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Markets Morning - Powell not that dovish but traders read him that way, stocks up, USD down

Market Analysis /
Greg McKenna / 27 Aug 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.29am Monday August 27)

Fed Chair Jerome Powell said at Jackson Hole Friday that, “if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate”.

BUT, it was comments on inflation and growth which took the markets attention and knocked the USD a little lower while buoying stocks where the S&P 500 closed at a new record high of 2,874.69. Powell said, “While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating”.

Neither comment is inconsistent, and the sentences following the one that highlighted no risk of overheating reinforce the Fed will keep tightening. it’s just that Friday the market chose to read Powell dovishly.

Which is where the US dollar troubles lay, that and a reasonably weak durable goods (-1.7% ) I should say . It’s down at 95.16 in USD index terms, Euro is back up at 1.1622 this morning for a gain of 0.7% since this time Friday morning. USDJPY is at 111.31, and the Pound missed the Euro’s bus sitting at 1.2851 this morning. That the USD (Euro) move all happened in a short space of time and then petered out is testament to Powell’s influence and then a lack of catalysts as the week ended and many northern hemisphere traders are still on holidays.

On the commodity bloc currencies the resolution – hopefully – of the political turmoil in the Australian government helped the Aussie dollar rally up to 0.7330 this morning from a low around 0.7238/39 on Friday when the spill was on. The Kiwi is at 0.6686 and the Canadian dollar sits at 1.3020.

Back to stocks now and the S&P 500 rose 0.62% to close at 2,874. It’s interesting that stocks have taken a different view of the US economic outlook to the curve right now. They see a Fed unlikely to choke off growth whereas bond traders increasingly fret a choke is coming. The Dow finished at 25,790 for a half a percent gain while the Nasdaq 100 was 0.97% higher at 7,485.

Europe had a better day of it as well although they did underperform the US. The DAX was 0.24% higher, the CAC about the same and the FTSE in London was 0.2% higher. Here at home SPI traders knocked 1 point off Friday’s 3 point gain for the ASX200. The fact the government is so far behind in the latest poll may worry some – but one of the best market timers I know reckons the ASX is set to head higher again soon.

On commodity markets the rally in oil continued. A bit of that was the USD but the technical break and news a big Chinese buyer will be back for US crude helped drive prices around 1.5% higher. WTI ended the week at $68.72 while Brent finished at $75.82. Copper was higher too ripping 2% in Hgc1 terms to $2.7085 a pound while Gold might have broken out with a $20 gain, 1.75%, to $1205. The CRB is up 1.13% as a result of the above and other moves.

EM currencies were mostly a  bit firmer with multiple 1%+ moves for last weeks losers on Friday. Bitcoin is driving higher and is at $6668 this morning while the 2-10 curve is at 18.6 points with the 2’s ~2.63% and the 10’s at 2.825%     

Oh, and Tesla. late Friday night US time Elon Elon Musk and Tesla announced that the company is not going to be taken private after all. I’ll leave it to your imagination, the investors who apparently wanted the company to remain private, and the SEC as to what happens to Musk and the share price in the next little while.

On the data front we can ease into the week here at home. China is set to release industrial profits, then tonight we get the Ifo business climate and expectations data out of Germany, the Chicago Fed releases its national activity index, and the Dallas Fed manufacturing index. Given Robert Kaplan’s recent musings I’m expecting that to be pretty solid.

Have a good day.  

Macro Stuff that affects everyone and everything – either today or eventually


  • Powell delivered a masterful speech in Jackson Hole Friday. It was one which said if the economy continues to evolve the way the Fed expects then rates will keep rising. But it was also one that reinforced the gradual nature of those moves higher against this backdrop. AS I highlighted in the Introduction, Powell said “While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating“.
  • But he followed that sentence with the following, “this is good news, and we believe that this good news results in part from the ongoing normalization process, which has moved the stance of policy gradually closer to the FOMC's rough assessment of neutral as the expansion has continued. As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate”.
  • It’s not exactly dovish is it? But the market choose to look at it this way because of USD and bond positioning together with the recent data flow in the US make that the path of least resistance. You should take a few minutes and read the speech yourself. I think you’ll also see that it’s a pretty good defence of what the Fed is doing the next time the US President complains about rates rising.   


  • I’ve done a lot of work on Amazon this year in my work with advertising agencies as we talk about consumers and where they are headed and what’s affecting them. What’s really interesting is that if you look at Jeff Bezos’ shareholder letter of 1997 you see that he has been essentially executing of that plan of putting the customer first and using technology to build a better experience to put the customer first. Anyway, the algorithms Amazon pioneered and which are now ubiquitous across global finance are a big part of low inflation it was argued at Jackson Hole over the weekend.   
  • What’s interesting about this algorithmic economy is that it impacts both inflation and pricing power – just over the weekend at Jackson hole Alberto Cavallo, an associate professor at Harvard Business School argued, “In the past 10 years online competition has raised both the frequency of price changes and the degree of uniform pricing across locations”.  And then BoE chief economist and MPC member Andrew Haldane suggested the concentration of power in a few big brands meant that central banks could run looser policy. That also implies weaker pricing power for companies and lower inflation for any given level of economic growth. It all adds to a real sense from observers that the message from policy makers at Jackson Hole is not to get to worried about inflation.
  • And on the 2-10 curve, which the Fed has suggested is less important than the front end spread, it’s under 20 points and the recessionistas are getting antsy. Anyway, here’s an interesting one from Nordea markets. Apparently google searches for “curve flattening” are the highest ever. Martin Enlund, chief analyst at Nordea Markets wonders if this time is different. Here’s his tweet, the light blue is the google search numbers.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • The S&P 500 has broken to a new high and it does not look done yet. That’s my sense and it’s the sense of one of my favourite chartists on Twitter Henry Zeberg Jensen who says prices are still rising. Here’s his chart. 3,000 anyone???
Source: Twitter Screenshot
Source: Twitter Screenshot
  • And it being Monday it’s time to catch up on where the CESI scores re for the major regions and nations. What’s notable here is that even though the Atlanta Fed pushed up its guesstimate for Q3 growth from 4.3% to 4.6% Friday the CESI score for the US continues to fall – it’s now around 14 points behind the EU, 30 behind the UK, and 45 behind Australia. It’s easy to see in these circumstances, and with a big miss on durable goods, why the market read Jerome Powell as dovish.
Click on me, I'll expand
Click on me, I'll expand
  • And just quickly on China and US trade talks. The delegation returned home over the weekend and the Wall Street Journal reported that on the issues being discussed up to 40% could be dealt with immediately, 40% over a few years, but that at least 20% are intractable and non-negotiable. More here.

Have a great day's trading.

Greg McKenna

Chief Market Strategist


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