European stock markets were up a tad at the open but are kind of flatlining this week so far – seemingly no direction with the Jackson Hole gathering in view. The FTSE 100 is up 0.69 per cent in early trading, while the Dax is a little behind on 0.45 per cent. It was a mixed session in Asia with the Shanghai Composite falling 1.3 per cent but the Hang Seng holding firm. Wall Street finished lower with the S&P 500 pulling back 0.3 per cent and the Dow Jones down by 0.5 per cent.
Credit rating downgrades on some banks hit financials, retailers showed weakness as the US seems to be intent on allowing lawlessness in its big cities to become normal, and Nvidia (US:NVDA) fell almost 3 per cent after its big pop on Monday. Clearly a lot is hanging on results from Nvidia after the bell tonight. It’s expected to deliver a roughly 67 per cent rise in Q2 revenues. Remember a lot is already in the price after it guided for fiscal Q2 to be $11bn, $4bn more than had been expected. Options imply an 11 per cent swing in the share price. If you are trading it, good luck.
Elsewhere, the data is not very encouraging with German economic expansion at its weakest in three years and France’s services sector contracting further in August, which has sent bond yields down and presents the European Central Bank with a real problem come September. The dollar’s brief pause ended and DXY futures have risen to a fresh two-and-a-half month high even as Treasury yields declined from their 16-year highs. Crude oil extended lower for a third day; gold rose for a third day to build support above $1,900.
But the big news this week is going to be Jackson Hole, which kicks off in Wyoming tomorrow. What should we expect?
A victory lap? Not quite but Federal Reserve chairman Jerome Powell could be forgiven if he were to crow a bit about the fact the US economy is holding up well and inflation has come down. A significantly higher number of people think the Fed is threading the needle to achieve a soft landing. But he will reiterate its commitment to getting inflation back to 2 per cent.
Inflation is back down towards more comfortable levels – the big shock is over. But the last stretch will prove the hardest because we are now in a new inflationary paradigm. This will inevitably lead to discussion and ultimately implementation of a kind of tacit or explicit acceptance that inflation will be higher for longer. The theme of this year’s event – Structural Shifts in the Global Economy – is a tell. Deglobalisation, climate change means higher taxes, so it’s time to accept higher inflation, peasants! That bit won’t be said out loud, but this is the direction even if no one really wants it.
Rate cuts are not imminent. The recent US data with the labour market so strong suggests that it is not in the mood to swiftly cut rates. It could argue that smashing the labour market is the only thing to bring inflation back down to 2 per cent; but as per pt2, it won’t be doing that if it can avoid it. The risk we see is that inflation reaccelerates, forcing the Fed into tightening further and breaking things – the hard landing. Guiding the super tanker into port is not going to be easy. The Fed has basically cut the engines and is letting it drift in, but the risks of a mistake are as high as ever.
So don’t worry about a September hike. The fine-tuning is not going to do much now. Policymakers are worried about inflation overshooting still but it’s now more a question of how long they maintain a restrictive stance than how hard they go.
What about the rest? The ECB is entering a period of ‘wait and see’ and the Bank of England is a little behind the US. But unlike the US, the Eurozone economy is floundering and the UK’s isn’t much stronger. Same conundrum ultimately – inflation is still too high, but the economy won’t take much more hiking.
The Trader is written by Neil Wilson, chief market analyst at Finalto
