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No change in EUR/JPY's outlook as sideway trading continued below 163.86 last week. Initial bias remains neutral this week first. On the upside, break of 163.86 will target 61.8% retracement of 175.41 to 154.40 at 167.38, as the second leg of the corrective pattern from 175.41. On the downside, however, firm break of 159.80 support will suggest that the rebound from 154.40 has completed, and turn bias back to the downside for 154.40 instead.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Current development suggests that the first leg has completed. The range of consolidation should be seen between 38.2% retracement of 114.42 to 175.41 at 152.11 and 175.41 high.

In the long term picture, considering bearish divergence condition in W MACD, 175.41 is at least a medium term top. It's still early to conclude that up trend from 94.11 (2012 low) has completed. But a medium term corrective phase is in progress with risk of deeper fall back to 55 M EMA (now at 145.56).

EUR/GBP's fall from 0.8624 extended to as low as 0.8399 last week but recovered since then. Initial bias is turned neutral this week for some consolidations. Risk will stay on the downside as long as 55 4H EMA (now at 0.8457) holds. Below 0.8399 will target 0.8382 support. Firm break there will resume larger down trend.

In the bigger picture, as long as 0.8624 resistance holds, down trend from 0.9267 is expected to continue. Firm break of 0.8382 will target 0.8201 (2022 low). However, decisive break of 0.8624 will indicate that such down trend has completed, and turn outlook bullish for 0.8764 resistance next.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's decline from 1.7180 extended to as low as 1.6256 last week but recovered since then. Initial bias is turned neutral this week for some consolidations. Further decline would remain in favor as long as 1.6580 resistance holds. Below 1.6256 will target 1.5996 key support level next.

In the bigger picture, outlook is mixed up by the deeper than expected fall from 1.7180. Yet as long as 1.5996 support holds, up trend from 1.4281 (2022 low) is still expected to resume at a later stage. Firm break of 1.7180 will pave the way to 61.8% projection of 1.4281 to 1.7062 from 1.5996 at 1.7715.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5987) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF's deep decline last week confirmed that rebound form 0.9209 has completed at 0.9579, ahead of 55 D EMA. But as a temporary low was formed at 0.9351, just ahead of 61.8% retracement of 0.9209 to 0.9579 at 0.9350, initial bias stays neutral first. Break of 0.9351 will target 0.9209 low next. However, break of 0.9497 will turn bias back to the upside for 0.9579 resistance instead.

In the bigger picture, medium term corrective pattern from 0.9407 (2022 low) might have completed with three waves to 0.9928. Decisive break of 0.9252 (2023 low) will confirm long term down trend resumption. Next target will be 61.8% projection of 1.1149 to 0.9407 from 0.9928 at 0.8851. For now, outlook will stay bearish as long as 0.9928 resistance holds, even in case of strong rebound.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 0.9928 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, Sep 2, 2024

Tuesday, Sep 3, 2024

Wednesday, Sep 4, 2024

Thursday, Sep 5, 2024

Friday, Sep 6, 2024

• US PCE data keeps Fed rate cut hopes alive as inflation moves towards 2% target.
• Commodity prices fluctuate on geopolitical fears and OPEC+ production plans.
• US jobs data release is key market-moving event in the week ahead, with potential to impact Fed rate cut decisions.

Week in Review: Rate Cut Hopes Alive Post PCE Data

As the week draws to a close, US PCE data has kept Fed rate cut hopes on track as inflation continues on its way to its 2% target. Consumer spending remains strong and this has kept pricing for a 50 bps cut steady. However with a massive Jobs report next week, we could be having a very different conversation this time next week should the US economy deliver a soft jobs print.

Heading into the Labour day weekend, the rate hike odds for the September 18 meeting has adjusted once more. The theme of the week has seen the probability of a 50 bps cut continue to diminish as robust US data gave market participants something to think about it. As you can see from the CME chart below, the probability of a 50 bps cut declined from 36% to 30% during the course of the week.

