Category: Briefings

Summary and Price Action Rundown

Global risk assets are attempting to stabilize after a sharp three-day countertrend selloff in high-flying tech stocks spilled over into broader market sentiment. S&P 500 futures indicate a 0.5% higher open after the index sank 2.8% yesterday for a three-session decline of 7.0%, reducing its year-to-date upside to 3.1% and falling further below last Wednesday’s record high. The tech-heavy Nasdaq is set to regain 1.3% at the open after underperforming again yesterday, sinking 4.1% to take its losses since last Wednesday to 10.9%, though its year-to-date gains remain robust at 20.9%. Equities in the EU are also rebounding moderately but Asian stocks were lower overnight. A broad dollar index is hovering slightly above it recent 28-month low, while longer-dated Treasury yields are also steady, with the 10-year yield at 0.67%. Brent crude prices are holding near $40 per barrel after yesterday’s steep plunge.

Equities Set to Rebound Despite Negative Vaccine News

After headlines early yesterday evening indicated that AstraZeneca has halted its phase three vaccine trial, US stock futures initially dropped but are moving higher this morning, led by tech shares. Yesterday, after US stock markets had closed, news that a potentially severe reaction in a vaccine trial participant led AstraZeneca to pause its final phase testing program, which is targeting a pool of roughly 50,000 participants around the world. Details of the ill participant’s condition were scarce, but experts note that such occurrences are relatively common in experimental drug trials and the illness probably has no direct link to the vaccine. AstraZeneca is in the process of assessing the situation and its trial safety protocols. Shares of the drug giant are only down 1.4% in London, while the stock prices of Moderna and Pfizer, two of AstraZeneca’s main competitors in the race to develop a vaccine, are 4.8% and 1.3%, respectively, in US pre-market trading. This comes amid overt political pressure in the US for a vaccine to be ready by the US election, which spurred the CEO’s of leading biotech companies to issue a letter yesterday that set forth a joint pledge not to cut corners in the vaccine development process in order to beat its competitors to market.

Congress Faces a Challenging September

With the House and Senate soon to be back in session, the stalled pandemic relief bill and another government funding measure needed to prevent a shutdown after September 30^th top a daunting legislative to-do list. As Congress gets set to resume after its month-long recess, both sides prepare for an inevitable showdown over the fate of the deadlocked stimulus package, which economists generally believe is needed to counteract the ongoing economic fallout from coronavirus lockdowns. Senate Majority Leader McConnell, who has been in private discussions with fellow Republicans in an attempt to strike an accord over the stimulus, has stated he will announce the new GOP bill and move towards a vote this week in an attempt to provide a contrast to the Democrats’ HEROES Act proposal. Currently, sources are reporting the new Republican bill would feature about half the original $1 trillion previously sought before the recess, which Democratic leaders have already characterized as inadequate. Expected provisions include aid for schools and small businesses, funding for the USPS, and $300/week jobless benefits, halving the $600/week benefits that expired in July. Pelosi and Mnuchin have come to an informal agreement on a continuing resolution separate from the stimulus to prevent the government from shutting down through December, stoking hopes that compromise there could spill over into stimulus negotiations, but the current gap in acceptable package size appears no smaller than before the August recess.

Additional Themes

US-China Issues Feature on the Campaign Trail – With President Trump making his “tough on China” stance a key election issue and accusing Joe Biden of being soft on Beijing, reports indicate that Biden will seek to respond today. In a campaign speech in Michigan, Biden is expected to announce his plan to impose a 10% tax levy on companies that offshore operations, while offering a 10% tax credit to companies that create jobs in the US. Over the holiday weekend, President Trump again mused about “decoupling” the US and Chinese economies, emphasizing that he is focused on boosting US manufacturing jobs to “end our reliance on China once and for all.”

Wall Street Ponders US Election Risk – As partisan passions run high and unrest continues in some major US cities, with the ongoing pandemic as a grim backdrop, investment strategists are increasingly focused on managing the potential turmoil related to a disorderly election process and outcome. Some, like Morgan Stanley, are focused specifically on the potential for a drawn out vote counting process, replete with legal challenges, which would extend the volatility around the US election, which is usually fleeting, into a multi-week condition.

Summary and Price Action Rundown

Global risk assets are under pressure again this morning as the countertrend selloff in high-flying tech stocks looks set to continue today. S&P 500 futures point to a 0.6% lower open after the index lost 0.8% on Friday, taking its losses last week to 2.3%, reducing its year-to-date upside to 6.1%, and falling further below last Wednesday’s record high. With losses concentrated in richly-valued IT stocks, the tech-heavy Nasdaq is set for a more downbeat open at -2.0%. Equities in the EU are also down but Asian stocks were mostly higher overnight. A broad dollar index is continuing to climb from its recent 28-month low, while longer-dated Treasury yields are stabilizing after Friday’s spike, with the 10-year yield at 0.69%. Brent crude prices are sliding toward the lower end of their recent range, falling below $41 per barrel.

