Jackson Hole Symposium – 25/08 – this year’s annual central bank Jackson Hole Symposium is entitled “Reassessing Constraints on the Economy and Policy” and will be closely scrutinised for evidence of a Federal Reserve, and central banks more broadly that might be concerned about the risks of overtightening monetary policy at a time when the challenges facing the global economy are numerous. Markets have been rising for several weeks on the basis that for all the Fed’s hawkish rhetoric the central bank will be forced to adopt a dovish pivot when it becomes apparent that inflation has started to top out. We’ve already seen in recent data that US inflation may well have peaked, however markets appear to be betting that it will somehow fall back quite quickly to the 2% target, at the same time as the Fed signals that rate rises are close to their end game. This seems unlikely given that CPI is still at 8.5% and the Fed Funds rate is between 2.25% and 2.5%. Furthermore, the Fed will want to be sure that inflation is falling at a sustainable enough pace before it signals any sort of dovish shift or pivot, especially if inflation proves to be sticky and stalls at around 5%. If inflation finds a base at this sort of level its highly unlikely the Fed will lean into any sort of guidance that suggests a rate cut is coming, which means that further rate rises are much more likely between now and year end, with consensus on a Fed funds rate of between 3.5% to 4%. If markets are looking for Powell to give any indication that the Fed might be about to go soft on inflation, they are likely to be disappointed. The idea that the Fed would start to reverse its rate hiking cycle if inflation is still well above 2% comes across inconceivable and its surprising that the market is even pricing it. This week Powell has the opportunity to prick that misconception.        US Q2 GDP – 25/08 – with the US now in a technical recession, having seen a -0.9% contraction, following on from a -1.6% contraction in Q1, this week’s numbers aren’t expected to tell us anything new about the state of the US economy. The decline in output was a symptom of sharp falls in inventories and gross private domestic investment, which appear to have been hobbled by sky high inflation. Gross private domestic investment also fell sharply falling by 13.5%, while personal consumption rose by 1%, with spending focussed on lower margin items as durable good spending fell by 2.6%.      US PCE Core Deflator (Jul) – 26/08 – having fallen back from a record 5.3% in March to 4.7% in May, we edged back up to 4.8% in June, while Core PCE jumped up to a record high of 6.8%. This jump higher appears to show that inflation is started to become much more embedded into the US economy, and will be something the Fed won’t want to see. It is these numbers that are likely to dictate the Fed’s reaction function on whether it chooses to go with another 75bps move or 50bps when it next meets in September, with the odds favouring a 50bps move. The likelihood of the Fed slowing the pace from 75bps at its last two meetings to 25bps is less likely than a 50bps move. Given the current tone amongst Fed policymakers the bias is more likely to lean towards a tendency to overtighten in the short term and ease off towards year end, than the other way around.   UK flash PMIs (Aug) - 22/08 – have remained in positive territory all of this year despite the combined challenges of rising prices and weakening economic activity. Hiring patterns have remained robust, and while costs have been rising businesses have been able to pass on the increase in costs. At the most recent PMI numbers enthusiasm about the economic outlook was starting to wane and with August being a slow period due to holidays we could well start to see economic activity on the PMI level start to slide into contraction territory.    Germany IFO Business Climate (Aug) – 24/08 – with water levels in the Rhine sliding below the minimum levels that can see trade up and down the river carry traffic and energy rationing already taking place in some German states it would be surprising to see any sort of recovery in German business confidence in August. In July the business climate index fell to 88.6 from 92.2 and the lowest levels since June 2020. The expectations index fell to 80.3 and levels last seen in May 2020, post the pandemic lockdown low of 69.4 in April 2020.   Harbour Energy H1...

