High Impact Events – September 2021 Week 4

There are 3 high impact events in September 2021 Week 4

Expect Powell’s speech on 29 September to carry on the same narrative from Week 3.

I do not expect the Core PCI and PMI to have material impact on the markets

  1. FOMC have already stated their narrative of bond tapering to tentatively start from November.
  2. Correction has already started. $SPX is already down 5% . Technically the market has not rebounded yet.

For my readers, do not let your guard down in Week 4. The correction has started and $SPX is still down 5%. Notice the lower highs and lower lows. There is no sign that the correction has recovered yet.

All eyes are also now on the impending debt limit drama coming up which could accelerate further correction from next week

 

High Impact Events – September 2021 Week 3

There were four high impact events in September 2021 Week 3

The four events were all from the FOMC.

The Federal Reserve is wrestling with how to continue getting Americans back to work after the historic COVID-19-induced downturn while guarding against a persistent surge in inflation.

It’s a delicate balance.

Citing an outlook for faster inflation but slower economic growth than it previously forecast, the Federal Reserve on Wednesday signaled plans to begin tapering its bond buying stimulus by year’s end and possibly raise interest rates in 2022, a year earlier than it had anticipated.  

The central bank is buying $120 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term rates. It reiterated it will continue the purchases at that pace “until substantial further progress has been made toward” the Fed’s goals of full employment and 2% inflation. 

For a second straight meeting, the Fed said the economy “has made progress toward these goals.”

And in its statement after a two-day meeting, Fed officials said, “If progress continues broadly as expected (toward the Fed’s employment and inflation goals), the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”

At a news conference, Fed Chair Jerome Powell said the central bank could well announce that it will start cutting back the market-friendly bond purchases at its next meeting in early November.

Ian Shepherdson, chief economist of Pantheon Macroeconomics, expects the Fed to start scaling back the purchases in November, unless Congress fails to resolve its standoff over raising the government’s debt ceiling, or borrowing authority. Under that scenario, Powell said he expects the purchases to conclude by the middle of next year.

The Fed launched the bond buying at the start of the pandemic to prevent Treasury and mortgage markets from freezing up amid investor panic, and then to push down long-term interest rates.

“Now we’re in a situation where they still have a use but their usefulness is much less, as a tool,” Powell said.

The Fed left its key short-term rate near zero but projected it could modestly raise it next year to about 0.3% and it will end 2023 at about 1%, above its June forecast of 0.5% to 0.75%, according to officials’ median estimate.

Nine Fed of 18 Fed policymakers now predict at least one rate hike next year, up from seven in June, a split that indicates the Fed could raise the rate by about half of the quarter point increase that is typical. And the officials now foresee three hikes in 2023, up from two in June, and two more in 2024.

 

High Impact Events – September 2021 Week 2

There is only one high impact event in September 2021 Week 2.

US producer prices likely accelerated further in August. The headline rate may rise from 7.8% to close to 8.5%, while the core rate could poke above 6.5% (from 6.2%). However, the month-over-month increase may slow from 1.0% (both the headline and core) in July to around half as much in August.  For the headline, it would be the smallest increase of the year. After trending lower in July and most of August oil prices over the past two weeks. With WTI pushed above $70  again, it is a timely reminder that higher oil prices are not inflationary but rather the opposite.  The past three US economic downturns were preceded by a doubling of the price of oil.

The Fed issues two reports in the coming days: the Beige Book, which few read, many talk about, and rarely contains surprises.  The general takeaway is likely that many businesses still cannot find the workers they desire at the pay they offer, supply chain disruptions persist, and the broad economic expansion may have slowed a bit in recent weeks.  The high-frequency economic data has mostly disappointed, including the nonfarm payroll jobs gain.  Consumer confidence has suffered. Most states have reported an increase in the number of covid cases. 

The other report that the Fed issues, which tends not to be discussed nearly as much but has new information is on consumer credit.  With households reportedly flush with transfer payments and supposedly less commuter-related expenses, one might be surprised to learn that consumer credit (excludes mortgages but includes auto, student loans, and credit cards) is at a record high.  It rose by $93.3 bln in Q2 20.  The previous quarterly record was Q1 16, when consumer credit rose by $64 bln. According to the Bloomberg survey, the median forecast calls for consumer credit growth to slow to about $28.5 bln in July after a record $37.7 bln increase in June, which followed the record $36.7 bln in May.  

High Impact Events – September 2021 Week 1

The undoubted highlight of September 2021 Week 1 was the fall in Non-Farm Employment Change of 235k versus analysts’ estimate of 1053k.