Source: CME FedWatch Tool

The strong GDP and PCE data prints at the back end of the week rescued the US Dollar Index (DXY) which appeared to be on the ropes. The early part of the week saw the greenback lose ground to its G7 counterparts with Cable holding near 30 month highs against the greenback. USD/JPY finally made a break of the 145.00 handle as the greenback recovered some of its early week losses.

Commodity prices went through a rollercoaster week with Brent Crude Oil rising on geopolitical fears and Libyan production going offline. However, news at the back end of the week regarding OPEC + and its proposed output hike saw Oil surrender some early week gains. According to sources, OPEC + are planning to increase output as planned with uncertainty around Libya production and some member states pledging cuts to overcompensate for potential overproduction. This sets up Oil prices for an interesting week.

Gold prices struggled within a tight range for the majority of the week. The $2530 handle in particular has proved a sticking point and a lot of this has to do with how much of the expected rate cuts by the Federal Reserve are already priced in. If we do not see a significant miss next week with the jobs data release this could facilitate a break of the range, if not expect more of the same in the week ahead.

Wall Street indexes are ending August in a completely different light to the start of the month. We all can remember the early August selloff and concern by many market participants, all of which seems to have eased as the summer period draws to a close.

The Nasdaq 100 was trading down 0.03% with the S&P 500 up around 1.5% for the month. Another indication of the change in market sentiment can be seen from the CBOE Volatility Index chart below which shows the change in volatility through the month of August.

Source: LSEG Workspace

Despite the positive end to the month of August for the S&P 500 I am cautious moving forward. This lies in my views on seasonality and with the US election around the corner the data speaks for itself. During US election years dating back to 1928, the S&P 500 usually experiences a lull and some small losses in September and October ahead of the election before a rally post election and into the Christmas period. Will history repeat itself?

The Week Ahead: US Jobs Data to Rule Out 50 Bps Cut?

The week ahead is actually shaping up to be a massive one for both the US Federal Reserve and Global Central Banks. The debate around rate cuts from the US has shifted toward the size of an initial cut expected on September 18, 2024.

At present the 25 bps cut is winning the race, however a softer jobs report on Friday could throw a spanner in the works. A soft jobs number could weigh on the US Dollar once more and lead to rallies in some risk assets such as US indices. The question that still remains though is how much of the rate cuts have already been priced in?

Let’s break down the key market moving events by region for the week starting Monday September 2.

Asia Pacific Markets

In Asia, the upcoming week is a busy one with a spate of inflation release from the smaller economies. The main areas of interest however will likely be Australian, Chinese and Japanese data.

Following the moderation in Australian inflation this week, GDP data will now be the focus. Unlike many of its counterparts the Reserve Bank of Australia has actually been grappling with concerts around further rate hikes as opposed to rate cuts. Thus a GDP print that shows a cooling economy is sorely needed by the RBA and thus could alleviate concerns of further rate hikes.

China’s official PMI numbers are scheduled for release by the National Bureau of Statistics on Saturday. The August PMI will likely stay mostly steady, dropping just a bit from 49.4 to 49.3. Manufacturing has slowed a little lately because car production has decreased. The Caixin PMI will also be released next Wednesday and should provide further insight into the performance of the Chinese economy and potential demand for raw material in Q4.

Japanese data continues to improve, setting the stage for continued rate hikes by the Bank of Japan (BoJ). The week ahead sees Japan sharing data on capital spending, labor earnings, and household spending, all expected to point to an economic recovery. Capital spending is expected to grow by 10% in the second quarter of 2024, up from 6.8% in the first quarter, thanks to more investments in transport and IT. There is also a strong possibility that labor earnings and household spending will get better in July, with real cash earnings rising for the second month in a row. This should help boost household spending and support the Bank of Japan’s efforts to adjust its policies.

Europe + UK + US

In Europe and the US, it’s another data-heavy week. The US is celebrating Labor day weekend with US markets closed on Monday. This should see a slow start to the week with thin liquidity on Monday..

The Uk will finally get some respite on the data front with the major economic data release coming early in the week. The BRC like-for-like retail sales YoY print will be released on Monday with no other high impact releases scheduled.