With the summer coming to a close, Fed officials will head to Jackson Hole for their annual symposium. Financial conditions have loosened lately despite the forceful rate increases, which is counterproductive for the central bank. If they push back, that could spell trouble for risk assets but good news for the dollar.  Fed summer camp The top brass of the Federal Reserve will head to the central bank’s summer retreat in Jackson Hole, Wyoming on Thursday to discuss monetary policy. This venue has been used in the past to signal major policy shifts, so it is seen as an unofficial policy meeting. Fed officials are caught in a bind. Despite raising interest rates at the speed of light, their actions didn’t have the desired effects. Yields on government bonds have pulled back and stock markets have rallied with a vengeance since June, ignoring signals from policymakers that they are far from declaring victory on inflation.  As Chairman Powell pointed out, Fed policy is transmitted mainly through ‘financial conditions’, which is essentially a code phrase for bond yields and stocks. The central bank needs tighter financial conditions to slow down the economy and tame inflation, but they have been loosening instead.  That’s a problem for the Fed. Inflation is still running at 8.5% and looser financial conditions mean it might stay hot for longer. In turn, that would require more monetary tightening to compensate, putting unnecessary pressure on an economy that is already stalling.  As such, the Fed could push back, either by hyping the prospect of another three-quarter-point rate increase in September that markets currently see as a coin toss or through its balance sheet. The process to reduce the balance sheet has already started and will ramp up next month, with $95 billion in securities rolling off per month as they mature.  If Powell and his colleagues want to tighten financial conditions, all they would have to say is they are having conversations on this topic. It would be a hint that the pace can be ramped up further through active sales of bonds or mortgage backed securities, instead of the current passive rolloff. A more forceful tone could dampen the comeback in equity markets and simultaneously add fuel to the US dollar, which continues to steamroll its opponents. The energy crisis has ravaged the euro, the Bank of Japan’s refusal to tighten policy has crippled the yen, and the implosion in China’s property sector has dismantled the commodity currencies.  There’s also a barrage of US data releases, starting with the S&P Global PMIs for August on Tuesday, which will reveal whether growth and inflationary pressures continue to cool off. Other releases include durable goods orders on Wednesday, the second estimate of GDP for Q2 on Thursday, and the core PCE price index on Friday.  European horror show The past few weeks have been dreadful for the European economy, with the energy shortage pushing natural gas prices on the continent to new records while an intensifying drought in Germany dried up rivers and made it harder to transport supplies.  It’s been a horror show for German industry, whose entire business model used to rely on cheap energy. With gas prices so incredibly high, many companies are uncompetitive and perhaps unprofitable. And if Europe’s powerhouse is struggling, other countries won’t escape unscathed - the supply chain is too interconnected.  Traders will look to the latest PMI business surveys, due out on Tuesday, for an assessment of the damage. Forecasts point to a further cooling of the Eurozone economy in August, with the manufacturing index sinking deeper into contractionary territory and the services print just barely staying in expansion.  If anything, the risks seem tilted towards disappointment considering that European companies also have high exposure to China, where economic growth is evaporating at an astonishing pace. That could curb bets for a three-quarter-point rate hike by the ECB next month, something investors currently assign a 45% probability to, and spell more trouble for the euro.  The latest relief rally in euro/dollar was rejected by the 50-day moving average and if the Fed indeed strikes a hawkish tone next week while business surveys highlight the Eurozone’s economic problems, there could be another battle around parity.  British PMIs eyed too The United Kingdom will also get a glimpse at its own PMI surveys for August on Tuesday. It has been a gruesome year for sterling so far, which is underperforming even the war-stricken euro despite the Bank of England raising interest rates at every meeting.  Although the UK doesn’t import much energy from Russia directly, it is not immune to the energy crisis either. The trade trade deficit has blown up as a result and since the UK also runs a large government deficit, sterling has become very sensitive to any shifts in global risk sentiment.    In other words,...