In his recent Jackson Hole Symposium speech, Chair Powell noted that at “the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year”. 

In the same paragraph however, he also emphasised a need to monitor “the further spread of the Delta variant”. This latter point has proved prescient given the severity of the third wave of COVID-19 now being experienced by the US and, of course, August’s nonfarm payrolls.

At less than one third of the average of the prior three months, August’s 235k increase was a shocking outcome, particularly as these jobs would have been finalised in mid/late-July when new delta cases were but a fraction of the current level. There were some odd outcomes by industry such as leisure and hospitality stalling after increasing 350k per month for the past six, but no definitive reason to believe August’s print should be dismissed as a statistical aberration.

The questions that need to be asked at this point are: (1) did August’s payroll outcome come about because of changing demand or lingering supply constraints; and (2) how far off course does it put the economy in pursuit of full employment, a pre-requisite for rate hikes. 

Given job openings are at historic highs and other indicators of labour demand remain strong, the August nonfarm payrolls surprise looks to stem from supply constraints. This assertion is backed up by the participation rate remaining unchanged for the past four months, 1.7ppts below its pre-pandemic level. If we assume, as the world is, that this surge in US Delta cases will be brought back under control soon, the uncertainty presently impeding job matches should abate in coming months.

This one outcome is enough to preclude a September taper announcement. But, unless it proves the first of a string of weak outcomes, a taper decision at the December meeting will be made, allowing the process to still run to our existing forecasted timetable of January to June 2022.

Employment growth does not have to bounce back to near a million a month for this to occur. Ahead of the August print, we had anticipated a material weakening in job creation from September, with gains from that point to end-2022 forecast to average 450k – a little over half the pace of May to July, and only 80k more than August’s print if prior month revisions are incorporated.

Importantly, job creation of this scale would not only be strong enough to eradicate the remaining pandemic employment deficit of 5.3 million by September next year, but would also, come December 2022, see the creation of a quarter of the jobs that could have been established absent the pandemic, based on the pace of employment growth in the 12 months immediately prior to the pandemic.

Not only can we therefore still justify a first-half 2022 taper timeline, but also a first rate hike in December 2022. This, of course, assumes the current wave of COVID-19 in the US does not get any worse, which is why the FOMC now need to wait until December to make their decision.

However, it is important to emphasize here that August’s weakness was due to supply rather than demand. If average monthly employment growth instead slows materially below 450k into year-end due to a marked weakening in demand, the FOMC will find it difficult to forecast full employment by end-2022. Knowing well from their GFC experience the challenges a protracted recovery poses for an economy and its policy makers, this is not a situation the Committee will want to risk. Hence, if such downside risks crystalize, a taper decision is likely to be further delayed and its pace slowed while rate hikes would be pushed out into 2023.

High Impact Events – August 2021 Week 4 #Jackson Hole Symposium

Here are the high Impact Events for this coming week.

All eyes will be on the Jackson Hole Symposium on 27 August.

This year’s meeting sees the main focus shift onto the Federal Reserve (Fed), with many believing we could see Jerome Powell lay the groundwork for a tapering programme given the rise in inflation.

That surge in both core personal consumption expenditures (PCE) and consumer price index (CPI) inflation has brought forward expectations for tightening at the Fed, although there are still some who hope that we could see price pressures ease as things normalize.

The idea is to utilize monetary policy to drive down unemployment, with inflation allowed to overshoot the 2% target for a period of time. It is worthwhile noting that the US economy remains 5.7 million jobs short of where it was before the Covid-19 pandemic.

The Fed have employed a policy of rock-bottom interest rates and a lofty $120 billion worth of monthly purchases of Treasuries and mortgage-backed securities (MBS).

The chart below highlights the unprecedented rate of asset purchases undertaken over the course of this crisis, with the sharp rise in Treasury securities in stark contrast to the gradual efforts in the wake of the 2007 financial crisis.

That highlights how the Fed will want to start to trim back on the size of monthly purchases before long, with the rise in inflation giving one cause to start tightening monetary policy.

However, while it has been commonly accepted that Powell will look towards the Jackson Hole Symposium as a perfect platform to outline the timing and size of their tapering, we have started to see some uncertainty creep in of late.

Interestingly, while markets have long been confident of an economic recovery and tightening of monetary policy, the CFTC positioning in the two-year treasury notes does highlight a potential shift in that tone.

