Cue the Sun

European stock markets were up a tad at the open but are kind of flatlining this week so far – seemingly no direction with Jackson Hole in view. Data is not very encouraging with German economic expansion at its weakest in three years and France’s services sector contracting further in August, which has sent bond yields down and presents the ECB with a real problem come September. The dollar’s brief pause ended and DXY futures have risen to a fresh two-and-a-half month high even as Treasury yields declined from their 16-year highs as the euro softened on the poor EZ data. Crude oil extended lower for a third day; gold rose for a third day to build support above $1,900.

Nvidia Stealing the Show

Wall Street finished lower with the S&P 500 pulling back 0.3% from the 4k level and the Dow Jones down by half a percent. Credit rating downgrades on some banks hit financials, retailers showed weakness as the US seems to be intent on allowing lawlessness in its big cities to become normal, and Nvidia fell almost 3% after its big pop on Monday. Clearly a lot is hanging on results from Nvidia after the bell tonight. It’s expected to deliver a roughly 67% rise in Q2 revenues. Remember a lot is already in the price after it guided for fiscal Q2 to be $11bn, $4bn more than had been expected. Options imply an 11% swing in the share price … if you are trading it, good luck.

What to expect from Jackson Hole (kicking off in Wyoming tomorrow):

1 –A victory lap? Not quite but Powell could be forgiven if he were to crow a bit about the fact the US economy is holding up well and inflation has come down. A significantly higher number of people think the Fed is threading the needle to achieve a soft landing. But he will reiterate the Fed’s commitment to getting inflation back to 2%, but he probably doesn’t need to go full Volcker.

2- Inflation is back down towards more comfortable levels – the big shock is over. But the last stretch will prove the hardest because we are now in a new inflationary paradigm...this will inevitably lead to discussion and ultimately implementation of a kind of tacit or explicit acceptance that inflation will be higher for longer. The theme of this year’s event - Structural Shifts in the Global Economy – is something of a tell. Deglobalisation is here, climate change will mean higher taxes - time to accept higher inflation, peasants! The quiet bit won’t be said out loud here but this is the direction even if no one really wants it.

3 – rate cuts are not imminent. The recent US data with the labour market so strong suggests that it is not in the mood to swiftly cut rates. It could argue that smashing the labour market is the only thing to bring inflation back down to 2%; but as per pt2, it won’t be doing that if it can avoid. The risk we see is that inflation reaccelerates, forcing the Fed into tightening further and breaking things – the hard landing. Guiding the super tanker into port is not going to be easy. The Fed has basically cut the engines and is letting it drift in, but the risks of a mistake are as high as ever. 

4 – so don’t worry about a September hike. The fine-tuning is not going to do much now. Policymakers are worried about inflation overshooting still but it’s now more a question of how long they maintain a restrictive stance than how hard they go. Lagged effects of the hikes already in the system will be an important consideration.

5 – What about the rest? The ECB is entering a period of wait-and-see, having teed up a pause next month after delivering nine straight hikes. But unlike the US the economy is floundering. Today’s HCOB German Flash Composite Purchasing Managers' Index, fell to 44.7 from July's 48.5, its weakest reading in three years. The EZ composite PMI slipped to 47.0 from 48.6. Meanwhile inflation has come down from 8.6% at the start of the year to 5.3%. Same conundrum ultimately – inflation is still too high, but the economy won’t take much more hiking...do you hike into recession or accept permanently higher inflation? Stagflation type scenario.

EURUSD – extending losses after failure at the 100-day line as EU economic data disappoints.