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Equities tumbled after the US Fed shattered hopes that policymakers might dial back the tightening. The Dow Jones 30 lost its momentum after hitting a four-month high at 34300. An initial drop below 33850 led some leveraged positions to close out. Then the selling intensified after the index lost ground at 32800. 31700 could be the next stop. An oversold RSI may cause a temporary bounce and 32900 has become a fresh supply zone where the bears could be expected to fade the next rebound.

Gold remains overshadowed by the prospect of higher interest rates. The price has been struggling to find buyers after it hit resistance at the psychological level of 1800, which was also a former demand zone on the daily chart. A short-lived bounce to 1765 met stiff selling pressure, suggesting that the bears have doubled down. 1739 is a support-turned-resistance after its breach left bullion vulnerable to a new round of sell-off. 1705 at the base of a breakout in late July would be the next level to see if there is enough long interest left.

The US dollar rallied after Powell reaffirmed that the Fed would raise rates as high as needed. A rally above the daily resistance at 0.9640 has flushed out short-term sellers. This could be the start of a bullish continuation after the pair went through a deep retracement of its April extension. As sentiment shifts to a more upbeat tone, a close above 0.9740 could attract momentum buyers and carry the greenback to July’s peak at 0.9870. 0.9570 is the closest support and 0.9500 is the bulls’ second line of defence.

Markets

Markets pondering Fed Powell’s assessment on monetary policy dominated trading throughout the whole of last week. It took Powell less than 10 minutes to clarify Fed’s intentions going forward. The Fed’s focus continues to be on bringing inflation back to 2.0% and its aim to do so is unconditional. In the respect, the Fed will do its part to bring supply and demand back into balance. Policy will have to be sufficiently restrictive. This probably will translate into a period of sub-trend growth and cause some easing of current very tight labour market conditions. However, this price needs to be paid to prevent persistently high inflation causing more damage. History illustrates that a delay in the policy response only raises the cost for employment. The Fed decisively intends to keep inflation expectations well anchored. Powell also clearly indicated that policy probably will have to remain tight for quite some time. A discussion on rate cuts is currently highly inappropriate. US interest rates evidently jumped higher in the wake of Powell’s straightforward message. However, the reaction could have been bigger. Of course, (US) yields last week had already repositioned for a hawkish guidance. The US 5y and 2y yield respectively closed 5.3 and 3.0 bps higher. In a further flattening trend the 30y lost 4.9 bps. The most forceful reaction occurred on equity markets. US indices lost up to 3.94% (Nasdaq). The Fed deliberately slowing aggregate demand is no good news for growth-sensitive assets. The dollar post-Powell reversed an initial intraday setback. Still, here too, gains could have been bigger. DXY closed the day only modestly  higher at 108.8. EUR/USD, which jumped well north of 1.005 in in the run-up to Powell’s speech, also closed little changed at 0.9966. Euro losses were at least partially mitigated by a flood of hawkish headlines on ECB policy. A Reuters report, citing sources with knowledge of the internal debate within the ECB, indicated that several policy makers want to discuss a 75 bps rate hike at next month’s meeting. This was later confirmed by comments from the likes of ECB’s Kazaks, Schnabel, Villeroy and Knot. Some ECB members apparently also want to start the discussion on shrinking the ECB balance sheet already before the end of this year. German yields rose between 11.4 bps (2-y) and 1.6 bp (30-y).

Asian markets this morning are in an outright risk-off modus in the wake of Powell’s comments on Friday (Nikkei -2.50%). After a modest reaction on Friday, US yields are now rising up to 7 bps for shorter maturities. The broad risk-off repositioning also fully allows the dollar to fulfill its safe have role. The DXY index tries to overcome the 109.30 June top. EUR/USD (0.9935) is drifting back lower in the 0.99 big figure. The eco calendar is extremely thin today. However, this probably won’t prevent the trend of weaker equities, a strong dollar and a bear flattening of the yield curves to continue.