The move back into positive territory this month marks the first time in three-years that the market has betted against higher yields and tighter Fed policy. That is notable given the fact that we had been looking towards this meeting as a basis for tighter monetary policy

Part of the reason for this recent uncertainty is the rise of the Delta variant, with the country exhibiting a sharp increase in cases over the course of the past two-months.

While US President Joe Biden will be unwilling to establish fresh restrictions, there are concerns that a lack of controls could see the health care system under pressure.

That rise tallies up perfectly with the increase in the Delta variant as a share of the cases in the country. Unfortunately, there is no guarantee that the Delta variant is the worst iteration of the virus.

FOMC minutes highlight lack of consensus

Last week saw the release of the minutes from the Federal Open Market Committee (FOMC), with the group striking a somewhat mixed tone. On one hand, members appeared to be confident that their employment targets could be achieved this year, laying the basis for a potential tightening of policy. The minutes highlighted that the Fed do expect to taper at some point this year, as they seek to trim the monthly purchases of $120 billion of Treasury bonds and mortgage-backed securities.

However, timing remains a key concern that appears to divide opinion. With differing opinions on whether to prioritise unemployment, inflation, or Covid-19 cases as a key concern, it seems the group are finding it more difficult to find a consensus than many had thought.

With that in mind, we head into this Jackson Hole Symposium with far less confidence that Powell will lay out a definitive blueprint of how and when the Fed will starting trimming their asset purchase programme.

This has resulted in the market adopting a bullish stance that the Fed may rein in their hawkish stance regarding the tapering programme.

The Nasdaq has been one of the biggest benefactors from the ongoing loose monetary policy stance from the Fed. That is reflected in the fact that assets typically flow towards value stocks and out of the Nasdaq when treasury yields rise and central banks tighten policy.

With that in mind, this index looks to be a major benefactor if Powell decides to hold off on explicitly laying out a tapering plan. The longer the Fed holds off, the longer the Nasdaq will likely outperform. With that in mind, last week’s FOMC minutes have led to a swift record high for the index after a 61.8% retracement. Those gains are likely to be heightened if we are to see a continued dovish stance from Powell.

On the flip-side, a hawkish stance and clear roadmap for tapering this year would likely see this index fall back as traders become fearful that the huge stimulus package could soon be unwound.

Stay cautious and as always , remember to put stop losses for bubble stocks

High Impact Events – August 2021 Week 3 #FOMC

Here are the high Impact Events for this coming week.

The CPI has been increasing every month . It will come as no surprise that for August, the CPI should follow the same trend, up.

indeed , a rising CPI will result in a higher interest rate. The US Treasury 10 yr note yield has been on an slight upward trend even though the overall trend is still bearish.

Fed officials have started to beat the tapering drums. This past week, another two senior policymakers threw their weight behind dialing back stimulus soon. One of them was Vice Chairman Clarida, the Fed’s second in command. The other was Board Governor Waller, who went as far as saying that if the next couple of employment reports are strong, the Fed should get the ball rolling in September already. Both are permanent voters in the FOMC, so their views carry weight. 

The dollar’s path this week will depend on the CPI result. It could determine whether the prospect of a September tapering announcement is realistic or not. The hotter inflation is, the better the chances that the Fed gets moving early. 

In general, this week should be relatively calm for equities as long as TNX maintains its overall bearish trend even though there is a minor bullish trend up this week in anticipation of a higher CPI.

High Impact Events – August 2021 Week 2 #CPI

Here are the high Impact Events for this coming week.

The CPI has been increasing every month . It will come as no surprise that for August, the CPI should follow the same trend, up.

indeed , a rising CPI will result in a higher interest rate. The US Treasury 10 yr note yield has been on an slight upward trend even though the overall trend is still bearish.

Fed officials have started to beat the tapering drums. This past week, another two senior policymakers threw their weight behind dialing back stimulus soon. One of them was Vice Chairman Clarida, the Fed’s second in command. The other was Board Governor Waller, who went as far as saying that if the next couple of employment reports are strong, the Fed should get the ball rolling in September already. Both are permanent voters in the FOMC, so their views carry weight. 

The dollar’s path this week will depend on the CPI result. It could determine whether the prospect of a September tapering announcement is realistic or not. The hotter inflation is, the better the chances that the Fed gets moving early. 

In general, this week should be relatively calm for equities as long as TNX maintains its overall bearish trend even though there is a minor bullish trend up this week in anticipation of a higher CPI.