Summary United States: Expansion Not Yet Heading to the Gallows An increase in real retail sales by our estimates and a rebound in industrial production in July offered evidence beyond recent jobs data that the U.S. economy is not yet in a recession. That said, with new orders in the manufacturing sector slowing sharply and housing activity continuing to tumble, data this week did little to change our view that a downturn in the coming quarters will be hard to avoid. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: Diverging Paths for Inflation in Canada and U.K. Headline inflation in Canada may be showing signs of cooling down. Overall CPI decelerated to a 7.6% year-over-year pace in July, driven by falling gasoline and energy prices. While inflation in Canada may have peaked in July, price pressures in the U.K. have not yet abated. Headline inflation surprised to the upside, reaching 10.1% year-over-year. We expect U.K. inflation to remain elevated for longer, as another sizable increase in electricity prices is planned for October. Next week: U.K. PMIs (Tue), Eurozone PMIs (Tue), South Africa CPI (Wed) Interest Rate Watch: The Fed Still Has More Work to Do We continue to look for the Fed to hike the federal funds rate another 75 bps at its September 20-21 FOMC meeting and to follow that up with a 50 bps hike in early November and a 25 bps hike in December. After that, we believe the Fed will take a break and see how the rate hikes it has implemented so far affect the broader economy. Topic of the Week: China's Renewed Slowdown Prompts Surprise Rate Cut The combination of COVID containment policies and a struggling property sector has led us to revise our annual GDP forecast consistently lower over the course of this year, and as of now, we believe China's economy will grow a little above 3%. We also believe risks are tilted toward even slower growth than we forecast, and July activity data released over the past few weeks reinforces that view. Read the full report

EUR/USD ranges this week as written Sunday were: 1.0298 to 1.0175. EUR/USD traded 1.0268 to 1.0122 or a 53 pips drop from 1.0175. Next week aligns as 1.0273 to 1.0150. What changed? 25 pips. We're looking for the close around 1.0150 then long again for next week. Big break for higher last week was 1.0420 and next week 1.0396. Oversold EUR/CHF at 0.9688 assists EUR/USD longs next week to target 0.9800's. EUR/JPY's big break at 136.95 broke below Monday and traded 200 pips to 134.93. Next week, 136.82 is the deciding factor for EUR/JPY shorts. Overall range is located from 137.15 to 138.16. Oversold EUR/CAD traded 113 pips higher then dropped 158 pips. The Friday close around 1.3088 would assist again to EUR/CAD longs and further help EUR/USD higher. EUR/NZD approaches 1.6297. A big drop is required for EUR/NZD longs next week or EUR/NZD is placed last to overall trade rankings. EUR/NZD traded its best day yesterday since last Wednesday at 295 pips higher. Last Wednesday traded 235 pips lower. No progress to EUR/NZD except trading normal ranges. EUR/AUD traded 322 pips this week and traveled straight up from Sunday at 1.4392. The move was required to alleviate severe overbought to AUD/EUR. AUD/USD is now fairly perfect to AUD/EUR alignment. Overall, EUR/AUD back to 1.4500's and 1.4400's for next week. EUR/USD driver pairs next week are EUR/CHF and EUR/CAD. GBP/USD range Sunday was located from 1.2178 to 1.2029. GBP/USD 1.2178 held at 1.2141 highs and lows at 1.2029 broke below to 1.1994 or 35 pips. GBP/USD was forced lower by overbought AUD/USD and NZD/USD. Next week 1.2149 to 1.1999 and extremely short range. Long for next week to match EUR/USD longs. GBP/JPY 161.99 traded to 159.00's and 163.00's in a fairly balanced trade week. Shorts next week with focus on 161.82. GBP/JPY larger range remains 148.00's to 168.00's. GBP/CAD traded 159 pips higher this week. A close Friday at 1.5400's then long again for next week. GBP/NZD traded 500 pips this week from 1.8700's to 1.9200's. Higher or lower for GBP/NZD at 1.9277. A significant move lower is required for longs next week. As written Sunday: focus is on deeply oversold wide range currency pairs: GBP/AUD, EUR/AUD, GBP/NZD, EUR/NZD, EUR/CAD, GBP/CAD. The primary concentration to oversold and trades is found in GBP/AUD, EUR/AUD, GBP/NZD and EUR/NZD. GBP/AUD as well failed to disappoint as GBP/AUD traded 383 pips higher this week and straight up from Sunday. Next week's range is located from 1.7378 to 1.7246. AUD/USD now trades oversold and long for next week with focus on 0.7024. AUD/CAD broke 0.9009 and traded 70 ish pips to 0.8951. Higher must break above 0.9020. AUD/NZD broke below 1.1012 and traded 22 pips lower to 1.0990. AUD/USD longs are assisted next week by AUD/CHF and AUD/CAD. NZD/USD longs for next week matches AUD. NZD/USD trades oversold from 0.6260's. NZD/CAD traded 100 pips lower from the break Tuesday at 0.8185. NZD/USD Longs are assisted by NZD/CHF and NZD/CAD as all are in compliance to longs. USD/JPY range this week 132.65 to 135.71 traded 132.58 to 135.49. Shorts for next week and higher prices assists to short profits. JPY cross pairs last weeks traded short ranges and this is positive as ranges are normalizing after months of non normal. This means moves are better predictable, better trades and normal ranges. USD/CAD despite 200 pips traded this week remains a problem currency. The 5 year average approaches at 1.2973. USD/CAD 200 pips is matched by DXY 145 traded pips this week.

