After nearly a week away in Central Java – and when the world reopens, I strongly recommend visiting the regions around Borobudur for a more Ubud experience than Ubud – the more things change, the more they stay the same. Last night’s impressive results from Salesforce saw its share price climb by 26.0% on the day. The big-tech, work from home, Covid-immune business model trade is alive and well. Naturally, the Nasdaq 100 and S&P 500 hit new record highs.
Elsewhere, currency and commodity markets appear to be in a consolidative mode, with precious metals much the same, albeit with some serious intraday volatility. That inevitably leads to tail-chasing markets in the shorter term, with the gnomes of finance and the world’s financial press desperately looking for facts to fit the narrative. Weeks like these are tiring mentally as the financial world expends needless energy justifying intra-day moves and searching for conspiracies.
Today’s data calendar is quiet through Asia and Europe. China Industrial Profits fell by 8.10% YoY in July, a marked improvement on last month’s 12.8% decline. It hints that China’s recovery remains on track. However, the low hanging fruit may have been plucked, and much of the improvement going forward will depend on a further recovery in international markets.
The Bank of Korea held rates steady at 0.50% in a well-telegraphed result, as the BoK sees little value in lowering rates from these levels, preferring fiscal and monetary stimulus to do the heavy lifting. The BoK stated that a recovery would be delayed due to coronavirus, in an impressive use of central bank states the obvious. Taking a page from the same playbook, the Bank of Japan also indicated today that monetary policy would remain accommodative until an economic recovery was in place, something they’ve been saying for the last 30 years. That will likely be the extent of central bank wisdom from the Asian region today, although I personally note, that markets can go up or down, depending on whether there are more buyers or sellers.
With Asia in safe central bank hands, most attention will be on the US data this evening and the Fed Chairman’s Jackson Hole speech at 2110SGT. US GDP is expected to shrink by a mind-boggling 32.50% in Q2 QoQ. It is though, a known unknown, as the economy was ravaged by Covid-19 lockdowns, both domestically and internationally. The world has quickly moved on since then and as they will with the GDP data. Far more interesting will be the weekly Initial and Continuing Weekly Jobless Claims. With no new stimulus in sight from the US Congress, the Initial Claims are expected to remain around 1 million, with continuing claims remaining anchored around 14.5 million. Neither is something for the US government to be proud of, and the potential for a negative surprise on both is perhaps higher than usual.
Any fallout from the jobless data is going to be short-lived, though, as Mr Powell’s speech follows shortly after the release. Financial markets are expecting the Chairman to hint at lower rates for longer, and most importantly, allow inflation targets to overshoot to get the average inflation up. The twin goals seem incongruous though, as I can’t imagine the Fed allowing the yield curve to steepen markedly. Tonight may be the first hint of yield curve control as well, just don’t call it yield curve control.
You could construct a bullish or bearish case, no matter what Mr Powell actually says. If the curve is to steepen and inflation rise, perhaps you would buy US dollars and sell gold. But wait; if inflation is rising, surely that means world growth is recovering? Therefore, one would sell US dollars and load up on everything else? And although inflation is zero, we are all buying gold, but gold is a hedge against inflation, therefore, buy more gold? The tail-chasing scene would be like something straight out of Top Gun. A far better strategy is probably waiting on the side-lines until the speech, let the FOMO gnomes do their worst, and see what the world looks like after the dust settles.
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