A preview of the day ahead in European and global markets by Wayne Cole.
Asia saw an extension of Powell’s rally on Monday, with yields and the dollar down and most stocks slightly higher. The main exception was the Nikkei, which didn’t really like the yen’s rise above 144.00 per dollar.
Oil prices rose 0.7% after Israel and Hezbollah exchanged rocket salvos and airstrikes on Sunday, raising concerns about possible supply disruptions if the conflict escalates.
Powell threw a spanner in the works by emphasizing the health of the labor market over inflation, saying in essence that the Fed would not tolerate a decline in the employment outlook. That lowered the bar for a disproportionate 50 basis point cut in September, with futures now implying a 38% chance of such a move and a 103 basis point chance of an easing by Christmas.
The 10-year yield, at 3.79%, is only 10 basis points lower than the 2-year yield, and it won’t be long before the curve turns positive in earnest. It’s surprising that it hasn’t happened already, especially given the magnitude of Treasury issuance, and it suggests that something more is keeping long-term yields low.
Time is also running out for the inverted curve to predict a recession, even though the Atlanta Fed’s GDPNow index slowed to a 2.0% annualized pace from 2.4% mid-month. Real consumer spending numbers on Friday will help refine that number, and could actually be more important than the core PCE deflator, given Powell’s focus on growth and jobs.
Flash estimates of EU inflation are also due on Friday and analysts assume it will be benign enough for the ECB to cut rates as planned on September 19.
The other main event of the week will be Nvidia’s earnings release on Wednesday, where the company will need to beat consensus by a wide margin to justify its stratospheric price-to-earnings ratio of 37% forward earnings.
Markets are pricing in revenue of $28.8 billion and third-quarter guidance of around $32 billion, and it will need to exceed that by at least $2 billion. Options are implying a 9% or more move after the results, which is a significant amount given its market cap is nearly $3.2 trillion.
Key developments that could influence markets on Monday:
– Riksbank publishes minutes of monetary policy meeting
– Ifo Business Climate Index in Germany for August
– US durable goods orders, Dallas Fed manufacturing survey
– Federal Reserve Bank of San Francisco President Mary Daly speaks
(By Wayne Cole; edited by Muralikumar Anantharaman)