The story into the end of the week is all about a repricing of Fed expectations. The market had been all excited about that recent softer US CPI read and tried its hardest to pressure the Fed into a more accommodative message. And yet, this hasn’t been the case.

Australia is expected to have added  25K new jobs in July. The sour market’s sentiment favors a bearish run on a dismal report.  AUD/USD is technically bearish and could extend its decline towards the 0.6850 price zone. Australia will report July employment data on Thursday, August 18. The country is expected to have added roughly 25K new jobs after gaining 88.4K in the previous month, while the Unemployment Rate is foreseen steady at 3.5%. Additionally, the Participation Rate is also seen as stable, at 66.8%. Wages remain well below inflation Ahead of the release, the aussie got hit by a key employment-related report, the Q2 Wage Price Index. The Australian Bureau of Statistics reported wages were up 0.7% in the three months to June, while the annual rate growth was 2.6%, slightly below the 2.7% expected. Still, it is the highest annual rate of growth since Q3 2014. Raising labor demand maintains unemployment at healthy lows, yet wage gains are still lagging behind inflation, which means that real wages are still going backwards. According to the latest official data, the Consumer Price Index stands at 6.1% YoY, more than doubling salaries’ gains. Poor wage growth undermined demand for the Australian dollar, which was further hit by a dismal market mood that boosted demand for the greenback. AUD/USD possible scenarios A solid Australian employment report would be cheered by market players but also have limited positive effects on the aussie, particularly if the market sentiment remains on the back foot.  A dismal report, on the other hand, should exacerbate the dominant trend and push the AUD further down across the FX board. Technically, AUD/USD is bearish. The daily chart shows that the pair has broken below the 38.2% retracement of its latest bullish run between 0.6680 and 0.7136 at 0.6960. The pair has also slid below a now flat 20 SMA while technical indicators head firmly south below their midlines. The immediate Fibonacci support is the 50% retracement of the aforementioned rally at 0.6907, followed by the 0.6850 price zone. Sellers may reappear if the pair manages to recover up to the 0.7020 price zone.