Countertrend US Equity Market Dynamic Extends

Although the magnitude of the stock market moves have moderated since last Thursday, which featured the steepest losses in months, underperformance for tech shares is continuing this morning and weighing on broader indexes. Equity markets continue to undergo what analysts characterize as a rotation among sectors as investors dump high-performing tech shares in favor of traditional “value” stocks, such as financials and industrials. The IT stock swoon last Thursday, which began more modestly on Wednesday with a bout of modest underperformance, extended into Friday with the tech-heavy Nasdaq dropping 2.7% on top of its 5% loss over Thursday’s trading period. Futures suggest that the Nasdaq will open another 2% lower later this morning. Analysts are pondering an array of potential catalysts for the move rather than one specific trigger. Some suggest that recent economic data, which has shown remarkable resilience of the US recovery (more below), alongside upbeat news about progress toward a vaccine may be eroding the relative appeal of technology, a strong performer during the pandemic, versus laggard cyclical stocks that are expected to rebound in the post-pandemic environment. Others have opined that the selloff may simply be a healthy and corrective move after the massive outperformance of tech stocks finally led to an inevitable bout of profit-taking among investors. There is also speculation that SoftBank spurred an unsustainable melt-up of tech stocks through large-scale buying of call options over the past several months. Analysts are pointing to this recent bout of volatility as a possible preview of the months ahead, particularly with the combination of institutional investors returning from summer, ready to seriously scrutinize potential economic pitfalls, and the inherent volatility that will be present leading up to the November 3^rd presidential election.

 

Upside Surprise in Friday’s Nonfarm Payrolls Induces a Flicker of Treasury Volatility

The fifth straight upside surprise for the monthly US jobs report hoisted longer-dated Treasury yields upward despite some nuanced underlying details. Data from the BLS on Friday morning showed the US economy added 1.371 million jobs in August, easing from July’s downwardly revised 1.734 million, and just topping expectations of 1.35 million. Though total nonfarm payrolls topped estimates, government payrolls accounted for nearly a quarter of the gain at 334K, and largely reflected a temporary hiring hike for the 2020 census. Isolating private payrolls, 1.027 million was still strong but missed the consensus of 1.325 million, and showed a continuing downtrend from last month’s revised 1.481 million. Retail trade added 249K jobs, while leisure and hospitality added 174K, education and health services grew by 147K, financial activities by 36K and manufacturing by 29K. August’s private sector job growth marked the slowest pace since the recovery began in May, with total payrolls remaining at about 11.5 million below pre-pandemic levels. The US unemployment rate fell for the fourth consecutive month, down to 8.4% from 10.2% in July, placing well below consensus estimates of 9.8%. While the unemployment rate may indicate far better-than-expected results, the Labor Department had noted that misclassification of workers who should have been labeled as unemployed has been a prevalent data bias in recent months. Adjusted for this misclassification, the rate could have been nearly 0.7% higher in August. The participation rate increased to 61.7%, possibly reflecting more Americans looking for work amid the expiration of the $600 weekly benefits. One troubling figure from the report showed that permanent job losses rose nearly 534K to 3.4 million.

Additional Themes

US-China Tensions Continue to Percolate – During a press conference on the Labor Day holiday, President Trump again mused about “decoupling” the US and Chinese economies, emphasizing that he is focused on boosting US manufacturing jobs to “end our reliance on China once and for all.” President Trump has made his “tough on China” stance a key election issue, accusing Joe Biden of being soft on Beijing. Also, reports indicate that the US could announce a ban on cotton from Xinjiang, the province at the center of China’s crackdown on Muslim minorities.

Brexit Developments Weigh on the Pound – After tagging its highest level against the dollar for more than two years on September 1^st, the pound has retreated 2.5% versus the dollar, with losses today spurred by deepening doubts about the feasibility of a Brexit agreement. Another round of key negotiations is beginning today after a set of hardline remarks from Prime Minister Johnson, who called October 15^th the deadline for an agreement that can be enacted by year-end. Reports also indicated that the UK government is considering steps that may weaken elements of the Withdrawal Agreement, specifically in regard to Northern Ireland.

Summary and Price Action Rundown

Global risk assets are mixed this morning ahead of key US labor market data as investors ponder the drivers of yesterday’s sharp equity selloff. S&P 500 futures indicate a flat open after the index plunged 3.5% yesterday, cutting its year-to-date upside to 6.9% as it retreated from Wednesday’s record high. With losses concentrated in richly-valued IT stocks, the tech-heavy Nasdaq is set for a more downbeat open. Equities in the EU are slightly higher, with a boost from news of a possible bank merger, while Asian stocks retreated overnight. A broad dollar index is hovering above its recent 28-month low, while longer-dated Treasury yields are holding in their recent range ahead of the US jobs report, with the 10-year yield at 0.64%. Brent crude is continuing its meandering price action this week, rising above $44 per barrel.

