The State of Markets: W(h)ither the Dollar?!
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks…..
…..The current level of our policy rate gives us ample room to respond to any risks we may face, including the risk of unwelcome further weakening in labor market conditions. ”
Source: Fed Chair Powell, Jackson Hole speech, 23rd August 2024 https://www.federalreserve.gov/newsevents/speech/powell20240823a.htm
One of the most interesting features in markets these past few weeks has been the weakness in the dollar. Traditionally, in pullbacks, the dollar is viewed as a ‘safe haven’ play. That is, it usually rallies during phases of ‘risk off’. Since late June, though, the dollar futures (DXY) have sold off during the ‘risk off’ phase (2nd half of July into 5th August); and then sold off again during the ‘risk on’ relief rally (past few weeks). In the first phase, that was the result of a sharp strong YEN rally. In the ‘risk on’ phase the non-dollar currencies of the other major pairs in the index rallied (i.e. GBP, EUR, CAD and so on).
That theme continued yesterday, as Chair Powell reinforced the expectation for a US rate cutting cycle and discussed the ‘ample room’ that’s available to the Fed (see quotes above). With that, the dollar sold off again with the GBP breaking out to new 2 year+ highs; whilst the Euro reached its highest since July last year. Strong non-dollar currencies fit the currently changing ‘global macro theme’ (which we’ve been outlining in 2024) and, of course, often occurs when the Fed cuts rates.
Elsewhere, one of the other key questions in investors’ minds is whether a ‘wave 3’ of selling is likely in this pullback (or, indeed, is the pullback over)? We discuss the evidence for, and our view of that, in this week’s Longview on Friday publication (see HERE).
This week attention will switch back onto the macro data (and away from the Fed). Key US data includes the Chicago PMI on Friday (typically a good indicator of the ISM manufacturing data the following week); consumer confidence on Tuesday and personal income and spending, including the PCE deflator, on Friday. Data out of Europe includes French, Italian & Eurozone headline & core CPIs on Friday & German IFO on Monday. Nvidia’s earnings results will be watched closely (Wednesday), whilst Chinese earnings, especially from its banks, will also be a key feature throughout the week. See below for a full list of key events this week.
Key chart: US dollar index (DXY) vs. S&P500
Upcoming important data/events this week:
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Key Research
Quant Monthly No. 8, 22nd August 2024:
“S&P500 Quarterly Earnings – Key Trends (& Concerns)”
• The trends in this quarterly reporting season were broadly positive. Earnings surprised to the upside and grew rapidly on a quarterly and annual basis. Sales growth continued (although didn’t surprise meaningfully to the upside), while margins remained strong.
• Arguably the most troubling part of earnings, at this juncture, is the expectation for continued growth in the operating (EBIT) margins. Despite hitting record levels in 2024, the consensus expectation is for further margin expansion in 2025 and 2026 (fig 1). Of note, though, that is despite slowing inflation (corporate pricing power) and a slowing economy (i.e. lower volume growth).
• Margin growth, in the past two years, has also been significantly boosted by a doubling of MAG7’s net income level (and near doubling of its share of total S&P500 net income). That sector compositional effect has helped push margins to record highs. From here, though, MAG7’s earnings growth rate is expected to slow, whilst its margins appear to be peaking.
Key North American macro data & events
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Events: |
Speeches by the Fed’s Bostic on the Economic outlook (Wed & Thurs, 11pm & 8:30pm respectively). |
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Monday: |
US durable goods orders (July first estimate, 1:30pm); US Dallas Fed manufacturing sector activity (Aug, 3:30pm). |
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Tuesday: |
US FHFA house price index (Jun, 2pm); US S&P/Case-Shiller 20-city & national house prices (Jun, 2pm); US Conference Board consumer confidence (Aug, 3pm); US Richmond Fed manufacturing (Aug, 3pm); US Dallas Fed service sector activity (Aug, 3:30pm). |
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Wednesday: |
N/A |
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Thursday: |
Canadian CFIB business barometer (Aug, 12pm); US GDP (Q2 second estimate, 1:30pm); US weekly jobless claims (1:30pm); US pending home sales (Jul, 3pm). |
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Friday: |
Canadian GDP (Jun, 1:30pm); US personal income & spending including headline & core PCE inflation (Jul, 1:30pm); US Chicago PMI (Aug, 2:45pm); US Michigan sentiment (August final estimate, 3pm). |
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Key earnings: |
