Bullock: Vigilant About Inflation Risks, Ready To Raise Rates if Necessary

Remarks of Officials

Summary:

As demand growth looks set to accelerate next year, the Board doesn't expect inflation to be back in the target range until the end of 2025. The Board will remain vigilant about upside risks to inflation and will not hesitate to raise interest rates when necessary.

On August 8, local time, Reserve Bank of Australia Governor Michelle Bullock spoke on the monetary policy, with the following main points:

The most recent inflation reading shows that while inflation is lower than it was a year ago, it is still too high. Inflation in many goods prices has declined but inflation in services prices is high and proving very sticky. And the reason for this is that demand for goods and services in the economy is still higher than the ability of the economy to supply those goods and services. Even though demand growth has been fairly weak recently, this slowing has not been enough to restore balance in the economy. The Board has been trying to bring inflation down by slowing the growth of demand to bring it back into line with supply. And it has been trying to do this while preserving as many of the gains in the labor market as possible. We've described this as the 'narrow path'.

The gap between aggregate demand and aggregate supply in the economy is larger than previously thought and this is resulting in persistent inflation. It also noted that the growth of demand looks like it will pick up over the next year, although there is considerable uncertainty around the outlook. The effect of this is that the Board's expectations for when inflation will come back to target have been pushed out to 2025. This is why the Board explicitly considered whether another interest rate rise was required to ensure inflation continued to decline in a reasonable timeframe. The Board decided to keep interest rates on hold, but remains vigilant with respect to upside risks on inflation and will not hesitate to raise rates if it needs to.

Bullock's Speech

Risk Warnings and Disclaimers

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Samantha Luan

Stocks

A wager that stock markets would stay calm has cost retail traders, hedge funds and pension funds billions after a selloff in global stocks, highlighting the risks of piling into a popular bet.

The CBOE VIX index, which tracks the stock market's expectation of volatility based on S&P 500 index options, posted its largest-ever intraday jump and closed at its highest since October 2020 on Monday as U.S. recession fears and a sharp position unwind have wiped off $6 trillion from global stocks in three weeks.

Investors in 10 of the biggest short-volatility exchange traded funds saw $4.1 billion of returns erased from highs reached earlier in the year, according to calculations by Reuters and data from LSEG and Morningstar.

These were bets against volatility that made money as long as the VIX, the most-watched gauge of investor anxiety, remained low.

Wagers on volatility options became so popular that banks, in an effort to hedge the new business they were receiving, might have contributed to market calm before the trades suddenly turned negative on Aug. 5, investors and analysts said.

Billions flew in from retail investors but the trades also garnered the attention of hedge funds and pension funds.

While the total number of bets is difficult to pin down, JPMorgan estimated in March that assets managed in publicly traded short volatility ETFs roughly totaled $100 billion.

"All you have to do is just look at the intra-day rate of change in the VIX on Aug. 5 to see the billions in losses from those with short vol strategies," said Larry McDonald, author of How to Listen When Markets Speak.

But McDonald, who has written about how bets against volatility went wrong in 2018, said publicly available data on ETF performance did not fully reflect losses incurred by pension funds and hedge funds, which trade privately through banks.

On Wednesday, the VIX had recovered to around 23 points, well off Monday's high above 65, but holding above levels seen just a week ago.

Volatility's Rise

One driver behind the trading strategy's popularity in recent years has been the rise of zero-day expiry options - short-dated equity options that allow traders to take a 24-hour bet and collect any premiums generated.

Starting in 2022, investors including hedge funds and retail traders, have been able to trade these contracts daily instead of weekly, allowing more opportunities to short volatility while the VIX was low. These contracts were first included in ETFs in 2023.

Many of these short-term options bets are based around covered calls, a trade that sells call options while investing in securities such as U.S. large-cap stocks. As stocks rose, these trades earned a premium as long as market volatility remained low and the bet looked likely to succeed. The S&P 500 rose over 15% from January to July 1 while the VIX fell 7%.

Traders Lose Billions on Big Volatility Short After Stocks Rout_2

Some hedge funds were also taking short volatility bets through more complicated trades, two investor sources told Reuters.

A popular hedge-fund trade played on the difference between the low volatility on the S&P 500 index compared to individual stocks that approached all-time highs in May, according to Barclays research from that time.

Hedge-fund research firm PivotalPath follows 25 funds that trade volatility, representing about $21.5 billion in assets under management of the roughly $4-trillion industry.

Hedge funds tended to bet on a VIX rise, but some were short, its data showed. These lost 10% on Aug. 5 while the total group, including hedge funds that were short and long volatility, had a return of between 5.5% and 6.5% on that day, PivotalPath said.

'Dampened volatility'

Banks are another key player standing in the middle of these trades for their larger clients.