August Nonfarm Payrolls in the Spotlight

Ahead of this morning’s August nonfarm payroll report, yesterday’s tally of initial jobless claims apparently improved but were flattered by a revised calculation method. With the rapid rebound in employment from May and June now easing, consensus forecasts for August’s nonfarm payrolls sit around 1.4 million new jobs with a 1.3 million gain in private payrolls, and the unemployment rate falling to 9.8%. Vice President Pence is set to discuss the numbers on CNBC later this morning. In the leadup to this consequential jobs report, this week’s series of labor market indicators have been somewhat mixed. The number of initial jobless claims declined to 881K in the week ending on August 29^th, falling well below consensus estimates of 950K, and continuing the improvement momentum from the prior report’s 1.011 million. Continuing claims also fell to 13.254 million from 14.492 million, and beat expectations of 14,000K. This week’s data now marks the lowest reported level since the pandemic took hold in early March. While the positive tone of these figures comports with much of the other recent economic data showing a broadly steady pace of recovery, a new seasonal adjustment methodology took effect in yesterday’s report, deflating what would have been a much higher tally. Specifically, this jobless claims figure would have been 1.020 million if the previous calculation methods were used. While the adjusted state claims data suggests further recovery, the same indications are not portrayed by initial claims for Pandemic Unemployment Assistance (PUA), which rose again for a third consecutive week. PUA claims came in at 759K, up from 607K last week, and topping 489K in early August. The report highlights that layoff numbers are still a prevalent concern, and state and PUA claims now total 28 million. Moving forward, analysts will have to factor in PUA and Pandemic Emergency Unemployment Compensation (PEUC) numbers to get a full picture of the heath of the labor market.

US Equities Abruptly Surrender Some Recent Gains

After Wednesday’s broad rally for the S&P 500 masked rare underperformance for high-flying tech shares, the IT sector selloff gathered pace yesterday, dragging down broader indexes. Shares of leading tech companies posted steep losses yesterday, and are struggling to rebound this morning in pre-market trading, but still retain gaudy year-to-date gains. Analysts are pondering an array of potential catalysts for the move rather than one specific trigger. Shares of Facebook, Amazon, Netflix, Google, Apple, Microsoft, and Tesla lost 3.8%, 4.6%, 4.9%, 5.0%, 8.0%, 6.2%, and 9.0% respectively yesterday, extending Wednesday’s losses, but still boast 2020 upside of 41.8%, 82.3%, 62.5%, 22.8%, 64.7%, 37.8%, and 386.5%. Though the downside for stocks was the steepest since June, analysts are broadly characterizing the price action as healthy and corrective, noting that “overbought” and expensive tech sector shares had rendered US equity markets increasingly top-heavy. On the question of timing, some analysts focused on headlines over the past two days indicating that vaccine trials are heading into the final stages, with the prospect of a viable vaccine by the fall undermining some of the advantage of tech giants and other winners of the pandemic over the rest of the market. Prior instances of encouraging vaccine headlines have spurred similar price reactions, with investors temporarily rotating away from tech shares in response and dragging down the broader indexes. Additionally, the timing of the move, on the Thursday before Labor Day, may have exacerbated the selloff with less than ideal levels of liquidity.

Additional Themes

Risk of US Government Shutdown Eases – Reports last night indicated that House Speaker Pelosi and Treasury Secretary Mnuchin agreed to cooperate in an effort to avoid a government funding lapse later this month. With Congressional Democrats and the White House at odds over the stalled pandemic relief bill, some analysts have pondered the potential for this already fraught negotiation to become entangled in the wrangling over funding the government past September 30^th. For context, Congress must agree on legislation to authorize government spending into the new fiscal year or face a government shutdown, with the last shutdown from December 2018 to January 2019 spanning a record 35 days amid controversy over funding for President Trump’s promised border wall with Mexico. A Continuing Resolution (CR) to fund the government past the election is considered the most likely option, with a spokesperson for Speaker Pelosi indicating that she favors a “clean” CR, rather than one that attempt to encompass terms from the deadlocked stimulus bill.

Looking Ahead and Happy Labor Day! – The holiday-shortened week in the US features some August inflation data and another round of initial jobless claims data, while the European Central Bank meeting will be in focus on Thursday, with the Bank of Canada the day before. To our US readers, enjoy a pleasant holiday weekend!

Summary and Price Action Rundown

Global risk assets are mixed this morning after a strong start to September as investors await more US labor market data and monitor fiscal and monetary developments in the EU. S&P 500 futures point to a 0.5% lower open after the index jumped 1.5% yesterday, increasing its year-to-date gain to 10.8% and registering a new all-time high. Equities in the EU are outperforming on the prospect of more fiscal and monetary stimulus (more below), while Asian stocks were mixed overnight. A broad dollar index is continuing to edge above its recent 28-month low, while longer-dated Treasury yields are comfortably back in their recent range, with the 10-year yield at 0.65%. Brent crude is sinking back toward $43 per barrel.

