemployment (from 5.9% to 5.4%), over 119K in upward revisions and 0.4% in average hourly earnings m/m, raise chances that Fed tapering of asset purchases will begin in Q4. Rather than persistent selling at the lows, gold will likely see offers hitting rebounds. We saw such activity exactly this same time last year, days after gold hit its record highs. The question then becomes whether we will see a break below 1600, similar to the breakdown of 2013-2014.  The answer to that question is found in the video from 14:30 min