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Japan PMI Manufacturing was finalized at 51.1 in August, down from July's 52.1. The health of the sector that was the joint-weakest since February 2021. S&P Global also noted new orders had the sharpest reduction since October 2020. Backlogs of work decreased for the first time in 18 months. Rise in input prices was slowest for 8 months.

Usamah Bhatti, Economist at S&P Global Market Intelligence, said: "Latest PMI data pointed to deteriorating current activity in the Japanese manufacturing sector midway through the third quarter of 2022.... The dip is likely to continue in the near term... A benefit that has come from softer demand conditions is that pressure on supply chains has been given the opportunity to ease."

Full release here.

Australia AiG Performance of Manufacturing Index dropped from 52.5 to 49.3 in August, indicating the first contraction since January. Production fell -1.8 pts to 45.7. Employment dropped -2.6 to 47.5. New orders dropped -4.1 to 55.8. Exports dropped -4.3 to 46.9. Sales tumbled -8.8 to 45.2. Input prices rose 2.0 to 81.7. Selling prices rose 4.6 to 69.1. Average wages rose 11.3 to 74.1.

Innes Willox, Chief Executive of Ai Group said: "The Ai Group Australian PMI for August points to the end of the recent expansion of manufacturing activity. Production, employment and sales were all down in August and most manufacturing sectors reported lower performance in the month.... Prices and wages continued to push higher and with the Reserve Bank seeking to ease these pressures by raising interest rates, further slowing in manufacturing looks increasingly likely over the coming months."

Full release here.

The Reserve Bank Board meets next week on September 6.

We are confident that the Board will decide to raise the cash rate by a further 50 basis points to 2.35%.

The Statement from the Governor following the meeting will be closely scrutinised. In the note below we discuss a range of issues that will be relevant to that issue.

In summary, "The best approach will be to strengthen the rhetoric we saw in the August Statement; maintain the term "not on a pre set path"; and, following Chair Powell, note that at "some point" it will be appropriate to slow the pace of tightening while emphasising that the cycle may have considerably further to run." Raising the cash rate by 50 basis points will move the cash rate into the "neutral zone".

In recent speeches (19 and 20 July) the Governor and Deputy Governor assessed "neutral" is at least 2.5%.

Having quickly moved policy into that neutral zone (225 basis points in four months – five meetings) we expect the Board will decide to slow the pace of increases to 25 basis points from the October meeting.

This second stage of the tightening process, with consecutive 25 basis point increments, is expected to extend out to February next year with the rate peaking at 3.35%.

At that point we expect that it will become evident that the Australian economy is clearly slowing with clear evidence of continuing deterioration as the series of rate hikes and high inflation weigh on households and business. Furthermore, although both headline and underlying inflation will be rising on an annual basis the quarterly increase in underlying inflation will have slowed from 1.5% (September quarter) to 1.2% (December quarter) with the prospect of a further slowing to 0.8% in the March quarter.

Our assessment of "neutral" is lower than the RBA's. We view neutral in the Australian economy to be around 2% (partly relying on comparisons with previous peak debt servicing ratios in earlier cycles).

The 2.5% estimate from the RBA assumes a zero real rate and a nominal component equal to long term inflationary expectations which are judged to be 2.5%.

We accept that the challenge to contain inflationary expectations in this cycle will be formidable given the current evidence that both businesses and households are becoming accustomed to rising prices and short-term inflationary expectations are rising quickly.

Holding the cash rate at 3.35% through 2023, well above the neutral setting of 2.0%, is a necessary condition for the Bank to bring inflation down close to the 3% target – the top of the 2-3% range.

But there will be a price to pay for such success – we forecast the economy to grow by only 1% in 2023 – well below the trend rate of growth of around 2.5%.

This growth forecast is more pessimistic than the Bank's forecast of 1.8% while our forecast for inflation (Trimmed Mean) by end 2023 is 3.1%, well below the RBA's forecast of 3.8%. Indeed, the RBA's forecast for headline inflation by end 2023 is 4.3% (3.8% underlying) - well above the 2-3% target.