The Euro Area as well is expected to enjoy a much quieter week on the data front with composite PMI, PPi and retail sales data the main releases. Following a week in which inflation data put pressure on the Euro as market participants ramped up their rate cut bets it will be interesting to gauge the reaction the data releases.

All eyes are on the US next week as the NFP and jobs report takes center stage. This has become a major release after the largest downward revision in Jobs numbers since the Global Financial Crisis. However, the past week’s GDP and PCE data restored some confidence but the labor data remains the kingmaker ahead of the September 18 Fed meeting.

A softer jobs print on Friday could increase expectation of a 50 bps cut and scupper the DXY’s attempt at a recovery from 13 month-lows.

Chart of the Week

This week’s highlighted chart brings us back to the US Dollar Index (DXY) chart which should be no surprise. The importance of the US Dollar and US data in the week ahead makes this a no-brainer, while the technical picture throws up some interesting takeaways as well.

The DXY hit a 13-month low this week, trading at levels last seen in July 2023. The Greenback enjoyed a late week renaissance of sorts, bouncing aggressively out of a key area of support at the 100.50 level and avoiding a retest of the psychological 100.00 handle.

There is a lot of resistance up ahead though and with the US jobs data potentially serving as a catalyst on Friday, Dollar bulls will be hoping the recovery continues in the early part of the week.

The daily chart below does show that we have had a change of structure (from a price action standpoint) from bearish to bullish as Friday’s daily candle is set to close above the swing high at 101.53.

This would mean that the DXY is now on track to either push on or if there is a pullback it will likely be to print a higher low above the 100.50. WIll the NFP data facilitate a break below the 100.50 handle? This is a possibility but it would require a significant downside miss in my opinion for such a move to occur.

Immediate resistance rests at 102.16 and 102.64. Beyond that there is further resistance available 103.00, 103.65 and 104.00 which houses the 200-day MA as well.

US Dollar Index (DXY) Daily Chart – August 30, 2024

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support:

• 101.50
• 100.50
• 100.00

Resistance:

• 102.16
• 103.00
• 104.00 (200-day MA)

U.S. Highlights

• The second estimate of Q2 GDP revealed that the U.S. economy grew at 3.0% annualized, a bit stronger than previously reported, thanks to an upward revision in consumer spending.
• Spending momentum continued into July, outstripping income growth for the sixth consecutive month and pushing the savings rate to a two-year low of 2.9%.
• Core PCE inflation held steady at 2.6% year-on-year in July, while the three-month annualized rate of change fell below the Fed’s 2% inflation target.

Canadian Highlights

• Second-quarter GDP came in ahead of expectations, driven by government expenditures and business spending. Other details were less encouraging, as household spending, residential investment and net exports fell short of expectations.
• In other news, June payrolls declined for the first time in six months while the job vacancy rate remained steady.
• The Bank of Canada is likely to interpret this week’s data as supportive of maintaining its easing bias, with three more quarter-point cuts expected by year-end.

U.S. – Fed to Tilt Focus to Labor Market as it Tees Up First Rate Cut

The Labor Day weekend is upon us, providing an opportunity to celebrate the achievements of the American worker. Keeping with the labor market theme, now that the Fed appears relatively confident that inflation will return to target, we believe it will put a little more emphasis the other side of its dual mandate – the goal of maximum employment – to determine the speed and size of policy easing. In that vein, next week’s payrolls report can’t come soon enough. This week’s data, meanwhile, did little to rock the boat, coming in broadly positive. Amidst this backdrop, long-term yields trended modestly higher, while the S&P 500 looks to end the week lower by 0.6% as of the time of writing.

A second read on U.S. GDP revealed an even better growth profile of 3.0% annualized in the second quarter (vs. 2.8% previously), thanks in large part to an upward revision in consumer spending (2.9% vs. 2.3% previously). But this week’s highlight was the July personal income and spending (PCE) report. The latter showed that overall and core PCE inflation held steady on an annual basis, coming in at respectively 2.5% and 2.6% in July. Looking to more recent trends, on a 3-month annualized basis, core PCE eased to 1.7% in July from 2.1% in the month prior, suggesting we’re likely to see more cooling in inflationary pressures in the months ahead (Chart 1).