News Headlines

Czech National Bank governor Michl wrote in a blog on the CNB-website that inflation is unlikely to be persistent as declining real income will probably curb household consumption. Monetary policy is already in restrictive territory (policy rate: 7%) and is helping to curb demand. Czech interest rates will remain at elevated levels in the coming quarters. He doesn’t exclude a potential rate hike at the next meeting, but says that rates alone won’t cure inflation. Earlier in the weekend, a CNB vice governor said she favoured an EU energy price cap over a Czech windfall tax while warning against large wage hikes. The government recently agreed a 10% salary boost for some sectors. EUR/CZK holds near 24.65 thanks to continued FX interventions by the CNB, preventing an unwelcome decline in the currency.

National Bank of Poland governor Glapinski told Business Insider that the NBP will probably raise its policy rate (currently 6.5%) once or twice by an additional 25 bps. Such smaller rate hike would signal that the cycle is slowing down. Personally, he’d even consider stopping the tightening cycle completely as inflation is expected to slowdown in coming months. A spike in the January 2023 reading because of an increase of regulated prices, shouldn’t influence monetary policy. Glapinski thinks that a first rate cut should be possible in Q4 2023. The Polish zloty remains rather weak around EUR/PLN 4.75. The global environment (big central banks stepping it up and hurting risk sentiment) plays in the currency’s disadvantage, especially should the NBP simultaneously slow it down.

Market movers today

Markets are focusing on discussing the message of 'coordinated tightening' from Jackson Hole. ECB and Fed appear to have re-committed to creating price stability, yields are shooting higher and risk assets are quite a bit lower since last week.

Focus also remains on European energy price developments, with gas and electricity prices continuing to see steep increases and no peak yet in sight as another maintenance shutdown of the North Stream 1 pipeline is due later this week.

German Chancellor Scholz will give a speech on the Future of Europe in Prague, while the Czech EU presidency is also calling for an emergency meeting of energy ministers.

ECB Chief Economist Lane, Riskbank's Flodén and Fed's Brainard are also on the wires. Tomorrow, the ECB Governing council member, Klaas Knot speaks at a Danske Talks at a hybrid event where we will discuss the monetary policy outlook.

In Sweden, Q2 GDP figures and retail sales are on the agenda.

The key releases later this week will be the euro area inflation figures (Wednesday), Chinese PMI manufacturing (Wednesday) and US labour market report (Friday).

The 60 second overview

US yields at new highs: Powell struck a fairly hawkish tone in his widely anticipated speech at Jackson Hole last Friday, signaling that Fed is committed to bringing inflation down even if it requires an extended period of below-trend growth and some weakening in labour market conditions. While Powell provided little new signals on the hiking pace of the coming meetings, he reinforced the view that financial conditions will need to be tightened further, and that rates will be held at moderately restrictive levels for some time - a message which was also echoed by Mester and Bostic later after the speech. The bottom line of Powell's statement, "We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply", summarizes our broad view which we wrote about earlier in Research US - Higher for longer, 19 August. Even though headline inflation will continue to ease further over the coming months, the aggregate demand has recovered above its potential, and a period of stagnant growth is required to bring the US economy back into equilibrium.

ECB officials warn of 'sacrifice' needed: ECB seems to follow in the footsteps of the Fed. On Friday, Reuters reported that ECB were to discuss a 75bp rate hike at the December meeting, while a Bloomberg sources story during the weekend said that QT may be discussed towards the end of the year. Also Schnabel, Holzmann, Kazaks and Knot were all very hawkish, where notably Schnabel's presentation at the Jackson Hole shows her clear view that a recession and higher unemployment rates in the euro area may be needed to bring inflation lower (and also less relevance where the inflation pressure is emanating). Rehn and Villeroy mentioned a 'significant' rate move was to be expected in September. ECB is set to meet next week.

Reversal in asset markets: Markets are focusing on discussing the message of 'coordinated tightening' from Jackson Hole as ECB and Fed appear to have re-committed to creating price stability: yields are shooting higher and risk assets are quite a bit lower since last week. This stands in stark contrast to the rally we have seen since June. Equally, the levels of risk assets does contribute to explaining how e.g. equities are down some 6% from recent highs. We continue to see EUR/USD as declining further, targeting some 0.95 in 12m as dollar strength will likely pick up pace in this environment.