The RBA's economic growth forecast for 2023 is 1.8% – significantly above our 1% forecast.

But the RBA uses a different interest rate profile in its forecasts, "the cash rate assumed to increase to around 3% by end of 2024" – a lower profile than our expectations. This profile is not a policy driven choice but rather "expectations derived from professional economists and financial market pricing".

So, although the Bank has a very clear policy objective, its forecasts use the estimates provided by others for the profile of its policy instrument.

There is a strong case for this approach to be reviewed in the current circumstances. It hardly signals the decisive "whatever it takes" commitment we see from US Fed Chairman Powell's Jackson Hole speech.

In the case of the RBA, the outcome is a set of forecasts that does not emphasise the Bank's commitment to returning inflation to the target zone in a reasonable time.

Consider the two policy approaches of the RBA and the Federal Reserve as indicated by the most recent Statements.

Governor Lowe, "The Board places a high priority on the return of inflation to the 2-3% per cent range over time, while keeping the economy on an even keel." (August Board)

Chairman Powell, "The FOMC's overarching focus right now is to bring inflation back down to our 2% goal…. Reducing inflation is likely to require a sustained period of below trend growth … will bring some pain to households and business." (Jackson Hole).

The Jackson Hole speech was clearly aimed at convincing business and households that the FOMC is absolutely committed to containing inflationary expectations, whatever the cost.

The Governor's Statement refers to "the path to achieve this balance is a narrow one and clouded in uncertainty."

The much more cautious, softer rhetoric along with the cautious forecasts risks the RBA losing control of inflationary expectations.

Chairman Powell emphasises that risk by invoking Chairman Volker, "Inflation feeds on itself, so part of the job … must be to break the grip of inflationary expectations."

That is compounded by a set of forecasts from the RBA that projects a "leisurely" two and a half years to reach the top of the 2-3% target zone.

So, the question is whether the powerful Jackson Hole speech will spur the RBA into stronger words after the September meeting than we saw in August.

I believe that would be the right approach although it should not commit to extending the 50 basis point increases into October.

Even the robust Chairman Powell noted, "At some point, as the stance of monetary policy tightens further it likely will become appropriate to slow the pace of increases."

The best approach will be to strengthen the rhetoric by strongly emphasising the inflation priority; maintain the term "not on a pre set path"; and, following Chair Powell, note that at "some point" it will be appropriate to slow the pace of tightening while emphasising that the cycle may have considerably further to run."

The Bigger Picture for Central Banks

Chairman Powell has emphasised his 2% inflation target.

It seems clear that he is prepared to impose considerable pain on the US economy to achieve that objective.

We forecast that growth in the US economy will be only 0.7% in 2023; a necessary development to squeeze inflation out of the system.

Consider the structural changes in the global economy in recent years:

• There has been ample supply in global labour markets, due to the rise of China and Eastern Europe. Through ageing; geo-political tensions; health shocks and mobility restrictions the excess supply of global labour has reverted into global shortages.
• The transition from fossil fuels to renewables, as the world deals with the realities of climate change, has quickly transformed into global shortages of fossil fuels which is pressuring energy prices.
• Food supplies are regularly disrupted by extreme climate developments.
• Globalisation and the resulting cost savings is reverting to deglobalisation as businesses that have suffered through supply chain disruptions are reassessing their supply chain policy – moving the mantra from "just in time" to "just in case".
• In response to the major shocks of the GFC and COVID central banks aggressively expanded their balance sheets. We cannot be sure exactly how this massive boost to liquidity will affect inflation, although the uncertainty is about the extent rather than the direction.

Central banks are likely to be able to restore inflation to their pre COVID targets through aggressively slowing demand over the course of the next few years. But, in facing these major structural changes to the global economy, they may have to accept higher inflation targets once they rebalance policy settings to revitalise demand and restore their economies to potential growth in the future.

