Post-Jackson Hole, market participants are obviously seeing hawkish currents at the FOMC. Even though this comes as a surprise to nobody, the marketplace still acted as if it were so. At last glance the Fed Funds Futures market now interprets a 42% probability of a rate increase at the September meeting. There are still two major macro events that will figure into the shaping of monetary policy in this country’s short-term, and two of them are this week. They are today’s year over year Core PCE Price index, and Friday’s jobs numbers to include both headline Non-Farm Payrolls, and wage growth data. I would think that an upside surprise in either of these items, particularly the NFP print could all but seal a .25 increase in the Fed Funds Rate. Conversely, any equally disappointing data could put such a move back in Limbo until after the national election. A third item type that could impact decision making would be unforeseen crisis. Though unpredictable in nature, one of these always seems to be in focus when decision makers don’t really want to be decision makers.
The global reaction to last Friday’s events are clear to see. The US dollar is stronger versus most of it’s peers, especially the Japanese Yen. With the weakening of that Yen, and Japanese equity markets rocketing in upward fashion, divergent expectations for central banking policy are plain to see. The reaction for equities are far less grand across Europe where expectations for the ECB are less defined in the “Not so bad, at least right now” wake of Brexit. Markets are closed today in the UK.
Strength in the Dollar will exacerbate weakness in the commodity space. Those trading Crude will find WTI under $47 a barrel this morning. Still, nothing is technically even tested until $45.75 breaks. Gold is more of a concern, as for many traders, it is their best trade of the year, and one would think that if the commodity approaches 1300/05, stop orders will become an issue to the downside. That may present a buying opportunity, but it will not feel like it at the time.
Last week of Summer, gang. Parking lots are thin. Train crowds are light. Let’s do a great job today (and everyday). When volume gets tough, let’s double down, and maintain focus. Effort costs you nothing. Even when it’s results are unproductive, it does breed discipline. Discipline breeds victory.
08:30 – Personal Income (July): Expecting 0.4%, June 0.2% m/m.
08:30 – Consumer Spending (July): Expecting 0.3%, June 0.4% m/m. We’ve run into a bit of a danger zone as far as these two items are concerned. For three straight months, the rate of growth for Consumer Spending has easily outpaced the rate of growth for Personal Income. While this is actually a positive in the short-term for the velocity of money (which excites academic economists), this is in truth an unsustainable trend that if left to continue will curtail not only spending, but saving as well. Projections are for this trend to end today. I hope so. The recent weakness in Consumer Sentiment will only get worse if the US consumer continues to be uncomfortable.
08:30 – PCE Price Index (July): Expecting 0.0%, June 0.1% m/m…0.9% y/y.
08:30 – Core PCE Price Index (July): Expecting 0.1%, June 0.1% m/m…1.6% y/y. This one item will impact Fed Funds Futures rate increase probabilities more than anything you’ve seen since…. last Friday, and more than anything you’ll see until this Friday. The money ticket in this space will be the year over year Core PCE print. We already know that y/y Core CPI took a step back in July (from 2.3% to 2.2%). Do we see a similar drop here to something like 1.5%? If you’re long Financials, you hope not. Dividend invstors hope so.
10:30 – Dallas Fed Manufacturing Index (August): Expecting -1.0, July -1.3. Thanks to what has transpired in the Energy space, Dallas has easily suffered the harshest conditions of all of the regional Fed districts when it comes to manufacturing. Though July showed some promise, the month still printed in contraction, the nineteenth consecutive negative headline print for this district. We expect today’s print to be very close to a positive number despite a number of other districts posting awful numbers for August.