As identified in the last blog post, USD Index made a low of 100.51 on Tuesday and retraced to close the week at 101.732. I will be closely looking at how the price action evolves around the 102.50 levels to re-initiate shorts.
In my post earlier, we identified the first braking zone to the downward momentum on USTs as the 3.64% - 3.81% zone where US2s found resistance. During the week, Yields on US2s dipped to 3.848% before closing the week at 3.92% inside of the 3.90% - 4.10% range seen for better part of the month. The steepening trend persisted this week as the US2s10s closed the week at -0.014%. On US10s, yields moved higher to close the week at 3.907%. I'm looking at 2 spots to re-initiate trades on US2s ~ 4.10% and 4.20% handle.
The break in US2s10s outside of the triangle targets 15.50 bps.
US economic data shows a softening trend but it does not outright suggests a sharp deceleration to warrant further pricing of rate cuts. The thought is predicated on Long term Neutral Rate for the US Economy are at 2.80% and if the inflation numbers settle around the 2.5% handle instead of 2.00% handle, then how much space of cuts are we talking about ~ 200 bps. Federal Reserve's June SEP shows 2024 inflation projection at 2.60%. Now while I was deep diving into the data to see whether the risk of a recession has materially increased, I wanted to understand how the US Corporate Earnings Scorecard (read here) has been performing. As I see it, a break down in earnings tends to be a leading indicator of declining growth. For the recently concluded Earnings Season, Earnings growth was a stellar 10.00% though the forward estimates have been consistently revised lower as you can see in the chart below.
According to the FFR, there is a 98% probability of 100 bps of rate cut and a 70% probability of another 100 bps rate cut by next year and a 30% probability of 125 bps rate cut. The Atlanta FED GDPNow estimate Q3 GDP at 2.50%, revised upwards from 2.00% as on Aug 26.
Now let's look at the data,
The IJC came in line with the 4W MA of 231,500 and the CJC marked the highest for 2024. The data shows that CJC have been rising through 2024 which suggests that more people are continuing to claim unemployment benefits and facing difficulties in finding employment.
Q2 2024 U.S. real GDP was revised upwards to 3.0% in the second estimates, from 2.80% reported earlier. Current-dollar GDP rose to $28.65 trillion, an upward revision of $ 23.20 bn, and the PCE price index increased by 2.5% (10 bps downward revision). Current USD Personal income grew by $233.6 billion ($4bn downward revision), with a 20 bps downward revision in the personal saving rate to 3.3%. With the second estimate, an upward revision to consumer spending was partly offset by downward revisions to nonresidential fixed investment, exports, private inventory investment, federal government spending, state and local government spending, and residential fixed investment. Imports were revised up.
Pending Home Sales (PHS) in the US fell 5.50%. Pending Homes Sales is a leading indicator of housing activity and is based on signed real estate contracts. Since a home goes under contract a month or two before it is sold, PHS generally leads Existing Home Sales by a month or two. Existing Home Sales have been decelerating since March 2024 barring the slight pick up in activity in July. PHS data shows affordability issues continue to weigh on the sector.
US PCE Prices came in line with consensus expectations at 0.16% mom for both the Headline and Core PCE numbers. The 3m Annualized change came in well under the 2.00% handle. Please have a look at the table below for detailed readings. Cleveland Fed estimates for Aug reading are at 0.18% and 0.22% on Headline and Core PCE Prices which translates into 2.32% yoy, 1.59% yoy (3m RoC) and 2.02% (6m RoC) and 2.75% (yoy), 2.2% (3m RoC) and 2.5% (6m RoC).
US markets are closed for Labor Holiday on Sep 2, 2024. The first week of the month is loaded with Employment Data.
Sep 3 S&P and ISM release the Mfg PMI
Sep 4 JOLTS Job Openings and Factory Orders
Sep 5 ADP Employment Change / IJC and CJC / S&P and ISM Services PMI
Sep 6 NFP and the AHE
The Fed is squarely focused on Employment numbers hence the coming week becomes key to gauge the speed of rate cuts as the Fed has gained more confidence that the inflation is on a sustainable path back to 2.00%.
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