Bank of Montreal, Bank of Nova Scotia, GE HealthCare, Woodside Energy (Tues); NVIDIA, Salesforce, RBC, CrowdStrike, National Bank of Canada, HP, Veeva Systems, (Wed); Dell, Canadian Imperial Bank, Marvell, Autodesk, Lululemon Athletica (Thurs). |
Fig B: US Conference Board consumer confidence (index)
Key European macro data & events
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Events: |
Speeches by the ECB’s Knot in Rotterdam (Tues, 11:45am), Nagel in Frankfurt (Tues, 3pm), Lane & Nagel in Frankfurt (Thurs, 10:15am & 6pm) & Schnabel, Rehn, Kazaks, Simkus & Muller on panel in Tallinn (Fri, 7:35am); Riksbank minutes from August meeting (Mon, 8:30am). |
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Monday: |
German IFO business climate (Aug, 9am). |
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Tuesday: |
German GDP (Q2 final estimate, 7am). |
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Wednesday: |
German GfK consumer confidence (Sep, 7am); French INSEE consumer confidence (Aug, 7:45am); Eurozone M3 money supply & monthly loans to households and companies (Jul, 9am); Italian industrial sales (Jun, 9am). |
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Thursday: |
Eurozone new car sales (Jul, 5am); Eurozone consumer confidence (August final estimate, 10am); German headline CPI (August first estimate, 1pm). |
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Friday: |
French total payrolls (Q2, 6:30am); German import price index (Jul, 7am); German retail sales (May, 7am); French consumer spending (Jul, 7:45am); French headline CPI & PPI (August first estimate, 7:45am); French GDP (Q2 final estimate, 7:45am); German unemployment change (Aug, 8:55am); Italian unemployment rate (Jul, 9am); Eurozone inflation estimate (Aug, 10am); Eurozone unemployment rate (Jul, 10am); Eurozone & Italian headline & core CPI (August first estimate, 10am); Italian ISTAT consumer & manufacturing confidence (Aug, 11am). |
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Key earnings: |
Novozymes (Wed); Pernod Ricard (Thurs); Ambu (Fri). |
Fig C: Eurozone headline & core CPI (Y-o-Y %)
Key UK macro data & events
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Events: |
Speech by the Bank of England’s Mann in Frankfurt (Wed, 1:15pm); market holiday in the UK on account of Bank Holiday (Mon). |
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Monday: |
N/A |
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Tuesday: |
BRC retail prices (Aug, 12:01am); CBI distributive trade survey (Aug, 11am). |
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Wednesday: |
N/A |
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Thursday: |
N/A |
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Friday: |
Lloyds business barometer (Aug, 12:01am); Nationwide house prices (Aug, 7am); Net consumer credit, mortgage approvals & M4 money supply (Jul, 9:30am). |
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Key earnings: |
National Grid (Wed). |
Fig D: UK M4 money supply growth vs. M4 lending growth (Y-o-Y %)
Key Asia-Pacific macro data & events
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Events: |
Chinese 1-year medium term lending facility announcement (size and rate). |
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Monday: |
Japanese ESRI leading index (June final estimate, 6am). |
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Tuesday: |
Japanese PPI services (Jul, 12:50am); Chinese industrial profits (Jul, 2:30am). |
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Wednesday: |
Australian headline & core CPI (Jul, 2:30am). |
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Thursday: |
Japanese ESRI consumer confidence (Aug, 6am). |
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Friday: |
Japanese jobless rate (Jul, 12:30am); Japanese industrial production & retail sales (Jul, 12:50am); Australian private sector credit (Jul, 2:30am); Japanese housing starts (Jul, 6am). |
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Key earnings: |
PetroChina, BHP Group, (Mon); Woodside Energy (Tues); CNOOC, BYD, Bank of Communication, China Citic Bank, People’s Insurance, Shanxi Xinghuacun (Wed); China Construction Bank, Bank of China, China Life Insurance, China Merchants Bank, Wuliangye, Pudong Development Bank (Thurs); Agricultural Bank China, China Shenhua Energy, Shenzhen Mindray, Shaanxi Coal Industry (Fri). |
Fig E: Japanese industrial production (Y-o-Y %)
Last week:
Longview on Friday, 23rd August 2024:
“Sector Rotation and the Case for Wave Three (More SELLing)”
Quant Monthly No. 8, 22nd August 2024:
“S&P500 Quarterly Earnings – Key Trends (& Concerns)”
The SHORT VIEW (& market positioning), 20th August 2024:
“Whither the Dollar?”
Prior week:
Longview on Friday, 16th August 2024:
“China & America –> The Inseparable Twins (still!)”
Quant Monthly No. 7, 15th August 2024:
“How Strong is the US Corporate Sector ex-Tech? a.k.a. Is the tech sector a significant distortion?”
Longview ‘Tactical’ Alert No. 84, 14th August 2024:
“This Pullback: More Selling Expected”