The PCE report also shed light on consumer spending, which had a relatively healthy start to the third quarter. Real spending rose by 0.4% month-over-month (m/m) in July – an acceleration from 0.3% in the month prior, with both goods and service spending chipping in with healthy gains. However, real disposable personal income continued to trail behind (+0.1%), which meant consumers had to dip into their savings to sustain the higher rate of spending. As a result, the personal savings rate fell to a two-year low of 2.9%.

Other consumer-related indicators continued to paint a nuanced picture. Americans were a little more upbeat in August, with the Conference Board confidence measure rising to a six-month high, thanks in large part to an improvement in the “expectations” subcomponent. Still, plans to buy large ticket items, including cars, homes, and major appliances, all trended lower on the month. And it’s not just survey data showing a consumer’s reluctance to make big purchases. Pending home sales – a leading indicator for existing home sales – fell sharply in July (-5.5%), driving home the point that the recent pullback in interest rates has so far failed to spark a sustained improvement in sales (Chart 2).

Next week, attention will turn towards the August payrolls report, which will help shape whether the Fed cuts by 25 or 50 basis points at its next rate decision in September. Market expectations call for some rebound in job gains relative to July’s gain of 114,000. The recent steadying of both jobless claims and job postings suggests that the chances of another downside miss is less likely, which favors a 25 basis point cut in September.

Canada – More Reason to Ride Down the Policy Escalator

The final week of a summer break stayed drama-free with analysts’ attention squarely on Friday’s marquee release of Canada’s second-quarter GDP. Equity markets saw intraday volatility primarily driven by earnings, leaving the TSX closing -0.3% on the week. In the rates market, today’s data was met as a confirmation of what had already been priced – a gradual stepwise descent in 25 basis points increments through the end of the year. Longer-term yields inched higher with the 10-year government bond up 8 bps to 3.12% to end the week.

Real gross domestic product (GDP) rose by 2.1% quarter-on-quarter (q/q, annualized) in the second quarter, ahead of expectations calling for a gain of 1.6% q/q (Chart 1). The primary drivers of this gain were government expenditures supported by increases in compensation of employees (expense on the government ledger), and purchases of goods and services. Business spending on non-residential investment and machinery & equipment also made a significant contribution to today’s reading.

However, other details were less encouraging. Household spending came in lower than expected, consistent with the more recent data pointing to a weaker trajectory. A higher revision to Q1 spending partially offsets last quarter’s miss as the upward adjustment roughly matches the magnitude of Q2’s shortfall. Services spending remained a steady growth contributor with consumers increasing their outlays on necessities such as housing, food, and electricity. Spending on goods edged down, particularly in automobile expenditures, which were impacted by temporary technological setbacks are expected to reverse next quarter. Softer spending combined with solid gains in compensation led to an increase in the savings rate, which rose to 7.2% - the highest reading since Q1 2022 and significantly above the pre-pandemic average.

On the housing front, residential investment saw its largest decline in over a year with all major components – construction, renovations and homeownership transfer costs – falling during the quarter. Net exports also fell short of expectations for a rebound, weighing on the GDP reading. We expect growth to continue at a below-trend pace for the next several quarters until the economy gains further relief from lower rates.

In other news, this week’s Survey of Employment, payrolls and hours data showed that June payrolls declined for the first time in six months. The job vacancy rate – a ratio of vacancies to a number of available jobs – remained close to its pre-pandemic average, indicating a relatively balanced demand-supply position (Chart 2). The details show significant disparities among sectors, with labour demand still elevated in the service sector, but has cooled below pre-pandemic levels for the goods-producing sector.

The Bank of Canada is likely to interpret this week’s data as supportive of maintaining its easing bias. With the Fed now poised to adopt a similar policy stance, the risk of significant monetary policy divergence has diminished, reducing downward pressure on the Canadian dollar and easing the risk of importing price inflation.

Summary

United States: The Search for Clues Continues

• Fed watchers are still on the lookout for clues on the size of the well-telegraphed September rate cut. This week's economic indicator lineup, which broadly beat expectations and reaffirmed a soft landing, provides limited insight. Next Friday's employment report will go a long way toward determining the actions taken by the FOMC at next month's meeting.
• Next week: ISM Manufacturing & Services (Tue. & Thu.), Employment (Fri.)