Summary With much of the world shunning Russia, countries have turned to the United States for the supply of key commodities. In this short special report we detail how Russia-related supply issues are helping propel export growth and are contributing to the normalization of the U.S. trade balance. U.S. export growth has started to turn a corner, with real goods exports outpacing imports amid a sizable lift in exports of industrial supplies & materials specifically. A look under the hood of recent industrial supplies strength suggests the gain was very much tied to goods that have been at the forefront of supply bottlenecks due to the Russia-Ukraine conflict. Categories associated with natural gas, oil and fertilizer accounted for nearly 70% of the gain in industrial supplies exports in June alone. Russia was previously a large supplier of solid fuel and natural gas to Europe, but as much of the world shuns Russia, the United States is helping to fill the gap by supplying more of those goods than it was before the war. According to the EIA, the U.S. became the world's largest liquefied natural gas (LNG) exporter during the first half of the year and data suggests the U.S. is supplying more to Europe specifically. It's unclear how long this boost will last for exports. Low inventories and colder months ahead suggest European demand should remain elevated, but a fire at a key U.S. LNG export facility is denting U.S. export capacity. We expect the conflict will continue to give way to strength in exports and a narrowing in the U.S. trade deficit. Import growth should continue to slow as goods spending moderates, and while the rest of the world is not immune to the broader economic slowdown, some of these Russia-related supply issues are helping propel export growth higher. Download The Full Special Commentary

The dollar has corrected around 3% from its highs seen last month. This has prompted a few questions about whether the dollar has peaked? Many trading partners would hope that to be the case, but the reality is that the Fed is likely to stay on track with its tightening. We think the dollar is more likely to retest its highs than correct much lower. Driving this view has been consistent rhetoric from the Fed that it will not be blown off target by some softer activity or price data. In fact, it now looks like US activity is accelerating again as lower gasoline prices leave more dollars in the pockets of US consumers. The 2023 US recession narrative looks a tough one to sell near term. And rising energy prices should continue to drive a wedge between the exporters of North America and the importers of Europe, meaning a much greater conviction of a recession in Europe. The ECB’s second 50bp rate hike on 8 September may well conclude its tightening cycle. Rate spreads and the energy income shock make it a very tough environment for the euro. EUR/USD should therefore drift near parity for much of 2H22. Elsewhere in Europe, the Swiss franc continues to be guided higher by the Swiss National Bank. Sterling remains vulnerable on recession fears. Beyond some substantial fiscal stimulus, sterling’s best hope is that the Bank of England delivers on most of the aggressive tightening currently priced into markets. Surging gas prices also spell trouble for the CEE4 currencies. The Polish zloty in particular looks unlikely to hold recent gains. Emerging market currencies have enjoyed a mini-renaissance over the last month. But a difficult external environment makes it hard to sustain those rallies until the dollar turns. Download The Full ING Economic and Financial Analysis

Investors embrace the ‘no recession’ story and take stocks higher. Treasuries remain inverted pointing to ‘a recession’. Gold waffles between maybe it is or maybe it isn’t. Oil under pressure as Saudi Aramco hints at upping production. Big week for the retailers – will it be Christmas in September? Try the Parmegiana Crusted Mahi Mahi. Stocks rose on Friday – posting another week of gains – marking the longest stretch since November 2021. The Dow advanced by 424 pts or 1.3%, the S&P up 73 pts or 1.7%, the Nasdaq raced ahead by 270 pts or 2.1%, the Russell up by 42 pts or 2% and the Transports gained 75 pts or 0.5%.  The mood was helped on Wednesday by the recognition that inflation might just be subsiding as Joey tried to make very clear -  Saying that “the CPI for July came in at 0% m/m….let me repeat that 0%”.......now that sounds great, but when you take out food and energy (which they do) the CPI for July rose by 0.3%...and y/y it is still up 8.5% - or near 40 yr. highs……  but this report did give investors a reason to think that the FED will ‘take a step back’ and raise rates by only 25 or 50 bps…. which they say – will prevent us from going into a recession… (Unless we’re already in one – that is still up for debate)  And here is another news flash- Congress just passed not 1 but 2 massive bills, One a Climate and Chips Bill – which they sold as a Chips Bill and the other a massive TAX and SPEND Stagflation bill …….and both spending bills are expected to only add to the inflation story, rather than reduce inflation as Chucky Schumer tells us. (In addition, they are hiring 87k new IRS agents to go after anyone with a ‘VENMO’ account…. You – know all of those billionaires that are moving money via VENMO and not telling anyone thereby avoiding millions of dollars in taxes! It’s laughable!).  So, my friends - ‘not so fast’…. While inflation did recede in July – one month does not negate the 17 months of advances – (March 2021 – present).  So, is it a bit early to rip off the bandage and celebrate?  