Bad News Is Back To Being Good News (For Now)

WHERE WE STAND – I’m going to lean into my favourite description of my job this morning, namely ‘finding a narrative to suit the price action’.

On Friday, that was simple, stocks sold off, and sentiment soured, after the dismal July jobs report sparked fears that the US economy might be in worse shape than we thought.

Yesterday, it was also simple, as sentiment firmed, and riskier assets bounced, amid a belief that said economic weakness will cause the Fed to cut more aggressively, which should be a boon for equities.

I jest, a bit, but it seems that all equity bulls needed was a break over the weekend to think up a reason as to why they should be buying the dip.

On a slightly more serious note, yesterday’s rebound was more likely mechanical in nature, at least in part being something of a ‘dead cat bounce’, especially considering how chunky Friday’s equity declines proved to be. Nevertheless, for the time being, it seems like this is a bull market that you just can’t keep down for especially long, even if my conviction in the bull case has been shaken somewhat, after the jobs report cast doubt on the resilient underlying nature of the US economy, and after Trump didn’t ‘chicken out’ on the latest tariff threats.

Anyway, there was little by way of fresh information on the trade front, or on any other front really, yesterday. In case anyone’s forgotten, the US-China trade truce is due to expire next Tuesday – no rush, lads, on confirming that the can has been kicked down the road on that front.

Participants, though, continue to wait for some names from the President, both in terms of who will be named to run the BLS, and who will be named to replace Gov Kugler on the Fed Board, with that latter name potentially also being who Trump will end up picking to replace Chair Powell when his term expires next May. In both cases, expect loyalty to the President to trump (pardon the pun!) any assessment of economic acumen or credibility.

In any case, whoever is named to the Board, money markets continue to price a >80% chance that the FOMC deliver a 25bp cut at the September meeting, while also seeing a one-in-three probability that we get more than 50bp of easing before the year is out. Both of those odds seem rather punchy to me, though the trigger to reverse some of that dovish repricing might not come until next Tuesday’s CPI print.

For the time being, though, that dovish repricing has kept the greenback on the backfoot, with the dollar spending most of yesterday simply consolidating Friday’s declines. In my mind, the dollar’s brief moment to shine has now come to an end, with the path of least resistance leading lower once again, as cracks in the economy emerge, and as President Trump yet again ramps up his attacks on independent economic institutions. As we saw earlier in the year, the EUR will probably end up being the biggest beneficiary here.

As for Treasuries, while you’d expect those factors to also pose a headwind, the bulls remained in control as the new trading week got underway, at least at the long-end of the curve. This is a bit of a headscratcher to me, in all honesty, especially as the front-end is now pricing a fairly aggressive near-term easing cycle as a base case, which runs the real risk of inflation expectations un-anchoring.

Still, with benchmark 10-year yields probing 4.20% to the downside, and benchmark 30s getting towards the tighter end of the recent range too, here is the sort of spot where I’d look to fade recent gains, and get back into the steepener trade.

LOOK AHEAD – A plethora of PMIs litter the data docket today, though the US ISM services survey is the only one worth caring about.

The index is seen rising to 51.5 in July, up from a prior 50.8, where a print in line with consensus would see the index rise to its highest level since April. Of course, after Friday’s grim jobs report, the figures have attracted even more attention than usual, as participants attempt to gauge whether the underlying resilience of the US economy is beginning to crumble.

Elsewhere, we have PPI figures due from the eurozone, which shan’t move the needle for either markets, or policymakers at the ECB. Meanwhile, this week’s Treasury supply kicks off with a 3-year sale, which should be well-received, ahead of potentially dicier 10- and 30-year sales on Weds and Thurs respectively.

Lastly, though the bulk of Q2 earnings season is now behind us, notable reports today come from the likes of Caterpillar (CAT), Pfizer (PFE), as well as semiconductor names AMD and SuperMicro (SMCI).