More US Jobs Data Due Today

This morning’s release of initial jobless claims for the week ending August 29^th is the next in a series of increasingly consequential US labor market readings this week, culminating with tomorrow’s nonfarm payroll report. Unemployment filings for last week are forecast to again fall below the closely-watched 1 million threshold after the readings from the two weeks in mid-August indicated a degree of backsliding. For context, the week ending August 7^th featured the lowest tally of new claims since the height of the pandemic at 971K and marked the 20^th straight week of declining filings since the historical peak of 6.9 million in the last week of March. Meanwhile, continuing claims for the week ending August 22^nd are expected to hover around 14.0 million, only a moderate improvement from 14.5 million the prior week. This comes after yesterday’s ADP employment figures significantly undershot expectations for August as private businesses hired just 428K workers over the month, less than half of the expected 950K. While the labor market continues to rebound from the record 19 million job losses in April, only half of those jobs have been recovered so far. Industries underpinning the recovery include service providers such as leisure and hospitality (129K), education and health (100K), and professional and business employment (66K). Goods producers added 40K jobs during the month driven by increases in construction and manufacturing employment, as well as natural resources and mining. Large companies have driven the increases in employment as shown by private payroll data, where hiring was up 298K in contrast with midsize companies and small firms which sat at 79K and 52K, respectively. These numbers vary greatly from the expectations for nonfarm payroll data due on Friday, though such divergences are common due to ADP’s difference in methodology. With the rapid rebound in employment from May and June now easing, consensus forecasts for August’s nonfarm payrolls sit around 1.4 million new jobs with a 1.3 million gain in private payrolls, and the unemployment rate falling to 9.8%.

EU Fiscal and Monetary Policy in the Spotlight

French President Macron has announced a fiscal stimulus package while the European Central Bank (ECB) frets over the strength of the euro. The so-called “Relaunch France” program features €100 billion in spending on wage enhancements, tax breaks, and green economy initiatives. Analysts note that the composition of the package represents a pivot from direct pandemic relief measures to longer-term investments in French workers and the economy. This comes alongside news that German Chancellor Merkel and her government are set to suspend limits on deficit spending for next year as well, with an expectation that costly labor market support measures will need to be extended. Germany has approved €218 billion in additional spending this year. These headlines have put a floor under the euro this morning after the single currency had slid 1.7% since its intraday, multi-year high versus the dollar on Tuesday, with the selloff spurred in part by ECB jawboning. On Tuesday, as the euro crested $1.20 for the first time since May 2018, ECB Chief Economist Lane indicated that the strength of the currency is a headwind to the central bank’s reflationary efforts, which implies that it may prompt further easing, a position echoed in a subsequent Financial Times article citing ECB sources.

Additional Themes

Vaccine Headlines in Focus – Yesterday, the CDC alerted states to be ready for vaccine distribution by November 1 as analysts suggest that the earliest results from the advanced trials being led by AstraZeneca, Moderna, and Pfizer could be published as early as the middle of this month. Final results, which under normal circumstances would be required before drugmakers seek approval for a vaccine, are unlikely to be available before year-end, though analysts note overt political pressure to accelerate the process. Earlier this week, Dr. Fauci raised the possibility that the trials could be suspended if initial results were overwhelmingly possible.

Visa Data Shows Resilience – Earlier this week, Visa reported US payments volumes for August grew 7% year-on-year, marking a slight downtick from the 8% increase in July. Transaction trends were consistent with the overall economic data releases that have been showing stable growth throughout the second quarter. US credit volumes shrank 8%, consistent with July, and debit volumes growth fell two points to 24% for the month. Travel-related cross-border volume was down 70%, though e-commerce, excluding travel, remained at a notable 15%. August’s slight deceleration is likely attributable to the curtailing of key unemployment benefits at the beginning of the month as well as the ongoing Covid-19 resurgence in certain US hotspots. Moving forward, analysts will be highly attuned to consumer demand signals given the expiration of several CARES Act relief elements and deadlocked talks over the next stimulus bill.

Summary and Price Action Rundown

Global risk assets are continuing their strong start to September as investors await US labor market data, which is expected to be solid. S&P 500 futures indicate a 0.6% higher open after the index climbed 0.8% yesterday, increasing its year-to-date gain to 9.2% and registering a new all-time high. Equities in the EU are outperforming, while Asian stocks were mostly higher overnight. A broad dollar index is backing off its recent 28-month low, while longer-dated Treasury yields are fluctuating near the top of their recent range, with the 10-year yield at 0.68%. Brent crude is advancing back toward $46 per barrel in anticipation of bullish US inventory data.

US Jobs Data in Focus

This morning’s release of the ADP tally of private sector employment for August is the next in a series of increasingly consequential US labor market readings this week, culminating with Friday’s nonfarm payroll report. The ADP jobs figure is expected to rebound to 1.0 million after it showed that private businesses in the US hired just 167 thousand workers in July, dramatically undershooting both the record high 4.3 million increase in June and consensus expectations a 1.2 million rise. For context, the ADP jobs number is seen as a relatively poor indicator of the more closely-followed nonfarm payroll reading, but given the uncertainty surrounding August labor market data, it may be more closely scrutinized today. This comes ahead of tomorrow’s release of initial jobless claims data for the week ending August 29^th, which is forecast to again improve to below the closely-watched 1 million threshold after the readings from the two weeks in mid-August indicated a degree of backsliding from the previously ongoing downtrend. Economists generally expect this Friday’s reading of August nonfarm payrolls to show continuing strength, with a forecast of 1.4 million new jobs after 1.8 million the prior month, and the unemployment rate falling to 9.8%. Though official data reflects a solid pace of improvement in US labor market conditions, yesterday’s Gallup polling on worker attitudes conveyed heightened uncertainty, with 27% of US workers saying they are worried about being laid off, a figure up from 15% last year, with the degree of concern significantly higher for non-white versus white workers.

