Market Thoughts – Monday 2nd September – The Calm Before The Storm

Where We Stand – A new trading week gets underway with US participants away for Labor Day, heralding not only thinner than usual conditions, but also the end of ‘summer markets’, and the start of the final stretch of 2024 into year-end. Even if, it didn’t quite feel like the traditional summer this year - either in terms of the elevated cross-asset vol we saw, or the weather we endured here in the UK!

Unsurprisingly, it’s ’all quiet on the western front’ for markets this morning, though this feels akin to the ‘calm before the storm’. Equity bears have, again, found some luck in China and Hong Kong, with the Hang Seng just shy of 2% softer, in reaction to rather dismal weekend manufacturing PMI figures, which showed activity in the sector contracting for the fourth straight month. Spill-over from this softness, however, has been limited.

A busy week awaits, despite Labour Day, with the US data docket jam-packed, including the latest ISM manufacturing & services PMIs; July’s JOLTS job openings print; and, of course, Friday’s all-important employment report. Plenty among all of that to continue the tug-of-war in market pricing between a 25bp or 50bp Fed cut in three weeks’ time, and plenty to spark cross asset vol as well. Though, as always, there will likely be significantly more noise than signal in the price action. 

Equities come into the week on the front foot, having successfully navigated NVDA earnings last Wednesday, with the S&P having notched a third straight weekly advance last week, training to within inches of a fresh record. The path of least resistance continues to lead higher for equities, with dips continuing to be buying opportunities, given strong earnings & economic growth, coupled with the forceful ‘Fed put’ which remains in place. 

Curve steepening, meanwhile, has been a notable feature of the Treasury complex of late, with the 2s10s close to flipping back into positive territory as last week wrapped up. Given how market bets on near-term policy easing continue to look overdone, the front-end of the curve should soon pare recent gains, potentially bringing this spell of bear steepening to a conclusion. 

Higher front-end yields would naturally be a positive for the dollar, which starts the day on the back of its best week since the middle of April, per the DXY. Cable’s decline back below 1.32, and the EUR surrendering the 1.11 handle, both look like the start of a move with more left in the tank, with the buck’s post-Jackson Hole selling continuing to retrace. 

Though a 25bp September Fed cut remains my base case, the market’s reaction to this week’s data is likely to be a relatively straightforward one - good macro news will be good news for dollar bulls, as cuts continue to be priced out of the curve, and vice versa. The balance of risks for the USD, overall, still points to the upside, given the high bar for markets to price more than the present approx. 100bp of cuts by year-end. 

Further out, the 200bp of cuts priced by the end of next year effectively implies the market pricing a US recession over that period, which is certainly not borne out by last week’s upward revision to Q2 GDP, pointing to 3.0% annualised QoQ growth, the seventh quarter in the last eight which has seen growth of north of 2%. 

The FX market is, as expected, quiet this morning, with no major moves across the G10 board, and catalysts lacking. The same can be said of the precious metals space, though spot gold has dipped south of the $2,500/oz mark, potentially putting the bears in the driving seat if this downside break can hold on a closing basis.

Look Ahead – A quiet day almost certainly awaits with US and Canadian markets closed for Labor Day, resulting in lighter volumes, and much thinner liquidity, than usual. The economic docket also provides little of any particular interest, with final eurozone and UK manufacturing PMI figures unlikely to move the needle in a significant way. Mercifully, there are also no central bank speakers due, likely leaving markets in a holding pattern barring any unexpected news-flow, most obviously in the geopolitical realm.