High Impact Events – July 2021 Week 4 #FOMC #PCE

Here are the high Impact Events for this coming week

  • Undoubtedly the highest impact event this coming week is the FOMC Statement followed by the FOMC Press Conference on 29 July.

The July 29 July FOMC Statement and Press Conference will be the Fed’s last chance for any hints as any potential tapering announcements after will be either at the Jackson Hole symposium in August or the September policy meeting. Read about the potential timeline here

What is now complicating matters is the escalation in virus cases due to the highly contagious Delta variant of Covid-19, which has now become the dominant strain in the United States. Caution about the growth impact from the Delta variant could widen the divisions within the FOMC on how soon the $120 billion a month in QE needs to be pared back. Expect higher risk of mixed signals from the FOMC statement vs the FOMC Press Conference .

The above plus the no end in sight regarding the federal borrowing limit which i mentioned here expiring in 31 July 2021 may result in higher market volatility in the last week of July. Prepare for a spike in VIX, TNX and possibly gold.

The PCE Price Index differs from Core CPI in that it only measures goods and services targeted towards and consumed by individuals. Prices are weighted according to total expenditure per item which gives important insights into consumer spending behavior.

America’s housing market is booming on the back of pent up demand and the pandemic-induced trend to move out of cities into larger suburban homes. However, housing construction has been hit not only by shortages in materials such as lumber but in labour as well. So the sector is being watched closely right now for signs on how long these issues will persist to get clues on the bigger question about whether higher inflation is transitory or not.

The US economy is expected to have expanded by a staggering 8% annualized rate in the three months to June, surpassing the pre-pandemic peak in GDP. Higher price pressure means inflation which again points to a high likelihood for sell off in growth stocks… again

In summary,

Prepare for a spike in VIX, TNX and possibly gold and sell off in growth stocks this week. Another week of volatile movements

High Impact Events – July 2021 Week 3 $TNX #CPI #OPEC

Here are the high Impact Events for this coming week (Have included some medium impact events which i feel should be considered high too)

  • 10 yr Bond Auction – low take up rate for the 10 yr US Bonds this week will cause the US 10 YR Treasury Note Yield to go up. Already the yield has completed a bullish reversal at the key Fibonacci level of 1.279 and i foresee it hitting the resistance level of 1.462 soon. This does not bode well for growth stocks.

Consumer Price Index (CPI) – with the rise of Crude Oil due to indecision from OPEC on Monday, its a high probability that CPI will rise compared to June 2021. A rising CPI indicates a strong US Dollar , which again tells the Fed its time to raise interest rates.

Do refer to my post here regarding OPEC in July 2021

In summary, i foresee that the US 10 YR Note Treasury yield will continue on a bullish run which started end last week. Will growth stocks and NASDAQ see Red ??

High Impact Events – July 2021 Week 2 #OPEC #FOMC Meeting Minutes

Happy Independence Day America !!

This weekend is the 4th July weekend and tomorrow is a public holiday i.e. stock market is closed.

The OPEC JMMC meeting was extended from 2nd July to 5th July probably to lessen impact on the stock market due to any decisions made by OPEC.
But really, with the US focus on net carbon emissions to zero by 2050 and US Shale acting as alternative to crude oil, any decision by OPEC would have limited impact on equities as oil and gas investments have decreased year over year.

https://www.cnbc.com/2021/06/30/how-opec-could-impact-crude-oil-prices-kpmg-energy-expert.html

For both the PMI and FOMC Meeting Minutes, the more hawkish the tone, the more positive impact will be on the dollar index.

Hawkish tone means the Fed is guarding against inflation (i.e. raising rates). Dovish tone is the opposite of Hawkish.

Base on technical analysis, the dollar index had just experienced a double top follow by a W shaped reversal. The W shape reversal was due to the long term hawkish tone of the Fed back in June (i.e. announcing the bringing forward of the 2 rate hikes in 2023 instead of 2024). Refer to my post here for the recap.

Now its on a minor sell off trend. The sell off is probably due to profit taking before the PMI and FOMC meeting minutes this week. Expect the dollar index however to rebound at 91.81 after the sell off though as the index seems to taking the long term view of the Fed positioning compared to stocks.

Refer to my post here for the short and long term positioning of the Fed with regards to inflation.

The W shape reversal of the dollar index indicates the start of a bullish trend for the dollar index – which has already started a bearish trend for gold. This latest development had some impact on my portfolio as i currently do have some gold holdings.

Gold is turning bearish ! Notice the 20 EMA cutting over the 40 EMA and both pointing downwards?