Powell in Jackson Hole: Markets ended last week with all attention on US Federal Reserve Chairperson Jerome Powell’s speech at the Jackson Hole symposium. Following weeks of scrutiny from the US President Trump, particularly as it relates to the Fed’s gradual rate hiking cycle and its effects on the US Dollar, investors sat poised for insights into whether the political heat, along with growing global financial risks would derail the bank’s plans. On balance, the speech delivered by Chairperson Powell was neutral if not a little more to the dovish side, emphasizing the data dependence of the Fed’s decision making, especially regarding target-inflation.
Interest rates: Interest rate traders were hyper sensitive to the news, as they assessed what could possibly be inferred from Chairperson Powell’s speech regarding interest rate moves moving into the end of 2018 and the start of 2019. Markets changed little in terms of its pricing for the path of rate hikes at the end of this year, practically fully pricing in a rate hike at September’s meeting, and keeping steady bets that of a hike in December at around 60%. The disconnect remains in the outlook for 2019, with markets only pricing about 1 hike versus the Fed’s flagged 3, indicating traders’ lack of conviction that rates can be hiked too steeply into next year.
Tightening spreads: The remarkable move in bond markets in response to Chairperson Powell’s speech was again in the 10 Year US Treasuries, and the spread between that asset and its 2 Year equivalent. Yields on 10 Year Treasuries hovered around 2.81% to 2.82% throughout late week trade, as market’s continued to diminish the term premium on long term bonds; while the yield on the 2 Year note edged higher to 2.63%, as traders continued to factor in 2018’s flagged rate hikes from the Fed. Naturally, the effect of this dynamic narrowed the bond spread to new lows of about 19 points, reaffirming concerns of an inverted yield curve and a medium term economic slow-down.
The Greenback: The US Dollar once again eased its recent bullish run in response to the more dovish Fed, with the DXY shedding 0.54 per cent in the immediate aftermath of the news. The EUR/USD was the greatest beneficiary in the dovish Fed, tearing through the 1.15 handle to presently trade around 1.1617. The local unit also managed to recover territory against the greenback, pushing above 0.7310 resistance to end the week at 0.7330 itself. Arguably the most noteworthy move in currency markets, however, was the oft-maligned USD/CNH, which hit a near-month-long-low on the back of the dovish Fed, coupled with the statement from the PBOC earlier on Friday it would undertake “counter-cyclical” measures to support the Chinese currency.
Wall Street records: The prospect of lower long-term rates and slightly easier monetary policy pushed Wall Street to all-time highs late on Friday. The benchmark S&P500 broke through the resistance level at 2874 established during January’s record number, to close only slightly above that mark, while the booming tech-space pushed the NASDAQ to its own intraday record. The Dow Jones sits someway off its highs, with perhaps the new narrative there one of whether it can also reclaim all-time records. The expectation of lower discount rates in the US provides credence to the share-market bulls calling this market higher, with an acceleration in consumer discretionary stocks underpinning the notion that the fundamental strength of an increasingly confident US consumer will underpin further equity market gains.
ASX today: Despite the overwhelmingly positive lead handed to it by Wall Street, SPI futures are pointing to an effectively flat start to the week for the ASX200. After what must be described as a distracting week for the local share market, the futures market and our out of hours pricing indicates further sluggishness for the ASX today, surely due to confidence-sapping effects of Canberra’s leadership struggle. The index sits now just above an upward support line near 6255, which coincides with its 50-day exponential moving average. A close below here today would be quite bearish signal and would open-up a breach of support at the significant 6240-mark.
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