Deadlock Continues for US Pandemic Relief Bill

The latest signals from Capitol Hill suggest little progress toward a compromise. House Speaker Pelosi yesterday expressed continued disappointment with the White House’s negotiating position on the currently stalled fiscal support bill, criticizing the Trump administration’s unwillingness to fund what she characterized as essential Covid-19 containment efforts at the state level and again rejecting a staged approach to the bill, which Treasury Secretary Mnuchin apparently suggested again in their call yesterday. Congressional Democrats have consistently shunned the option of a piecemeal series of agreements, citing Senate Leader McConnell’s expressed unwillingness to vote on more than one bill and potential loss of leverage by segregating the more contentious issues, like aid to states, from the more consensus segments, like augmented unemployment benefits. This comes after Secretary Mnuchin in his Congressional testimony yesterday reiterated the need for prompt fiscal support for impacted US workers and pledged to re-engage with House Democrats on the stalled negotiation. Meanwhile, the support provided by the executive orders issued by President Trump early last month remains unevenly implemented and Senate Republicans are preparing a possible vote on a “skinny” $500 billion version of the bill when they return from recess next week. White House Chief of Staff Meadows has indicated that he hopes the Senate bill could form the foundation for a more comprehensive deal but it is unclear how this would be different than the piecemeal approach already rejected by Speaker Pelosi.

Additional Themes

Post-Abe Policy Continuity Likely – Chief Cabinet Secretary Suga, a close ally of outgoing Prime Minister Abe, indicated that he is in the running for the premiership and pledged continuity with “Abenomics.” He emphasized the maintenance of PM Abe’s relations with the Bank of Japan and cited the importance of additional monetary easing to meet potential economic challenges going forward. The yen is continuing to retrace more of its reflexive appreciation versus the dollar from last Friday following PM Abe’s surprise resignation.

Oil Prices Seek Non-OPEC Support – The American Petroleum Institute has reportedly forecast a sixth straight week of US crude inventory declines, which is helping steady crude futures near their recent highs this morning. The Energy Information Administration will release the official stockpile data later today. This comes as analysts are pondering the ability of oil prices to hold their gains even as OPEC and its allies begin to taper their extraordinary supply curbs. Analysts have cited the weaker dollar and China’s inventory build as providing some support, but the demand picture of the coming months is expected to the be key driver of any move out of the current tight price range for both international benchmark Brent crude and US benchmark WTI.

Summary and Price Action Rundown

Global risk assets are mostly higher this morning as investors monitor generally encouraging manufacturing data from China and the EU, though varied price data and pronounced dollar weakness represent a challenge to central banks. S&P 500 futures point to a 0.3% higher open after the index edged 0.2% lower yesterday, paring its year-to-date gain to 8.3% and backing off Friday’s all-time high. Equities in the EU are posting upside as well, while Asian stocks were mostly higher overnight. A broad dollar index is extending its declines to a new 28-month low, while longer-dated Treasury yields are hovering near the top of their recent range, with the 10-year yield at 0.72%. Brent crude is advancing back toward $46 per barrel.

Solid Global Factory Data Reflects Crosscurrents Amid the Recovery

Another reading of China’s purchasing managers’ indexes (PMIs) for August, as well as finalized EU PMI readings, signaled ongoing recovery though some details were more nuanced. China’s privately-compiled Caixin manufacturing PMI for August, which features more input from mid-sized and private sector enterprises than China’s official PMI gauges, topped expectations, printing 53.1 versus a forecast of 52.5 and July’s 52.8. This marks the fastest pace of expansion for this series in nearly a decade. For context, PMI readings over 50 denote expansion in the sector. This bettered the official version of the manufacturing PMI released yesterday, which remained muted and slightly undershot expectations at 51.0. In the EU, the final prints of August manufacturing PMIs roughly matched their preliminary estimates, though Germany’s was revised down tow 52.2 from 53.0 and France was revised up from 49.0 to 49.8. This left the EU-wide August manufacturing PMI unchanged from its initial reading at 51.7. However, among the sub-indexes of these relatively encouraging EU factory PMIs, analysts point to notable weakness in the employment gauges. Later this morning, final prints for August’s US Markit manufacturing PMI will be released, as will the alternate metric of ISM manufacturing PMI, with both expected to stay firmly in expansionary territory.