Equities: Equities fell Friday, as Powell did not hint at signs of pivoting. It makes sense based on the inflation and job market outlooks but it obviously disappointed equity investors. Please note that according to surveys the biggest tail risk for investors are inflation and with central bank tightening coming in at third place. In that perspective the sell-off on Friday makes sense. Recession risk is in our opinion the biggest risk. In US on Friday, Dow -3.0%, S&P 500 -3.4%, Nasdaq -3.9% and Russell 2000 -3.3%. Asian markets are catching up (negative) this morning. However, more interestingly, US futures are sharply lower led by growth stocks as yields continuing higher.

FI: A Reuters sources story saying that a 75bp rate hike was to be discussed at the September meeting sent European rates in a bearish flattening move. 10y Bunds sold off by 7bp, while the 2y point rose 10bp. Powell's much awaited Jackson Hole speech was essentially a blow to anyone thinking a Fed-pivot was imminent. During the weekend, several ECB speakers were on the wires, where notably Schnabel's presentation is worth highlighting as she essentially argued that the origin of inflation is largely irrelevant and that a recession may be needed with higher unemployment to follow to get inflation lower.

FX: EUR/USD bounced around Friday amid hawkish signals from Fed and ECB, but ended the week below parity. Scandies dropped on the back of the following set-back to risk sentiment.

Credit: The modest tightening we saw during the course of last week reversed Friday with tangible spread widening driven by hawkish central bank signals coupled with recession worries. The liquidity in the cash market has deteriorated and the bouts of activity amongst investors remains focussed on new issues. During Friday, iTraxx main widened 5.6bp to 113bp while Xover widened 29.4bp to 559.9bp.
Nordic macro

Q2 GDP release Monday with the Q2 GDP indicator suggesting +1.4 % q/q. SCB also releases July trade balance and retail sales, the latter probably more interesting, giving clues to whether Swedish consumers can keep up spending or not. The Riksbank's Martin Flodén will particpate in a panel on the topic "High inflation and other challenges for monetary policy". His speech last week was interpreted as somewhat hawkish saying that the Krona is "too weak" and that further rate hikes are needed for inflation to fall.

Federal Reserve (Fed) Chair Jerome Powell’s speech at the Jackson Hole meeting wreaked havoc across the equity markets on Friday. His message was crystal clear: inflation must come down even if it means pain for households and businesses in the process.

The S&P 500 tanked more than 3% on Friday and slipped below the 100-DMA. It will certainly clear the major Fibonacci support in the coming hours, which is the 38.2% Fibonacci retracement on the summer rally, and which stands near the 4060 points. Breaking below this level will mark the end of the summer rally, from a technical standpoint, and send the index to the bearish consolidation zone. The 50-DMA, which stands a touch below the 4000 mark, will then be the next important support.

Nasdaq, on the other hand, dropped more than 4% on Friday, as the technology stocks are more sensitive to interest rate changes. The index slipped below its 100-DMA, and the 38.2% Fibonacci support on the summer rally, and is already in the bearish consolidation zone.

And oh, before I forget, Powell also mentioned how surprisingly resilient the US jobs market is, and hinted that the Fed is tolerant for a certain cool down in the jobs figures.

Therefore, this week’s jobs data has power to further revive the Fed hawks, rather than the contrary.

Due Friday, the NFP data is expected to print another month close to 300’000 new nonfarm job additions in the US. Over the past four months, the data clearly exceeded the market expectations, especially last month, the number printed was above half-a-million new job additions, versus around 250’000 expected by analysts.

Although, the layoff news over the past couple of months should, at some point, reflect in the US jobs data, it’s too early to titillate the Fed about the destroyed jobs. Therefore, even if we see a disappointing number, the Fed doves will be nowhere to be found and from now, we expect to see a deeper downside correction in equities, and further retracement of the summer rally.

Up goes the dollar, again

The US 2-year yield came close to the 2.50% level, the 10-year yield edged up following Powell’s Jackson Hole speech, but the price action in the US papers were less aggressive than in equities, as long-term bond holders seem relatively happy with a 3% return. Near the 3% threshold, the selloff in equities drive capital to the less risky sovereign assets.

The FX price action was of course in favour of a stronger US dollar. Powell sent the dollar rallying, and the dollar bulls now eye the 110 level, on the back of a solid divergence between the decidedly hawkish Fed, and more hawkish, but increasingly worried other central banks.

Other major central banks are also hawkish, but they are less aggressive than the Fed. The European Central Bank members, for example, are increasingly in favour of a tighter monetary policy, if nothing, to fight the strong dollar, which becomes a serious headache.

