Happy Monday, and welcome back to FXDD’s On the Daily- our daily research updates on markets and economies. Here’s what we have been watching in economic and financial data over the last 24 hours:
- Today’s economic data in the US was marginally stronger- the Chicago Fed Activity Index and Existing Home Sales both came in stronger than expected. However, Markit composite PMIs came in weaker. UK PMIs were split, with services disappointing and manufacturing surprising markets to the upside. Overall, the trend of “growing but slowing” continues globally. Over the last 10 days, US economic momentum has stalled more than global economic momentum, but both remain downtrending.
- This week, we’re sitting on the edge of our seats ahead of the Jackson Hole Symposium, where Jerome Powell is widely expected to drop hints about the path of a potential tapering of the Federal Reserve’s asset purchase program. Markets have already begun to tighten (i.e., dollar up), indicating the tightening of global liquidity conditions. If Powell signals that the Fed is on the path to taper in December, we expect markets to tighten further in a dollar rally and risk-off.
- Looking at markets thus far this morning, the risk is largely rebounding after a tough week. Global equities are positive, commodities are broadly rallying, and the dollar is giving up some gains. Since our full pivot to US stocks as our dominant preference, the S&P 500 is 3.6%. Going into this week, it would be prudent for us to think about protecting some of these gains ahead of a potentially negative catalyst, i.e., Powell tied teeing up a September taper announcement. Chairman Powell has a poor track record in eliciting strong equity market responses around the major meeting, so we should be cautious this week.
Overall, we continue to think QUALITY US stocks will be the best place to hide during a contraction of liquidity alongside the dollar (vs. EUR and JPY). Let’s look at some of this data. First, we show our YTD tracking of major currencies, what we like to call traditional currencies (we also include commodity returns in the table):
Next, we proxy capital flows using our Currency Bloc Monitor, which aggregates exchange rate moves across 48 currency pairs into major regions or Blocs. We show the evolution of these Currency Blocs over time:
Finally, we show our Market Environment Monitor, which aggregates the growth and inflation signals from major global investment markets to tell us what the current market environment is, i.e., expansion, inflation, deflation, or stagflation:
Stay vigilant this week, and keep your eye out for our Jackson Hole preview! Until tomorrow.