Deepening Contrasts in EU and US Inflation Data

With the Fed putting US inflation metrics in the spotlight by revising its definition of price stability, the downside surprises in EU inflation raise the stakes for the European Central Bank. August consumer price index (CPI) for the EU sank into negative territory at -0.2% year-on-year (y/y), missing estimates of 0.2% y/y and declining from 0.4% the prior month. The core CPI reading, which strips out more volatile components, was 0.4% y/y but still missed a forecast of 0.8% and was down from 1.2% the prior month. The month-on-month pace of CPI remained at -0.4%, matching the disinflation rate of July. These readings, however, are not undermining the euro this morning, as the single currency reaches a new high versus the dollar since May 2018, with this appreciation trend representing a headwind to the reflationary efforts of the European Central Bank (ECB). Market-based gauges of longer term inflation expectations in the EU remain relatively depressed, though they have recovered significantly from the doldrums of the spring. Former ECB President Draghi’s favored metric, the EU 5-year/5-year forward inflation swap, has clawed its way back from 0.7% in March to 1.3%, but this remains near the bottom-end of its historical trading range and far from the ECB’s 2% inflation target. Meanwhile, the most recent slate of US price data from July registered broad upside surprises, with core CPI reaching 1.6% y/y. Though this reading also remains well shy of the now average 2% inflation target of the Fed, market-based gauges of US inflation expectations are generally back to levels close to or above 2% and the declining dollar is a tailwind for reflation.

Additional Themes

Australian Central Bank Retains Easing Bias – Although key rates and the ongoing asset purchase program were left unchanged in their meeting overnight, the Reserve Bank of Australia expanded its loan program for banks and the accompanying communications suggested that options for additional easing are being considered. The bias toward additional easing did little slow the Australian dollar’s ongoing ascent versus its US peer, with today’s slight appreciation registering a new high for Australia’s currency since June of 2018.

Beijing Weighs in on TikTok Buyout – Late last week, China’s Commerce Ministry expanded its list of restricted technologies for export to cover TikTok’s functions, effectively allowing it veto power over any potential sale of the US business of the app to suitors like Microsoft and Oracle. Chinese officials have likened the prospective sale to thievery, as the impending ban on the social media platform by the Trump administration precipitated the bidding. This adds an additional layer of complexity to a deal that analysts already expected to be a challenge to complete by the September 15^th deadline imposed by the White House.

Summary and Price Action Rundown

Global risk assets are mostly higher morning as investors continue to digest the monetary policy shift announced by Fed Chair Powell last week and ponder incoming global economic data. S&P 500 futures indicate a 0.3% higher open after the index climbed 0.7% on Friday, increasing its year-to-date gain to 8.6% and registering its sixth straight all-time high. Equities in the EU are modestly higher, while Asian stocks were mixed overnight, with the Nikkei outperforming on news of Berkshire Hathaway investments in Japanese companies (more below). The dollar is hovering around its more than two-year low, while longer-dated Treasury yields are edging back to the top of their recent range, with the 10-year yield near its highest level since June at 0.74%. Brent crude is advancing above $46 per barrel.

Global Economic Data Points to Continued but Uneven Recovery

China’s purchasing managers’ indexes (PMIs) for August signaled ongoing recovery, though with a muted pace for manufacturing, while Japanese data for July was mixed. China’s August PMIs were broadly upbeat, with the manufacturing gauge only slightly below estimates of 51.2, registering 51.0, which is roughly equivalent to the 51.1 pace of July, while services were strong at 55.2, topping a consensus estimate and the prior month’s reading of 54.2. For context, PMI readings over 50 denote expansion in the sector. The resulting composite PMI was 54.5, bettering July’s 54.1. Tomorrow, the privately-compiled Caixin PMI readings for China are due, with expectations for a slightly easing pace of expansion in this data series, which features more input from mid-sized and private sector enterprises than China’s official PMI gauges. Meanwhile, Japanese industrial production data for July outperformed expectations, rising 8.0% month-on-month (m/m) versus estimates of 5.0% after June’s 1.9% m/m pace. Nevertheless, the year-on-year (y/y) reading remained very depressed at -16.1%, though this was better than the -17.5% forecast and -18.2% y/y in June. Japan’s retail sales for last month, however, undershot projections at -3.3% m/m and -2.8% y/y, with both of these figures representing a deterioration from the prior month. This comes after Japanese assets have been whipsawed since Friday by news of Prime Minister Abe’s resignation and then news that Warren Buffett has significantly upped his investments in Japan (more below).

Dog Days for the Dollar

US economic figures continue to generally surprise to the upside though the overall recovery trend appears to be slowing and traders are focused on the murkier outlook for August and beyond, as well as Fed easing, all of which pressures the dollar. US economic data has thus far held up better than expected through the late July and August period that featured a resurgence in Covid-19 cases in a number of US hotspots. Though weekly initial jobless claims indicated a modest setback in mid-August, last Thursday’s reading for the week ending August 22^nd showed a renewed improvement trend. Meanwhile, US preliminary PMIs for August were stronger than forecast across the board, signaling continued expansion, and Friday’s U. Michigan metric of consumer confidence also topped estimates. The relatively encouraging US economic data, however, has not been supportive of the dollar, which continues to slide. A broad dollar index registered its lowest level since spring of 2018 on Friday, a trough it lingers near this morning. Traders are focused on a variety of headwinds for the dollar, including doubts about the sustainability of the US economic recovery, particularly in light of the failure to agree on the latest pandemic relief bill. The Fed’s proactive accommodation, resulting in increasingly negative real interest rates, is considered another key downside catalyst for the dollar. Market consensus is for continued depreciation, with speculative bets on further appreciation of the euro versus the dollar at their highest level of the past decade, according to the CFTC. Nonfarm payrolls this week could provide some interim support for the dollar but prior readings have been strong and still provided scant support.