I think so….remember – since we are seeing history repeat itself (1980/82 and 2021/22) – do not be surprised to see inflation and employment suddenly reverse course and move up in the months ahead – and all that means is – The FED should not change the pace or increment of increases that they have led the markets to believe is happening – meaning 75 bps should be the call, anything less risks the chance that they will be seen as ‘waffling’ – bowing to the pressure…..a mistake for sure.  For those of you NOT around in 1981 – soaring inflation also ‘retreated’ and unemployment mounted (rising to 7.4%) and the FED pivoted –  only to see inflation and unemployment rear their ugly heads and zoom higher – forcing the FED to re-pivot and force rates up to 21% to tame the beast…and that forced the country into a deeper recession – that lasted from July 1981 – thru November 1982 – One that may not have happened had the FED stuck to the plan.   So, I say – stick to the plan…. raise rates by 75 bps in September.  At the moment- the Treasury curve remains deeply inverted…. but don’t tell anyone. The inversion points to the idea that the FED tightening that is coming will send us into a deep recession….and remember- they haven’t said a word about reducing the balance sheet at all…by September – we were supposed to reducing it by $90 billion/month – how’s that working? Oil traded down 2% on Friday on the expectation that any disruption from the damaged pipeline – in the Gulf of Mexico would be short term at best – so any fear that supplies would be disrupted for any length of time are no longer an issue. 7 offshore deep-water platforms had been affected helping to send oil higher on Thursday….…. but that is no longer an issue and so the run up on Thursday was met with selling on Friday.  This morning – oil is trading down $4 to $88/barrel – Saudi Aramco telling us that they are ready to raise crude output to a maximum of 12 million barrels/day IF the Saudi gov’t requests it to meet demand.  Easing of covid restrictions in China and a pickup in demand in the airline industry is behind that request.  Funny, but the Chinese just reported weaker macro data (due to the lockdowns) – so which is it?  A stronger China or a weaker China?     Gold surged by...

There will be no shortage of data releases in the coming week and the RBNZ is poised to hike rates again. But with investors still undecided about the implications of the latest US inflation report on Fed policy, the FOMC minutes might steal the limelight. Meanwhile, thinning liquidity as more traders head for their holiday destinations increases the likelihood of big knee-jerk reactions as markets obsess about the pace of monetary tightening and the risks of a recession. RBNZ leading the tightening race The Reserve Bank of New Zealand is tipped to lift its official cash rate (OCR) for the seventh straight meeting on Wednesday, becoming the first major central bank to take borrowing costs as high as 3% in this cycle. However, the hawkish posturing may be reaching the end of the line and there are downside risks for the New Zealand dollar from the meeting. Back in May, the Bank had forecast that the OCR would peak just below 4% by September 2023. That means there would only be a 100-basis-point increase remaining if it hikes rates by 50 bps in August as expected. But that is assuming that the rate path doesn’t get revised lower. The RBNZ will publish updated forecasts in its quarterly Monetary Policy Statement and given the recent easing in energy and other commodity prices, policymakers might predict a slightly lower terminal rate. But it’s not just the inflation outlook that’s changing. Economic growth is slowing too. Consumption in New Zealand has been subdued lately and the jobless rate unexpectedly ticked up in the second quarter, prompting policymakers to emphasize the negative risks to growth in the July policy statement. Hence, the kiwi, whose rebound versus the US dollar picked up speed over the last week, faces the possibility of being knocked down by either a lower projection of the terminal rate or hints that the pace of tightening could soon switch to 25-bps increments, or both. Aussie hoping for more upside before next RBA decision In neighbouring Australia, the July employment report due Thursday will be the highlight, though wage data for the second quarter a day earlier will be important too. The Reserve Bank of Australia abandoned the use of forward guidance at its last meeting amid the uncertainty surrounding the forecasts for both inflation and growth, so the upcoming releases will likely play a significant role in swaying the odds for or against a 50-bps rate hike in September. Investors widely believe the RBA will raise rates by only 25 bps next month so the scope for expectations to shift towards a 50-bps move is quite large if the job figures impress. There may also be some clues about the size of the next hike in the minutes of the August meeting out on Tuesday. Having just surged back above the $0.70 handle, the Australian dollar could extend its strong gains if rate hike expectations are ratcheted up. Ahead of the domestic agenda, traders will be keeping an eye on some key metrics out of China on Monday. Growth in industrial output and retail sales is anticipated to have accelerated in July. If the data confirms that China’s recovery is gathering steam, there could be a boost for the aussie, as well as broader risk appetite at the start of the week. Will retail sales and Fed minutes spoil the mood? Signs of cooling inflation in America have tempered bets of a 75-bps rate rise by the Federal Reserve in September, hurting the dollar but reviving the stalled rally on Wall Street. It comes after both consumer and producer prices