With the key current objective for central banks being to contain inflationary expectations there will be no immediate move to address this challenge.

As we move beyond 2023, and into 2024 when we expect central banks to be easing policy settings to restore demand, upward pressures on inflation may emerge more quickly than is currently expected.

Key Highlights

• Gold price started a major decline below the $1,750 support zone.
• It is following a key bearish trend line with resistance near $1,712 on the 4-hours chart.
• GBP/USD, AUD/USD and NZD/USD traded to a new multi-week low.
• USD/JPY rallied to a new multi-year high above 139.40.

Gold Price Technical Analysis

Gold price struggled to gain pace above the $1,800 resistance zone against the US Dollar. The price started a major decline below the $1,780 and $1,750 support levels.

The 4-hours chart of XAU/USD indicates that the price settled below the key $1,750 support, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours).

It opened the doors for more losses below the $1,720 support. The price even traded close to the $1,700 support zone. It seems to be following a key bearish trend line with resistance near $1,712 on the same chart.

On the downside, an initial support is near the $1,700 level. The next major support is near the $1,685 level, below which the price could accelerate lower. In the stated case, the price may perhaps decline towards the $1,660 level.

On the upside, the price might face sellers near the $1,710 level. The next major resistance is near the $1,720 level. Any more gains might send the price towards the $1,732 level.

Looking at GBP/USD, there were additional losses and the pair traded to a new multi-month low below the 1.1600 level.

Economic Releases to Watch Today

• Germany’s Manufacturing PMI for August 2022 - Forecast 49.8, versus 49.8 previous.
• Euro Zone Manufacturing PMI for August 2022 – Forecast 49.7, versus 49.7 previous.
• UK Manufacturing PMI for August 2022 – Forecast 46.0, versus 46.0 previous.
• US Manufacturing PMI for August 2022 – Forecast 51.3, versus 51.3 previous.
• US ISM Manufacturing Index for August 2022 – Forecast 52.0, versus 52.8 previous.
• US Initial Jobless Claims - Forecast 248K, versus 243K previous.

Short Term Elliott Wave View in Silver suggests rally to 19.43 ended wave 2. Wave 3 lower is in progress to complete a cycle from August 14th, 2022 high. Internal subdivision of wave 2 unfolded as a double three Elliott Wave structure. Up from wave 1, wave (a) ended at 19.09 and pullback in wave (b) ended at 18.78. XAGUSD extended higher in wave (c) of ((w)) towards 19.28. Connector wave ((x)) completed as a zigzag correction at 18.93. The metal then resumed the rally in wave (a) ended at 19.40 and pullback in wave (b) finished at 19.07 Final leg higher wave (c) ended at 19.43 which ended wave ((y)) of 2.

Silver turned lower in wave 3. Internal subdivision in wave ((i)) unfolded as an impulse. Down from wave 2, wave (i) ended at 18.81 and bounce in wave (ii) ended at 18.92. Silver extended lower in wave (iii) at 18.56. A shallow bounce completed wave (iv) at 18.69. Last leg lower ended at 18.50 completing wave (v) of ((i)). Then market rally ending wave ((ii)) as a flat correction at 19.91.

Wave ((iii)) already has started and wave (i) ended at 18.63 and corrective wave (ii) at 18.84. XAGUSD continued falling and we can already see 5 swings lower from wave (ii). We are expecting to break 17.70 to complete an impulse as wave (iii), then a corrective bounce as wave (iv) and continue lower end wave (v) and also wave ((iii)). Therefore, silver should see more downside as far as pivot at 19.43 high stays intact, expect that any rally to fail in 3, 7, or 11 swing for further downside.

Silver (XAGUSD) 45 Minutes Elliott Wave Chart

Market picture

Bitcoin has stopped falling but has still not managed to gain strength to rise, remaining near $20K. Ethereum remains more interesting for buyers, increasing 1.6% overnight to above $1600. Top altcoins showed mixed dynamics: from a decline of 1.3% (Dogecoin) to a rise of 2.2% (Cardano).