Additional Themes

Warren Buffett Ups Japan Stakes – New that Berkshire Hathaway has spent roughly $6 billion accumulating stakes in Japanese trading companies lifted the Nikkei 1.1% and the yen, which tends to depreciate in response to positive market atmospherics, is down 0.5% versus the dollar this morning. The positions are said to be roughly 5% in Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo and Warren Buffett suggested that he might look to increase from this level. Shares of the conglomerates soared, and today’s upbeat price action in Japanese assets retraced a portion of Friday’s downbeat trading following the news that Prime Minister Abe is stepping down due to health reasons. Analysts suggest that the likely successor, Chief Cabinet Secretary Suga, is a continuity candidate and will ease investor concerns over the transition.

This Week – There is plenty of global economic data on the calendar this week and August nonfarm payrolls will be in the spotlight on Friday ahead of Labor Day weekend, along with another reading of weekly initial jobless claims on Thursday. Final readings of August PMIs in the US, EU, and Japan are also due. On the central bank front, the Reserve Bank of Australia has a meeting at which policy settings are expected to be held steady.

Summary and Price Action Rundown

Global risk assets are mixed this morning as investors continue to digest the monetary policy shift announced by Fed Chair Powell yesterday. S&P 500 futures point to a 0.3% higher open after the index held gains of 0.2% in yesterday’s seesaw trading session, increasing its year-to-date gain to 7.9% and registering its fifth straight all-time high. Equities in the EU are muted, while Asian stocks were mixed overnight, with the Nikkei underperforming after the resignation of Prime Minister Abe (more below). The dollar is sinking to a new multi-year low, while longer-dated Treasury yields are steady after yesterday’s rise, with the 10-year yield hovering at its highest level since June at 0.75%. Brent crude is holding above $45 per barrel.

Fed Monetary Policy Shift Announcement Leaves Questions

Markets have exhibited somewhat mixed reactions after the unveiling of a moderately more dovish formulation for inflation targeting and added nuance to the Fed’s stance on full employment left a meaningful degree of ambiguity. In his virtual Jackson Hole conference speech yesterday morning, Fed Chair Powell unveiled a new framework of price stability for the central bank that will tolerate inflation “moderately” above its target so that it averages 2% over time, referencing core personal consumption expenditures prices (which excludes volatile components like energy and food prices). Although analysts note that this new strategy will to some degree restrain the practice the Fed has followed for more than three decades of pre-emptively lifting interest rates to head off higher inflation, the exact interplay between the new target and interest rate or asset purchase policy was left unclear. St. Louis Fed President Bullard suggested that 2.5% inflation would be an acceptable level of overshooting, though Powell warned that “excessive inflationary pressures” would elicit Fed tightening. Meanwhile, Powell also indicated that its full employment mandate would be viewed going forward with particular reference to the lower-income segment. The Fed also committed to reviewing this policy every five years. These alterations to the Fed’s stance highlight that interest rates and other policy settings will remain exceptionally accommodation for the foreseeable future, though markets had already been pricing in an extended period of zero interest rates based on prior Fed guidance. At the September meeting, analysts expect that the Fed may more directly link their policy outlook to these revised mandates, known as “enhanced guidance.” Dallas Fed President Kaplan, however, indicated that there would be “no formula” for hitting the inflation target and suggested in his remarks today that extraordinary Fed easing programs should “sunset.”

Prime Minister Abe Resigns Due to Health

Japan’s longest serving Prime Minister will stay in office until a successor is determined by his party, but his impending departure weighed on Japanese equities and lifted the yen. The Nikkei underperformed regional peers overnight, closing 1.4% lower after initially falling over 3% on headlines regarding the upcoming move by Prime Minister Abe. Meanwhile, the yen, which tends to appreciate in times of market turmoil, is trading 1.2% higher versus the dollar. This news follows months of building concerns over Abe’s health, as he suffers a chronic digestive condition that had forced him to resign the premiership once already in 2007. As the architect of so-called “Abenomics,” an expressly reflationary combination of fiscal and monetary stimulus coupled with a reform program, analysts note some uncertainty over the continuation of his eponymous policy prescription, though reports today indicated that the Bank of Japan would persist with its current ultra-accommodative monetary policy program and Abe’s successor is expected to make few alterations to his blueprint. Nevertheless, Abe’s nearly 8-year tenure represented political stability and policy continuity that had been lacking after Prime Minister Koizumi ceded power in 2006, after which there were a revolving door of six premiers over six years, the first of which was Abe in his first truncated term. Abe also enjoyed a relatively stable relationship with President Trump, with Japan avoiding much of the trade policy friction and currency drama that has been leveled at other US trading partners. No timeline for choosing his successor has been announced and the next general election is not due until October 2021.