International: Eyes On Global Monetary Policy Decisions Ahead as Summer Comes to a Close

• It was a relatively light week for global economic data releases. Eurozone headline inflation slowed, while services price pressures remained persistent in August; we maintain our view for gradual European Central Bank rate cuts. A slight upside surprise in Australia inflation in July should keep RBA policymakers on hold until next year, in our view. Both Canada and Sweden released GDP reports that we view as consistent with a steady pace of rate cuts from the Bank of Canada and Riksbank through the end of 2024.
• Next week: China PMIs (Sat.), Bank of Canada Rate Decision (Wed.), Japan Labor Cash Earnings (Thu.)

Topic of the Week: That Chill in the Air Means College Football Is Upon Us

• Summer is winding down and fall is just around the corner. Before the leaves change color, temperatures dip and pumpkin spice finds its way into everything, what better way to mark the transition into autumn than to dive deep into the college football season and the regional economies the top teams call home?

Full report here.

We expect another 25-bps cut to the overnight rate (to 4.25%) from the BoC meeting next week to build on cuts already delivered in each of the prior two meetings in June and July. Comments from Governor Macklem will likely again err on the dovish side, continuing to emphasize a softening economic backdrop that makes it more likely that inflation will keep trending lower.

CPI prints, although still important to the BoC’s consideration, are backward-looking and lag the economic backdrop that has continued to soften. The 2.1% annualized increase in Q2 GDP was above the 1.5% gain that the BoC expected in the July MPR but still left per-capita output down for the seventh in the last eight quarters. The unemployment rate is up almost a percentage point from a year ago – and we expect another increase (to 6.6%) in August to be reported next Friday as employment continues to grow at a slower pace than the size of the labour force.

Governor Macklem reinforced after the last rate cut in July that the central bank is convinced inflation will continue to drift lower even if “there could be setbacks along the way,” but July CPI data also surprised on the downside. Moving forward, the hurdle for more BoC rate cuts from what are still-elevated levels is low. Our own base-case assumes another 150 basis points of cuts (including the expected September reduction) by mid-2025.

While the decision for the BoC to pivot to lower interest rates this year was likely relatively easy, the economic backdrop for the U.S. Federal Reserve has been more complicated. Resilient U.S. GDP growth and a flare-up in inflation pressures earlier this year has kept the Fed on the sidelines for longer than other advanced economies. But a downside surprise in U.S. labour market data in July jolted worries that a feared more significant labour market slowdown may have started, with a rise in the unemployment rate breaching thresholds usually only seen during U.S. recessions (the so-called ‘Sahm’ rule.)

For now, slowdown has been more of a ‘normalization ’ than a crumbling in the broader economic backdrop with the unemployment rate rising but to levels that are still low. And we expect a surge in temporary layoffs in July will at least partially reverse in August. Further sharp deterioration in labour market conditions is not in our base case and, as Powell made clear at Jackson Hole, would not be welcomed by Fed policymakers. If, however, next week’s report was to show a significant number of those ‘temporary’ layoffs have shifted into permanent job losses, that could prompt more interest rate cuts than our current assumption for two 25 bps cuts (September and December Fed meetings) this year.

Week ahead data watch

We look for Canadian employment to edge up 10k in August after two consecutive small declines in June and July. But with the population still growing rapidly, and a large pullback in the labour force participation rate in July is not likely to be repeated, we look for job growth to be outpaced by labour force growth and for the unemployment rate to rise to 6.6%.

We expect the July Canadian trade surplus to increase to $2.0B in July, with exports expanding by 1.3% and imports down by 0.8%. Much of the export growth is expected to have come from higher motor vehicle shipments (4%), and higher oil prices boosting the energy trade balance.

U.S. trade deficits likely widened to $79.1 B in July. According to the advance trade report, goods deficits widened by $6.1B from June to July, given imports were up 2.3% m/m, and exports of goods came in flat.

