Markets always love good news and they got that last Friday. Technology shares roared along as stocks gathered momentum after Alphabet’s results. The GDP number was good on Friday, so the economy is going alright, and the Fed is expected to cut this week. What can go wrong?
The GDP rose at a 2.1% annualised rate for the second quarter. A surge in consumer spending blunted some of the drag from falling exports and smaller levels of inventory.
The S&P 500 and the Nasdaq Composite hit fresh highs and earnings continue to support the underlying prices. Earnings results are somewhat better than expected. What could be better than resilient earnings growth and low interest rates with the prospect of more to come. Positive quarterly results from Google, Intel, Starbucks Corp, and McDonald’s Corp helped to boost stocks. A rally in large cap shares helped boost European shares.
Equities trading volumes for July have been tepid compared to June’s trading volumes.
This week though will be an important week. A lot of data is due to be released between now and Wednesday when the Fed is expected to cut. It is also expected that the Fed’s favourite measure of underlying inflation is likely to show an uptick, and this has the markets on edge. As we know traders are pricing in a cut and the Fed has been a little difficult to read just what are its intentions and what is driving policy.
Traders have an expectation that the Fed will ease as an insurance measure and an assurance that more cuts are in the offing should they be required. However, if the Fed were to suggest that maybe its easing cycle had finished for a while then rates and equity markets will most likely take that as a bearish signal and sell.
Traders are also looking for signals that the Fed may slow or stop shrinking its balance sheet. Should that happen that would signal to the markets that policy tightening may be off the agenda.
The risk for interest rate traders is the possibility of a 50 bp easing. Fed Funds futures have a 66bp policy rate fall in their pricing. The Fed Funds futures traders have a 19% chance of a 50 bp cut.
Interest rate traders in Europe were a little disappointed with Draghi’s comments last week. Investors were hoping for signals that would suggest that QE in some form was recommencing and were sadly disappointed. Focus is now on September’s meeting where an easing is expected.
Graph 10 yr bunds.
Larry Kudlow came to the dollars aid by suggesting that the U.S. had ruled out plans to intervene in the foreign-exchange markets.
Equities: The S&P 500 rose 0.74% The Dow rose 0.19%. The Vix closed at 12.16. The Stoxx Europe 600 Index rose 0.3%.
Currencies: The euro fell 0.2%. The Bloomberg Dollar Spot Index rose 0.2%.
Bonds: (as at 4.30pm). The ten-year is trading at 2.074%. The 2-year is trading at 1.86% and the 30-year is at 2.596%. The U.S. curve closed on the day with the following closes 2/10 at 21.4 bp, 2/30 at 73.6 bp and the 10/30 closed at 52.0 bp. The U.S. 5-year closed at 1.854%. The 2/5 spread is now -0.7 bp. The ten-year bund closed at -0.417% and the British gilt closed at 0.689%. The 10-year yen gilt is trading -0.151%.
Commodities: WTI rose 0.3%. Gold rose 0.2%. Copper lost 0.68%, and aluminium lost 1.07%.
Bitcoin is trading around $9,479.
Aussie Market Today.
Stocks to continue their rally. All eyes remain pinned to the outcome of the FOMC meeting this week and whether the cut will be 50 bp or 25 bp. Expectations, are built into the market so the result is now becoming rather important.
Bonds are likely to be a little mixed over the course of the week. Initially they should stage a little rally however as we draw towards the middle of the week expect some profit taking and squaring of positions. If this happens then bonds will stage a little pullback. Overall though the direction is for further rate falls as the RBA has indicated a willingness to cut interest rates again.
At least one more rate cut is now expected.