Additional Themes

Stalemate Continues of US Pandemic Stimulus – House Speaker Pelosi yesterday indicated that her call with White House Chief of Staff Meadows, which was their first contact in nearly three weeks, yielded no progress toward agreement on the latest pandemic stimulus bill. For context, this fiscal relief package has been in limbo after talks broke down earlier this month with the White House and House Democrats roughly $1 trillion apart, with no consensus on contentious issues like aid to states, the magnitude of unemployment benefits, and pandemic liability limitations for employers.

US Politics in Focus – Last evening on the closing night of the Republican National Convention, President Trump officially accepted his party’s nomination, touting his economic program in his acceptance speech and casting Joe Biden as a “Trojan horse for socialism.” US equity volatility futures and certain rates and currency derivatives convey a considerable degree of investor concern over potential turbulence surrounding the election date

Summary and Price Action Rundown

Global risk assets are mixed this morning after yesterday’s price action extended market trends associated with Fed accommodation ahead of this morning’s highly anticipated speech by Chair Powell, while last week’s US initial jobless claims data will also be in focus. S&P 500 futures indicate a 0.2% lower open after the index advanced 1.0% yesterday, increasing its year-to-date gain to 7.6% and registering its fourth straight all-time high. Equities in the EU are retracing some recent gains, while Asian stocks were mixed overnight. The dollar continues to fluctuate near two-year lows, while longer-dated Treasury yields are steady, with the 10-year yield in the middle of its recent range at 0.68%. Brent crude is holding near multi-month highs of $46 as Hurricane Laura lashes the Gulf of Mexico.

Investors Lean into Heightened Expectations for Fed Dovishness

Yesterday’s price action reflected doubling down on bets that this morning’s speech by Fed Chair Powell will deliver another historically accommodative pivot in monetary policy. Later this morning, Fed Chair Powell will be delivering his “Monetary Policy Framework Review,” a yearlong retrospective and projection of how policy will evolve going forward. He is expected to outline what could be the central bank’s most proactive posture in recent history to spur inflation back to the Fed’s target level. Specifically, market participants are expecting Powell to clarify the Fed’s express tolerance for overshooting the 2% price growth goal with a novel formulation of average inflation targeting. Along with the reassessed posture toward inflation, the Fed also, as indicated by the minutes from its July meeting, appears likely to reinforce its commitment to full employment. Powell’s speech could more formally link the Fed’s interest rate policies and asset purchase programs to the inflation target and full employment mandate, a policy approach known as “enhanced guidance.” Some analysts are characterizing this shift as an inversion of the anti-inflation campaign of famed Fed Chair Paul Volcker. Where Chair Volcker enacted inflation-busting measures, Chair Powell and his colleagues are committing to eliciting price-inflation after a decade of mostly falling short of their inflation target.

This speech comes after some market participants expressed disappointment at the lack of clarity on these expected policy shifts in the July FOMC meeting minutes, which were released last Wednesday. The minutes also suggested that the FOMC may not be as close as expected to consensus over enhanced guidance. Specifically, analysts seized on the characterization that a pivot to enhanced guidance would be appropriate “at some point” rather than the June minutes’ more specific timeframe “at upcoming meetings.” The minutes also related continued skepticism about using bond purchases for purposes of yield curve control.

Ahead of Powell’s speech, initial hesitancy across financial markets yesterday morning gave way to rising bets on another exceptionally dovish performance by Chair Powell. The dollar sank back toward two-year lows, helping propel precious metals prices higher, while longer-dated Treasury yields hovered in the middle of the current, exceptionally low, trading range, as US equities continue to register new all-time highs. This morning’s price action is more subdued.

Investors Alert for Signs of Slippage in US August Data

Last week’s tally of initial jobless claims will be in focus today after the prior reading showed a degree of backsliding. New filings for unemployment benefits are forecast to settle slightly lower to 1.0 million in the week ending August 22^nd. For context, initial jobless claims for the week of August 15^th rose by 1.1 million, above market expectations of 925,000 as the persistent impact of the Covid-19 pandemic weighed on the labor market recovery. The 4-week moving average eased to 1.18 million, the lowest since March, while continuing claims decreased to 14.84 million for the week of August 8^th, marking the lowest claims reading since April. While the averages across the pandemic period are still in an improving trend, the unexpected jump back up to over one million new claims raised concerns about the state of the economy amidst a bitter partisan divide over stimulus support for unemployed workers. Reports indicate that President Trump’s executive order offering $300 per week in augmented unemployment benefits, down from $600 under the CARES Act, is being taken up in a broad number of states but that implementation may take three to six more weeks, depending on the state.

Additional Themes

Oil Prices Steady as Hurricane Laura Lashes the Gulf – Though US production and refining in the Gulf region has been disrupted, crude prices have halted their pre-landfall rally as traders pause to assess the impact of the powerful storm as it moves inland.

US-China Tensions Percolate – Analysts noted China’s firing of test missiles in the South China Sea yesterday, characterizing this show of force as a warning to US carrier groups and bases in the region. Though financial markets have been broadly sensitive to US-China trade friction, and have reacted selectively to some other facets of the ongoing confrontation like the Huawei and TikTok/WeChat controversies, geostrategic posturing of this variety is generally discounted by market participants.