Total crypto market capitalisation, according to CoinMarketCap, rose 0.2% overnight to $997bn. The Cryptocurrency Fear & Greed Index fell 4 points to 23 by Wednesday and moved into “extreme fear” status.

The upcoming move to proof-of-stake creates a speculative component to Ethereum’s dynamics. While in the short term, after September 6, there could be a “sell-through,” causing pressure on the price, in the longer term, such a transition will strengthen interest in using Ethereum for transactions, making them cheaper. This promises more interest in the coin, allowing it to remain “better than the market”.

From the technical analysis perspective, ETHUSD is trying to get back above the 50-day average, which is an informal indicator of the medium-term trend. A consolidation above $1620, like in July, could be a prolonged rally with possible targets at $2000-2200 in the nearest future. The opposite is also true. A reversal down from this level will weaken bulls, as it did in February and April, triggering a new decline towards $1000.

News background

Some 5,000 BTCs, which have been in “hibernation” for the past 7-9 years, are on the move, said Look Into Bitcoin founder Philip Swift, citing data from the Whale Shadows indicator. Historically, such spikes in activity have preceded significant price declines.

A link has been established between the 10,000 BTC, which on August 29 went in motion for the first time since 2013, and the bankrupt cryptocurrency exchange Mt.Gox, a Telegram channel reported.

Meanwhile, the US Federal Bureau of Investigation has advised investors to be wary of investing in decentralised finance (DeFi) projects as they are too vulnerable to hacking.

Iranian authorities have approved a comprehensive law regulating cryptocurrency transactions. In particular, imports from abroad with payment in digital assets are allowed.

On Friday, Bitcoin and major altcoins plummeted but did not approach their 2022 lows, after Jerome Powell restated the Fed’s commitment to tame inflation at any cost and warned against premature loosening at the Jackson Hole symposium. Surprisingly, Bitcoin exhibited some resilience and quickly clawed back above the $20,000 level, despite the widespread stock market weakness. Do these indications suggest that crypto markets have hit a tough floor?

Hawkish Fed weighs on cryptos

Despite the growing optimism in the past two months, Jerome Powell’s latest comments at the Jackson Hole symposium pushed back expectations of a slower monetary tightening pace, sending a clear message to markets that a ‘Fed pivot’ is not on the cards. Powell outlined that the Fed would keep hiking interest rates for as long as it takes to bring inflation under control, while acknowledging that this aggressive approach will most likely cause financial distress in households and businesses.

In turn, markets flooded with risk-off sentiment as investors braced themselves for rate hikes even into a recessionary period. Consequently, both the 2- and 10-year US Treasury yields spiked in multi-year highs, inflicting severe damage to risky assets. Specifically, the crypto space received a significant blow, with the global market capitalisation dipping below the $1 trillion barrier for the first time since January 2021.

Are cryptos stocks on steroids?

Even though Bitcoin fell in tandem with equity markets, it quickly bounced back above the crucial $20,000 psychological mark, whereas stocks extended their retreat. Interestingly, digital coins exhibit smaller swings than stocks in a period where negative risks in crypto markets are increasing. For instance, Powell’s hawkish remarks sent the famous Bitcoin Fear and Greed index back into the ‘extreme fear’ territory.

Moreover, seasonal trends suggest that September is historically the worst month for Bitcoin prices as they have experienced a drop of about 10% on average over the last five years. To make matters worse, cryptocurrencies have never faced an environment of rising interest rates and high inflation so far, with both themes being negative for their performance.

To sum up, Bitcoin’s mild rebound and consolidation, in a period when stocks keep losing ground, could endorse the scenario that the bottom in crypto space is close. Nevertheless, investors should keep in mind that cryptocurrencies are currently trading closer to their 2022 lows than equities are, thus the downside potential for stocks is actually higher.