• Traders see decent chance for 50bps Fed cut in September
• Powell adds extra importance to jobs data, NFP awaited
• BoC decides on rates, third consecutive cut is fully priced in
• Aussie traders lock gaze on GDP numbers

Bets for double Fed cut remain elevated

Here comes another NFP week, with investors eagerly awaiting the results as they try to discern the size and pace of the Fed’s forthcoming rate cuts.

The weaker than expected July numbers triggered market turbulence, instilling fears about a potential recession in the US and prompting investors to price in around 125bps worth of Fed rate cuts by the end of the year.

Nonetheless, subsequent data after the jobs report alleviated investors’ concerns, encouraging them to scale back their bets. That said, a dovish speech by Fed Chair Powell at Jackson Holec did not allow them to materially alter their dovish view. Investors are still expecting interest rates to end the year around 100bps below current levels, while penciling in a decent 35% chance for a 50bps reduction at the September 18 gathering.

Employment data take center stage

At Jackson Hole, Powell said that the “time has come for policy to adjust” and that the timing of rate cuts “will depend on incoming data”. He also placed extra emphasis on the labor market, saying that they would “not seek or welcome further cooling in labor market conditions.”

This makes next Friday’s nonfarm payrolls even more important as signs of further cooling may convince more traders that the Fed may start its easing cycle with a bold 50bps reduction. This could push Treasury yields lower and exert more pressure on the US dollar.

The question is: How will Wall Street react? Will another tepid employment report rekindle recession fears, or will equity investors cheer the prospect of even lower borrowing costs? Perhaps the answer lies on the outcome of the ISM manufacturing and non-manufacturing PMIs for August, due out on Tuesday and Thursday, respectively.

The Atlanta Fed GDPNow model estimates a respectable 2.0% real GDP growth for the third quarter, and if the ISM prints point to improving activity, investors may retain their confidence in the world’s largest economy, thereby increasing their risk exposure.

Market participants may get some information about the state of the labor market ahead of Friday’s NFPs. On Tuesday, the JOLTS job openings for July are due to be released, while on Thursday, the ADP employment report will be published. Thursday’s agenda also includes data on Nonfarm Productivity and Unit Labor Costs for Q2.

BoC preparing for a third straight cut

In neighboring Canada, the BoC is scheduled to announce its interest rate decision on Tuesday, with Canada’s overnight index swaps (OIS) suggesting that a third consecutive quarter-point cut is virtually assured. There is even a 15% chance of a more substantial 50bps cut.

At its July meeting, the BoC announced its second cut in a row, keeping the door wide open for more action in upcoming gatherings. Since then, the monthly GDP data revealed that the economy slowed in May from April and approached stagnation in June. The employment report revealed a greater loss of jobs in July compared to June, and, most importantly, inflation continued its downward trajectory.

The data justifies the expectation that the Bank will cut again at this gathering, suggesting also that policymakers will maintain a highly accommodative stance. The loonie may slide in such a case but considering that rate cuts have already been anticipated for each of the remaining meetings this year, the broader outlook for dollar/loonie is unlikely to change.

Due to its risk-sensitive nature, the loonie has recently been enjoying inflows, as risk appetite remains elevated in the face of aggressive Fed rate cut bets, and should the US data corroborate that view, the prevailing downtrend in dollar/loonie may stay intact.

The Canadian jobs data are due to be released on Friday, at the same time with the US employment report.

Will Australia’s GDP numbers halt the aussie’s rally?

Aussie traders will also stay busy next week as apart from changes in the broader market sentiment, they will also have to digest Australia’s GDP data for Q2 on Wednesday, as well as China’s Caixin manufacturing and services PMIs on Monday and Wednesday.

When they last met, RBA policymakers decided to keep interest rates unchanged at 4.10%, adding that they remain willing to further tighten policy as inflation, although declining, remains elevated. Yet, the market is not penciling any additional rate hikes. On the contrary, traders are almost fully pricing in a 25bps cut by the end of the year and soft data may verify their view.

If so, the aussie could give back a portion of its latest aggressive gains, but the fact that RBA expectations are way less dovish than other major central banks, combined with the broader risk appetite, may keep any GDP-related losses limited and short-lived.