Market Looks to Nvidia

MACRO FRAME

Fiscal dominance has returned to the market, though underlying concerns over the deficit and debt burden are driving investors to demand more risk premium in an environment with persistent inflation. Meanwhile, yields have broadly taken a backseat to equity market performance as corporate earnings growth and expectations have set up bullish conditions to continue through the remainder of the year.

STOCK INDEX FUTURES

Equity index futures were higher overnight, with tech leading gains as the market has brushed off Washington’s push for tighter sanctions against Iran and the ongoing trade spat with Canada. Rather, the market is more concerned with Nvidia’s earnings after the bell Wednesday, as the company is regarded as a bellwether for AI CAPEX and broad sentiment around the tech sector. Treasury yields were little changed overnight, ahead of tomorrow’s PCE report, which is likely to offer greater clarity on price pressures in the economy. Forecasts are expecting headline prices to rise 0.1% MoM and core prices to rise 0.5% MoM. Another in-line reading is likely to see yields fall and expectations of a September rate hike wane and prove supportive of the equities. Investors are also focused on Chair Warsh’s Jackson Hole speech for guidance on how the Fed views the oil shock and its opinion on the Treasury’s buyback program.  Still, it is unlikely that Warsh will do much to tip his hand.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, though a September rate hike remains a near-term risk.

CURRENCIES

US DOLLAR: The USD index is little changed at 99.00 ahead of tomorrow’s PCE data, which is likely to significantly shape expectations of a September rate hike from the Fed. Investors have largely brushed off the US’s sanctions on Iran and the trade fight with Canada, leaving the PCE data to be the main catalyst of the week. The dollar is likely to lose further support if the reading matches consensus forecasts, which could significantly weaken expectations of a September rate hike from the Fed. The dollar is still feeling pressure from debasement fears resulting from the Treasury’s buyback program aimed to lower rates and risk premium at the long end of the curve. Investors are likely to continue to diversify away from the dollar and other major currencies amid persistent worries over government deficits, reflected through elevated long-term yields. The Treasury’s move to lower yields its means that the dollar is likely to be under pressures because if bond prices cannot move lower naturally, the foreign exchange price of owning US debt will price it out via currency depreciation in the dollar. Investors will await the Jackson Hole Symposium for further clues on Fed policy, though Warsh is unlikely to tip his hand. Still, any opinion on the Treasury’s move that could restore confidence in the Fed could boost some confidence in the dollar.

Watch point: The market remains doubtful over a September hike, though the risk of a move upwards in policy should not be discounted given the current inflationary backdrop.

EURO: The euro is little changed at $1.1665. Germany saw a raft of positive data overnight, with Q2 GDP data being revised higher to 0.3% QoQ growth and the Ifo business sentiment index hitting a one-year high. Current and expected conditions for the index rose, suggesting that companies have become more optimistic and that business conditions have stabilized amid the rise in energy prices. That has seen German 10-year Bund yields rise to a 15-year high as traders cemented expectations of rate hikes from the European Central Bank and as natural gas prices remain elevated. Money markets are pricing an 95% chance of a hike in September against 35% for the Fed. Traders are pricing around 40 bps of further ECB tightening this year. This dynamic has offered a strong tailwind for the euro in recent weeks and as such, an unwinding of these expectations risks a pullback in the euro.

Watch point: Broader price direction will be subject to Fed-ECB policy expectations, which is likely to be favorable to the EUR in the near-term.

BRITISH POUND: Sterling is little changed at $1.3636, as traders await US inflation data for policy signals from the Fed. Recent economic data has argued against the opinion that the UK’s economy is sluggish, keeping market expectations of at least one Bank of England rate hike in place. Labor data pointed to a broad cooling in hiring and wage pressure. Markets are priced for 25 of tightening by year-end. For the BoE, the central question is whether energy costs create durable second-round effects in wages and services pricing. Elsewhere, the Burnham government’s October budget is coming into focus and will be key for fiscal confidence in the UK, as concerns over elevated sovereign debt levels have rattled bond markets across major DMs.

JAPANESE YEN: The yen is little changed at 159.20 yen per dollar. The yen has largely been in a holding pattern over the last couple of weeks as investors await the Bank of Japan’s September meeting, where it is expected to raise rates. Bank of Japan Deputy Governor Ryozo Himino will speak on Thursday, his speech will be closely watched for signals if he pushes back on a shift in market pricing of a faster rate of hikes from the BoJ. Stronger expectations of a September hike from the BoJ have been keeping the yen from sliding as fast as it had been earlier in the summer, though existing fundamental pressures remain. Mounting unease over Japan’s fiscal outlook has kept JGB yields elevated without offering the yen support, highlighting market worries over the debt-load. Failure to hike at the September meeting could pressure the yen back toward the 160 area. Markets are pricing a 66% chance of a September hike after the July meeting revealed a more hawkish debate, but a failure to validate those expectations could renew pressure on the currency.

Watch point: Failure to raise rates at the Bank of Japan’s meeting could see the yen drop toward the 160 level.

AUSTRALIAN DOLLAR: The Aussie is 0.15% higher at $0.7160. Minutes of the Reserve Bank of Australia’s August meeting showed that several members were pushing to hike rates, however, noted that upcoming data on inflation, jobs, and GDP ahead of September’s meeting would be needed to further assess the economy. This has set up September’s meeting to be more lively than expected, although money markets have not reflected this. Markets are priced for a 14% chance of a hike in September and see a 68% chance by December. Weak labor data (employment fell by 15,800 in June vs. forecasts of a gain of 15,000) has suggested some softness in the labor market, which was likely welcomed by the Reserve Bank of Australia, and could offer some relief on inflationary pressures. Still, the data is unlikely to weaken the RBA’s tightening bias, as Q3 inflation figures will serve an outsized role in determining whether or not the ban raises rates this after.

Watch point: June’s hiring figures have offered some relief on inflationary pressures, though ongoing pass-through into broader prices is likely to be in focus in upcoming data.

TREASURY FUTURES

Yields moved lower overnight as a CNBC report on Monday that the Treasury could use some of its cash on hand to purchase longer-dated debt has helped keep yields at the long-end of the curve tame. However, investors continue to remain wary of the buyback program and see current debt levels as threatening. Those factors are expected to keep the dollar and bond prices under pressure through the rest of the year. Traders are likely to continue to push back against like-style moves from the administration without any efforts to address the underlying problems of a rising deficit and massive debt load. In the near-term, investors are likely to continue to demand more risk premium in Treasuries and compounded by the rising supply of corporate bonds and persistent inflationary worries set up conditions for yields to resume their uptrend. Markets are pricing a 35% chance of a hike next month and see 21 bps of total tightening by year end.  Warsh’s speech at Jackson Hole symposium this week, will see traders look for guidance over the recent climb in yields and for reassurance of Fed policy from the Trump administration. Failure to address near-term issues without any material plans from the Fed is likely to add to bond market unease.

Watch point: For Fed policy, without any forward guidance, the September decision will likely remain a close call.

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