Activity in the European money markets now hints at nearly 50% chance of seeing a bigger than a 50bp hike in September. But even that, doesn’t get the euro bulls back on track. The euro is pushing lower below parity against the US dollar, and the Europeans are holding their breath before the next round of inflation figures in Europe start flowing in from tomorrow. Due Wednesday, the flash CPI estimate for Europe is expected to hit the 9% mark, and there is a stronger probability of seeing a bad surprise than a good done, given the skyrocketing gas prices, and the weakening euro.

Energy up

The European nat gas prices continue spiking. The Dutch TTF futures rose another 8% on Friday, and are up by 340% since June, and crude oil kicks off the week on a positive note, as the supply side issues came back in force last week, after the Saudi minister said that OPEC is unhappy about the falling prices, and could restrict output. Also, there is no breakthrough in the US – Iran nuclear deal. We could see the barrel of crude exceed its 200-DMA level this week, which stands a touch below the $97 mark. The latter would add more pressure on equity pricing.
Gold, Bitcoin dive

Elsewhere, gold is cheaper since Powell’s speech, and is set to make another attempt below the $1700 mark, while Bitcoin fell below the $20’000 mark, and is now below the summer uptrending trend. The selloff in equities should further pressure Bitcoin lower. The next natural target for Bitcoin bears stands near $17’500, the June dip, then the $15’000 level, the next psychological support.

Daily Pivots: (S1) 0.6852; (P) 0.6930; (R1) 0.6972; More...

AUD/USD's fall from 0.7135 resumed by breaking through 0.6855 temporary low, and intraday bias is back on the downside. As noted before, corrective rebound from 0.6680 could have completed with three waves up to 0.7135. Deeper decline would be seen back to retest 0.6680 low next. Firm break there will resume larger down trend. For now, outlook will stay cautiously bearish as long as 0.7008 minor resistance holds, in case of recovery.

In the bigger picture, price actions from 0.8006 (2021 high) is seen more as a corrective pattern to rise from 0.5506 (2020 low). Or it could also be a bearish impulsive move. In either case, outlook will remain bearish as long as 0.7282 resistance holds. Next target is 61.8% retracement of 0.5506 to 0.8006 at 0.6461.

Daily Pivots: (S1) 1.2947; (P) 1.2996; (R1) 1.3086; More...

Intraday bias in USD/CAD is back on the upside with break of 1.3063 temporary top. As noted before, corrective decline from 1.3222 could have completed with three waves down to 1.2726. Further rise should be seen to retest 1.3222 high next. Decisive break there will resume larger up trend. For now, outlook will stay cautiously bullish as long as 1.2893 support holds, in case of retreat.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Daily Pivots: (S1) 0.9911; (P) 1.0000; (R1) 1.0053; More...

Intraday bias in EUR/USD remains neutral and outlook stays bearish with 1.0121 minor resistance intact. Break of 0.9899 will resume larger down trend to 61.8% projection of 1.0773 to 0.9951 from 1.0368 at 0.9860. Firm break there should prompt downside acceleration to 100% projection at 0.9546. However, firm break of 1.0121 will dampen this view and turn focus to 1.0368 resistance instead.

In the bigger picture, down trend from 1.6039 (2008 high) is still in progress. Next target is 100% projection of 1.3993 to 1.0339 from 1.2348 at 0.8694. In any case, outlook will stay bearish as long as 1.0368 resistance holds, in case of strong rebound.

Daily Pivots: (S1) 1.1682; (P) 1.1791; (R1) 1.1849; More...

GBP/USD's down trend resumed by breaking through 1.1716 temporary low. Intraday bias is back on the downside. Current decline should target 1.1409 long term support. On the upside, above 1.1899 minor resistance will turn intraday bias neutral again. But outlook will stay bearish as long as 1.2292 resistance holds, in case of recovery.

In the bigger picture, fall from 1.4248 (2018 high) could be a leg inside the pattern from 1.1409 (2020 low), or resuming the longer term down trend. Deeper decline is expected as long as 1.2292 resistance holds. Next target is 1.1409 low. However, firm break of 1.2292 will bring stronger rise back to 55 week EMA (now at 1.2859).