By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – Sentiment wobbled yesterday despite solid US data, as markets priced a more hawkish path for Fed policy. Today, US PCE & final UMich sentiment data highlight the docket.
WHERE WE STAND – The Fed’s plan, right now, is to ‘run it hot’; incoming US data, meanwhile, says that things are already pretty toasty.
Yesterday brought a slew of upside surprises – a chunky upward revision to Q2 GDP, to +3.8% annl. QoQ; the lowest initial jobless claims print, at 218k, since July; and, a much better than expected August durable goods orders figure, +2.9% MoM. Once again, this data not only speaks to the continued resilience of the US economy, and robust nature of underlying growth, but also supports the idea that some of the labour market softness, in particular, is more reflective of an adjustment to changing trade policies, as opposed to a sign of deeper structural issues.
In reaction to all of that, participants unsurprisingly pared bets on Fed easing, with the OIS curve now discounting just 39bp of cuts by year-end, as opposed to the 45bp we had in the curve this time last week. The cross-asset fallout was also pretty much what you’d expect to see amid such a hawkish repricing, as the dollar continued to bound higher against major peers, Treasuries softened across a flatter curve, and stocks had a bit of a wobble on Wall St.
I’d argue, though, that the pricing out of Fed cuts because the economy is resilient enough not to need them is far from a bad thing, or a bearish narrative. Quite the opposite, in fact, as such a narrative reinforces two of the most important legs of my long-running equity bull case, namely that economic growth remains robust, and earnings growth remains resilient.
As such, I continue to view any equity dips as buying opportunities, with the path of least resistance leading to the upside. Frankly, the environment is akin to a goldilocks one, where the economy is ticking along nicely, risks to the outlook tilt to the upside, and the policy backdrop is to become considerably looser.
I’m also sticking with my bullish USD view, as risks to the outlook tilt increasingly to the upside amid the solid underlying nature of the economy, and with the Fed leaning in hard to provide extra support. Add that to the rather shambolic nature of developments everywhere else in G10, and the buck becomes not only the ‘cleanest dirty shirt’, but also leaves us potentially on the verge of a return to the ‘US exceptionalism’ theme.
Moving on, I’ve had a few questions in recent days about the continued tear higher in precious metals in recent sessions. Although gold took a bit of a breather yesterday, silver traded to fresh highs at $45/oz, while platinum and palladium chalked up solid gains as well. There’s a lot of chatter about whether this rally bodes poorly for sentiment at large, to which I’d remind folk that gold and the S&P have rallied in line with each other for the last three years, quite easily setting to rest the whole ‘PMs are rallying must be bearish risk’ idea.
Finally, I’d be remiss not to mention Gilts – ‘here he goes again!’, I hear you cry! No, don’t worry, I won’t go on a rant about the UK’s ongoing fiscal shambles today, but it was nonetheless noteworthy that as Govvies sold off across DM yesterday, it was the long-end of the Gilt curve that severely underperformed, with 10- and 30-year yields climbing 9bp apiece, taking the former to its highest level in three weeks. I remain of the view that we see 5% on 10s, and 6% on 30s, here in Blighty, before too long, potentially even before the Budget, which is still two long months away.
LOOK AHEAD – A light docket ahead today, thankfully, with almost nothing noteworthy scheduled during the European session.
Stateside, though, there’s a smattering of prints, with last month’s PCE report due, as well as final consumer sentiment stats from the University of Michigan. That sentiment metric is set to remain unrevised at 55.4, while the PCE figures should point to a core PCE deflator at 2.9% YoY in August, unchanged from the pace seen in July.
Elsewhere, Canada gives us the incredibly noisy, and rather futile, monthly GDP figures for July, while the Fed’s Bowman and Barkin speak this afternoon.
Finally, all that’s left for me to do is provide the usual warning for potential gapping risk on any unexpected news over the weekend, then hunt down a spot from which to watch the Ryder Cup later on, while enjoying a cold beer or three to wrap up the week.