Record Highs As The Week Draws To A Close

Where We Stand – Sentiment firmed once more on Thursday, with the S&P 500 notching a fresh record high, as the tech sector led the market higher, amid notable outperformance in the Nasdaq.

The gains had little by way of fundamental catalyst behind them, evidencing once more how the path of least resistance continues to lead to the upside. The clear message from policymakers in recent days, that the policy ‘put’ is well and truly back is undoubtedly helping to provide support to risk appetite, with participants taking onboard the “we’ve got your back” messaging from monetary and fiscal authorities across the globe. This should continue to give participants confidence to remain further out the risk curve, knowing that a significant degree of tail risk has been removed, even if the ‘real world’ efficacy of recent measures could well be debateable.

In any case, yesterday brought a solid slate of US economic releases – the final estimate confirmed above-expected growth of 3.0% in the second quarter; initial jobless claims remained at a 4-month low; and, durable goods orders were unchanged in August, well above the Bloomberg forecast range. Once again, it appears that ‘good news is good news’ for stocks at the current juncture.

The packed slate of Fedspeak, meanwhile, was almost a complete damp squib, with neither Chair Powell, nor NY Fed President Williams making any remarks on the monetary policy outlook. Markets, however, have pared bets on a 50bp cut in November, now seeing such an outcome as an even chance, down from around a 2-in-3 probability a couple of days ago.

Nevertheless, with the FOMC firmly in data-dependent mode, and willing to act forcefully were data to soften, financial markets are likely to remain highly sensitive to incoming releases, chiefly next Friday’s US employment report.

The aforementioned hawkish repricing, and stronger than expected economic data, allowed the Treasury curve to flatten yesterday, with the 2s10s tightening back under 20bp, snapping a 6-day run of bear steepening, as sellers drove front-end yields higher, though both 10- and 30-year yields did touch their highest levels in three weeks. The overall balance of risks, however, continues to point towards a steeper curve, particularly if the Fed were to move towards a second straight 50bp cut.  

Elsewhere, the precious metals space continues to attract plenty of interest, with gold hitting a new record high for the sixth straight day yesterday. The yellow metal’s run appears to be a pure momentum play at this stage, particularly with none of risk sentiment, the USD, nor Treasuries moving in the direction that one would ‘expect’ were gold to be rallying so sharply. Exemplifying this was the sharp rise in silver, which traded to its highest level since 2012 intraday, though both precious metals reversed course entirely as the session progressed. This reversal could be cause for concern for the bulls, though it feels too early to call a ‘top’ just yet.

In contrast, crude traded heavy on the day, with front WTI down as much as 4%, the biggest one-day decline in over a fortnight. A combination of the continued ‘buy the rumour, sell the fact’ trade around recent Gulf of Mexico weather events, coupled with reports of Saudi Arabia preparing to abandon its unofficial $100bbl price target seemed the primary catalysts behind crude’s decline. I continue to favour selling any rallies, were they to emerge, with the demand outlook remaining soft, leaving a test of recent lows around the $65bbl figure a distinct possibility.

Finally, in the FX space, it was a relatively quiet and choppy day, though ultimately one where a fair chunk of Wednesday’s USD strength was given back – the DXY retreated back under the 101 handle, while other G10s also found demand, with the AUD and NZD leading the way higher, piggy-backing on the positive risk tone. Most of the moves, once again, appeared flow-driven, with USD selling picking-up into, and just after, the London fix.

That said, a slow, but steady, grind lower in the greenback remains my base case for now, as the Fed plot a quicker return to neutral than G10 peers.

Look Ahead – It’s finally Friday! And, thankfully, a relatively quiet economic docket awaits as participants look to cruise into the weekend.

This afternoon’s US PCE figures are likely to be of most interest, with the Fed’s preferred inflation metric – the core PCE deflator – set to have risen by 0.2% MoM, unchanged from the July read, and by 2.7% YoY, just 0.1pp quicker than the pace seen a month prior. Nevertheless, with the FOMC seemingly having obtained sufficient confidence in inflation returning to the 2% target, the impact of the data may well be somewhat minimal.

Elsewhere, today, July’s Canadian GDP figures are unlikely to cause much by way of significant volatility, nor is the final read on September’s UMich consumer sentiment survey. Another busy slate of central bank speakers awaits, however, with remarks from ECB Chief Economist Lane the ‘pick of the bunch’, with markets discounting around a 60% chance of a 25bp cut in October.