The FOMC minutes showed that the committee seemed to be inclined to keep stimulus “lower for longer”. However, market participants were surprised that the committee was less inclined to use new measures, such as yield curve control, as many were looking for. The Jackson Hole Symposium towards the end of this week may show a change to that view. The biggest data piece for the week was on Friday, in which the Manufacturing and Services PMI Flashes were released for August. While most of the world’s composite numbers were worse, the US numbers surprisingly held up. The US Democratic Party officially nominated Joe Biden as their candidate, while Republicans have their convention this week. Also, New Zealand postponed its General Elections by 4 weeks until October 17th amid worries of coronavirus contagion through the country.
“The Jackson Cage, Down in the Jackson Cage, And it don’t matter just what you say, Are you tough enough to play the game they play, Or will you just do your time and fade away, Down into the Jackson Cage” – Bruce Springsteen
The word “Cage” from one of Bruce Springsteen’s lesser known songs, Jackson Cage, can easily be swapped out with the word “Hole” to describe the situation of the 16th Chair of the Federal Reserve, Jerome Powell. On Thursday, at the Jackson Hole Symposium, Powell will speak to the Monetary Policy Framework. The framework, which was first announced in 2018, was based on how to keep inflation and interest rates low amid global recessions. Now that we are in a recession, Powell must figure out a way to help get the US out of this mess. Equity prices and gold prices are high, while the US Dollar is low. These are signs of inflationary environment. However, core PPI is was 0.3% YoY, core Inflation was 1%, and the Fed’s favorite core PCE is expected at 0.8% on Friday. Most central banks, including the Fed, try to target 2%-3% inflation. If higher asset prices and a lower US Dollar start feeding though to the real economy, the Fed will be in trouble.
One-way Powell may try and get out of this is through Yield Curve Control (YCC), in which the Fed buys short term bonds to target a certain rate. Australia, for example, is currently using YCC. They are targeting the yield of the 3-year bond. However, from the July FOMC minutes, we discovered that members felt there would be “only modest benefits in the current environment”. Some are expecting the FOMC to take up this approach at the September meeting. Watch for hints in Powell’s Jackson Hole speech on Thursday! In addition, the fall in US initial jobless claims seems to have leveled off near 1.1 million. The Fed will have to find a way to walk the tightrope by helping to increase employment while keeping inflation low.
Its worth noting that one topic that is not making big headlines is the coronavirus. Cases seem to be leveling in the US, Southeast Asia and Australia, while marginally increasing in the UK and Europe. Watch for “race for a vaccine” headlines which may push stocks higher.
This week is the Republican National Convention in Charlotte, North Carolina, where President Donald Trump will be selected as the nominee for the Republican Party to face recently selected Democratic Nominee, Joe Biden. Biden is ahead by a generous amount in many polls, however, watch for a bounce for Donald Trump after his acceptance next week. Meanwhile, US Congress remain in recess and there has been no advances on the fiscal stimulus talks.
Home Depot, Walmart and Target released spectacular earnings for Q2 last week, crushing estimates. However, keep in mind that these retailers were deemed “essential” and allowed to stay open during the shutdown for the month of April. While smaller mom and pop stores were closed, people had no where else to turn for groceries and toilet paper. We’ll have to wait until Q3 earnings to see if this turns into a trend. This week brings CRM, MDT and RY. Although these aren’t large retailer names, their earnings could move the markets this week.
Flash PMIs from most countries were disappointing on Friday. Although manufacturing data was roughly in line, services PMIs were mostly lower than expected, bringing down the composite numbers. This week will bring many second looks at Q2 GDP Growth Rates, however the primary macro event will be the Jackson Hole Symposium. Other relevant economic data is as follows:
Monday
- New Zealand: Retail Sales QoQ (Q2)
Tuesday
- Germany: GDP Growth Rate QoQ (Q2)
- Germany: Ifo Business Climate (AUG)
- US: New Home Sales (JUL)
- US: Richmond Fed Manufacturing Index (AUG)
Wednesday
- New Zealand: Trade Balance (JUL)
- US: Durable Goods Orders (JUL)
- Crude Inventories
Thursday
- China: Industrial Profits (YTD) (JUL)
- Canada: Current Account (Q2)
- US: GDP Growth Rate QoQ 2nd Est (Q2)
- US: Initial Jobless Claims (Week Ending August 22nd)
- US: Pending Home Sales (JUL)
- US: Jackson Hole Symposium
- US: Fed Chairman Powell Speech
Friday
- Germany: GfK Consumer Confidence (SEP)
- EU: Consumer Confidence Final (AUG)
- EU: Economic Sentiment (AUG)
- Canada: GDP Growth Rate QoQ (Q2)
- US: Personal Spending (JUL)
- US: Personal Income (JUL)
- US: PCE Price Index (JUL)
- UK: BoE Gov Bailey Speech
- US: Chicago PMI (AUG)
- US: Jackson Hole Symposium
Chart of the Week: Daily BTC/USD
Source: Tradingview, FOREX.com
Back in March, BTC put in a low near 4,550 around the same time as stock indices. Bitcoin traded higher into resistance near 10,000 in early May and consolidated in a flag formation. In late July, the cryptocurrency broke higher out of the flag patten and above the downward sloping trendline resistance from the highs of December 2017, as well as horizontal resistance near 10,500. The target for a flag formation is the length of the flagpole added to the breakout point from the flag, which in this case is near 15,500. The RSI has been diverging from price since early August. The strong move higher may have gotten a little ahead of itself and we may see a pullback to 10,500 before resuming higher towards the target.
Source: Tradingview, FOREX.com
In addition, on a weekly timeframe, the candlestick formation is a shooting star. After piercing horizontal resistance near 12,325, price moved lower to form the reversal candle.
Even during a pandemic, traders take holidays. As we reach the end of August, the last week is traditionally slow. This may be the case next week as well. The Jackson Hole Symposium may be the event to stir things up for the week. Until then, trade safe and watch quiet markets for sporadic, short moves. US Labor Day is right around the corner, which signals the unofficial end to summer. Things tend to pick up after that.
Have a great weekend and please remember to always wash your hands!
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