moderated in July. Next week’s slew of indicators will turn the attention back on the economic momentum. The housing market is one of the sectors of the economy being closely watched right now for possible signs of a downturn. Building permits and housing starts for July are released on Tuesday, followed by existing home sales on Thursday. There will be several clues on the manufacturing sector too as the New York and Philadelphia Feds publish their monthly surveys on Monday and Thursday, respectively, while industrial output is out on Tuesday. However, most of the focus will be on Wednesday when the latest retail sales numbers and the minutes of the Fed’s July meeting are due. Retail sales likely decelerated substantially in July and analysts have pencilled in month-on-month growth of just 0.1%, after jumping by 1% in June. Recent data that’s been on the soft side has had a mixed effect in dampening risk sentiment despite fuelling recession fears as the negative pressure has been countered by falling Treasury yields. However, with Fed officials standing firm on their determination to get inflation down towards their 2% target even after the CPI miss, the pullback in yields has likely gone as far...

Can stock markets continue to rally?  What a difference a week makes. Post last week’s weaker than expected July inflation print for the US, which saw annual headline CPI fall to 8.5% from 9.1% in June, the first positive inflation surprise for quite some time, and the market is in risk-on mode. Stock markets reached another milestone last week when the Nasdaq Composite index rose more than 20% from its mid-June low, to end its longest bear market since 2008. Added to this, the dollar has sold off sharply since its mid-July peak, with the dollar index losing 3%. The dollar had been inversely correlated with US stock markets for most of this year, thus, market bulls are looking for further dollar weakness if the stock markets continue to rally. However, the question now is, will the bull market continue? There seems to be two camps out there right now. On the one hand, those who think that the worst of the year’s market sell-off is behind us, now that US inflation looks like it has peaked, and on the other hand, those that are still concerned that the Fed has not finished its interest rate hiking cycle, that inflation is still too high and that the recent uptick in stocks is merely a bear-market rally, albeit an aggressive one. This week’s global economic data may determine who is right.  Below, we look at three events that could determine the direction of stocks and other risky assets this week.    1. FOMC minutes  There are two main pieces of data that we will be looking at this week, including the minutes of the July Federal Reserve meeting and US retail sales. The market had, on balance, concluded that the Fed’s press conference after the July meeting was dovish, with Fed chair Powell ditching forward guidance, refusing to rule out a smaller rate hike at future meetings and his comment that US interest rates at 2.25-2.5% was within the ballpark of neutral Federal Reserve interest rates. This was surprising to some, since at that time US inflation was at a more than 40-year high of 9.1%. However, last week’s cooler than expected inflation rate means that the next FOMC meeting will most likely go down to the wire, with the Fed expected to look closely at August NFPs and the August CPI report. The market has taken a dovish turn when it comes to the Fed’s next rate hike, there is now a 55% chance of a 50bp rate hike at the September Fed meeting, and a 45% chance of a 75bp rate hike. This is down from a 68% chance of a 75bp rate hike for September, just one week ago. Thus, this week’s minutes will be important to watch closely. Does the Fed really think that US interest rates are close to neutral and how much do they want to see inflation fall before they stop hiking rates? These will be important questions in the week ahead. They will determine if the Nasdaq can extend its recent 20% rally, and if some of the weaker US stocks, including meme stocks like AMC, can also continue their recovery. It will also determine the direction for the price of gold, along with the dollar. After the supposedly dovish press conference at the July meeting, the question now is, will the minutes throw a hawkish cat among the pigeons? If so, EUR/USD’s recent rally could be at threat after this pair failed to break $1.0270 resistance at the end of last week.    2. US consumer resilience  US retail sales, released on Wednesday, will also be watched closely as the market expects a slowdown of sales ex autos to -0.1% in July, after a 1% rise in June. However, the steeper than expected decline in US CPI last month, could boost sales. Added to this, there was an increase in the University of Michigan consumer sentiment survey that was released at the end of last week. Longer term inflation rates came down, with consumers expecting inflation next year to be 5%, down from 5.2% in July. Interestingly, consumers’ economic expectations edged up in August, according to the survey, particularly among low- and middle-income consumers, who are sensitive to inflation. This doesn’t mean that inflation is no longer a problem, 48% of respondents to the survey still blamed inflation for eroding their living standards, however, it suggests that there is a risk of an upside surprise to this week’s US retail sale figures on the back of falling gas prices.    2. UK CPI  Unlike the US, we do not expect the UK to follow suit and see a sharp decline in inflation for July. While economists expect inflation to remain flat on the month at 0%, the annual rate of headline CPI is...