Bitcoin seeks direction

Taking a technical look, Bitcoin has been rangebound in the last couple of sessions after it managed to cease its post Jackson Hole decline.

If selling pressures intensify, the price could decline to test the crucial $20,000 psychological mark. Sliding beneath that floor, the spotlight would turn to the 2022 low of $17,588.

On the flipside, bullish actions could propel the price towards the 50-day simple moving average (SMA), currently at $22,370. Even higher, any further advances could stop at the recent high of $25,200.

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WTI oil price is down for the second day and probes below $90 level, under renewed pressure from rising concerns about the state of global economy, rise in OPEC oil output in August to the highest since early period of pandemic in 2020 and s slowdown in the activity in China’s manufacturing sector, due to restrictions on the latest Covid outbreak that all contribute to growing concerns about global demand.

Weakening structure in daily technical studies, as falling 14-d momentum indicator moved into negative territory and formation of a bull-trap on a false break above 200DMA and Tuesday’s formation of bearish engulfing pattern, add to negative signals.

Cracked $90 round-figure support also marks Fibo 61.8% of $85.35/$97.62 upleg, with close below here to confirm reversal and open way for retest dented $88.25 support (Fibo 76.4%) and risk drop to seven-month low at $85.35 (Aug 16 low).

Near-term action should stay below daily Tenkan-sen ($91.94) to keep bears intact.

Res: 91.48; 91.94; 92.70; 92.93
Sup: 90.00; 88.25; 87.00; 86.27

Retail sales are back to the forefront of analysts' minds. Especially now in Europe, with the ECB raising rates. On the one hand, traders would like to be wary of any signs of demand destruction that could mean weaker currency going forward. On the other, tighter policy could be slowing the economy, which could also weaken the currency.

But, if retail sales beat expectations, it could help return some confidence in the economic outlook. The markets have already priced in a full 50bps hike by the ECB next week, with over half of economists expecting as much as 75bps. Better economic prospects could support the idea that the central bank has plenty of room to keep tightening.

Germany to the forefront

German retail sales are particularly important for the Eurozone not just because it's the biggest country in the Area. Germany has been experiencing less inflation than the periphery, despite its dependence on imported energy. The implication is that if retail sales are affected in Germany, they might be even worse in the rest of the common economy, which has higher debt issues.

Saving rates in Germany have started to fall, but remain higher than in prepandemic levels. Higher saving rates have correlated with lower inflation. People putting money into savings instead of spending it reduces demand pressure. If savings rates fall, or credit levels increase, it could imply further increases in inflation. That might give the ECB more reason to tighten policy.

Interpreting the data

The disparate situation between Germany and Switzerland might highlight the market reaction. While Swiss inflation remains above target, but not as bad as Germany, the SNB is under significantly less pressure to raise rates. Retail sales, therefore, have more room for expansion. While this could imply a weaker franc, the reality is that the difference in inflation expectations means real rates in Switzerland are much higher than in Germany.

Improving (or less negative) retail sales sends the signal that prices can keep rising, and raise inflation expectations. Coming on the heels of higher than expected CPI figures earlier today, it could increase the bets that the ECB will raise rates. But the calculus for the SNB is likely to remain the same.

What to look out for

German July monthly retail sales are expected to come in flat, compared to -1.6% in the prior month. Just a decimal higher could push the figure into the psychologically important "positive" category, and might spur a bigger market reaction. On the other hand, that the shorter term figure is improving, might give the impression that the situation in Germany is not as bad as initially feared. Particularly when considering that the annual figure is comparing to last year when there was relief buying during the summer. Annual change in retail sales for Germany is forecast at -6.5% compared to -8.8% prior.

Swiss July retail sales are expected to be somewhat the opposite, with monthly figures forecast to drop -0.2% compared to 0.1% growth. Annual change in retail sales is projected to slow to just 0.3% compared to 1.2% reading in June.