We’ve just had an update on US inflation via July’s Consumer Price Index (CPI). Headline CPI, which includes food and energy, rose 8.5% compared to this time last year. This was below the consensus forecast of +8.7% which was in turn significantly lower than last month’s +9.1%. This was the first indication that inflation may have peaked, and we got another one the following day when Producer Prices also came in below expectations. While this is all good news, one month’s data doesn’t make a trend. Nevertheless, it was enough to give equities a significant boost, while the US dollar fell sharply. The probability of the Federal Reserve raising rates by 75-basis points at their next meeting in September fell from just under 70% to 40%. A 50-basis point increase is currently the most likely outcome, according to the CME FedWatch tool which calculates the odds using the fed funds futures markets. Recession? This CPI release rounds off a recent clutch of important market-moving updates. This began a few weeks ago when the US Federal Reserve raised rates by 75 basis points for the second successive month. That wasn’t a surprise, and the stock market rallied even as Federal Reserve Chairman Jerome Powell warned of further increases to come. But what did shock traders was the drop in GDP growth announced the following day. This was unexpected. It also means that the US is technically in recession, using the simple definition of two successive quarters of negative GDP growth. Now, it’s true that it’s the National Bureau of Economic Research (NBER) that officially decides whether the US is in recession or not. It takes unemployment and other factors into account, not just GDP. But we will have to wait months for confirmation, which rather spoils the effect. Of course, knowing if a country is in a recession isn’t particularly helpful for traders. The ‘technical’ definition doesn’t help, as quarterly GDP is one of the most backward-looking pieces of economic data around. In addition, the numbers are continually revised which is why the US needs a committee to rule on the issue. But by the time the NBER announces its decision, it’s quite likely that any recession will already be over. Blow-out payrolls Further complicating the situation were the latest Non-Farm Payroll numbers. These showed an increase of 528,000, way above the 250,000 expected. Also, there were upward revisions to the prior data. Putting all this together, US payrolls are now back to pre-pandemic levels having made back all the 21,568,000 jobs lost in early 2020. On top of this the Unemployment Rate dropped and is now hovering around 50-year lows. If the US is in recession, it’s got a funny way of showing it. But as more people go back into the workplace while GDP declines, then productivity must be falling. If that’s the case then there will be more downside pressure on growth. Hiking into a slowdown It does appear bizarre that the US Federal Reserve would be hiking rates aggressively in the face of an economy which, if not officially in recession, is obviously slowing sharply. But while investors are cheering the possibility that inflation has peaked, prices are still rising four times above the Fed’s 2% target. This requires higher interest rates. But higher rates will exacerbate the slowdown in economic growth. Yet unemployment is near record lows with plenty of vacancies in hospitality and healthcare, even if the tech sector is shedding staff. This would suggest that the US economy can deal with tighter monetary policy, although changes in interest rates act with a considerable lag. The Federal Reserve is clear that bringing down inflation is its number one objective, and to that end we should expect further rate hikes this year. But bond markets are also telling us something, and currently they predict that those hikes will be reversed out quickly as the economy continues to slow. As far as investors are concerned, there are some choppy waters to navigate. It’s more important than ever to stay nimble and alert.