The Bank of International Settlements in its March quarterly review suggested that banks' hedging practices kept Wall Street's fear gauge low.

Post-2008 regulations limit banks' ability to warehouse risk, including volatility trades. When clients want to trade price swings, banks hedge these positions, the BIS said. This means they buy the S&P when it falls and sell when it rises. This way, big dealers have "dampened" volatility, said the BIS.

In addition to hedging, three sources pointed to occasions where banks hedged volatility positions by selling products that allowed the bank to even out its trades, or remain neutral.

Marketing documents seen by Reuters show that Barclays, Goldman Sachs and Bank of America this year were offering complex trade structures, which included both short- and long-volatility positions.

Some, according to the documents, do not have a constant hedge built into the trade to buttress against losses and are protected "periodically," the papers say. This might have exposed investors to higher potential losses as the VIX spiked on Aug. 5.

Barclays and Bank of America declined to comment. Goldman Sachs did not immediately respond to a request for comment.

"When markets were at near highs, complacency became rife, so it's not surprising investors, largely retail, but also institutional, were selling volatility for the premium," said Michael Oliver Weinberg, professor at Columbia University and special advisor to the Tokyo University of Science.

"It's always the same cycle. Some exogenous factor causes markets to sell off. Those that were short vol will now be hit with losses," he said.

Source: Reuters

Risk Warnings and Disclaimers

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Thomas

Commodity

There's more trouble brewing in the world's biggest steel market.

After a years-long property slump that has crushed the billion-ton Chinese steel industry's biggest source of demand, prospects are getting no better. Prices are tumbling, profits are dwindling, and there's little relief on offer from a government focused on retooling China's economy for the long term.

Beijing hasn't delivered a big-bang solution for its real estate woes, nor a boom in infrastructure spending that could keep steel consumption on track. As officials talk of boosting consumer spending and high-tech industries, demand for the alloy is poised to contract this year.

"There's not many positives for steel and the housing downturn has years to go yet," said Tomas Gutierrez, an analyst at Kallanish Commodities Ltd. "It's been clear for a long time that the government views stimulus very differently now."

The funk in China's steel market has global implications as iron ore prices languish and China ramps up its steel exports, fuelling trade frictions.

Here are four charts that illustrate the deepening gloom.

Demand doldrums

The main culprit is the prolonged malaise in China's property market. Steel demand from construction is poised to shrink by 10% this year, according to Kallanish. That would lower the sector's share of total consumption to around a quarter — a very low proportion by the standards of the past two decades.

Other areas are still expanding — for example consumer appliances and shipbuilding — but they're too small to offset the hit from property. Kallanish sees overall domestic demand falling 1% in 2024.

"Steel demand is really poor," said Wei Ying, an analyst at China Industrial Futures Ltd. "With highly indebted provinces focusing on deleveraging, plus a lack of good projects, infrastructure spending is less than ideal."

Price plunge

The slowdown in demand has triggered a price rout in recent months. Rebar used in construction is at its cheapest since 2017, while hot-rolled coil used in cars and home appliances touched its lowest in four years. Many higher-cost producers are making a loss on every ton produced.

Other more particular factors are weighing on prices. The government is introducing new quality standards for rebar that threaten to make existing inventories harder to ship. That's triggered some panic selling before the rules go into force in September, according to researcher Mysteel Global.

Export threat

ArcelorMittal SA, the biggest producer outside China, said "aggressive" exports from the Asian nation are creating problems for the global steel industry, pushing prices in the US and Europe below cost. China's outbound shipments are running at the highest rate since 2016, and Arcelor's concerns are shared by governments.

A big increase in flows to Latin America triggered trade pushback there, while anti-dumping cases in Vietnam have attracted recent attention. China's southwestern neighbour is by far its biggest steel buyer, and import restrictions there could add to downward pressure on China's domestic prices.

Material impact

The steel slowdown has had an impact on iron ore prices this year, affecting earnings at mining giants like BHP Group Ltd and Rio Tinto Group. Futures in Singapore have fallen over 25% since the end of 2023 and have struggled to stay above the key threshold of US$100 a tonne.

Port inventories of the raw material typically draw toward the middle of the year, but instead they've risen every month in 2024 to reach more than 150 million tonnes. That'll weigh on iron ore prices, especially with pressure growing for more production cuts at steel mills, including from a government keen to cap emissions.

Some producers have recently cut output sharply, which is helping to balance supply and demand, said Vicky Wei, chief ferrous analyst at Horizon Insights. But looking ahead, it's hard to see consumption getting support "unless there are new stimulus measures," she said.

On the wire

Chilean steel and iron ore producer Cap SA plans to close its mills, saying new tariffs on Chinese products weren't enough to ensure the profitability of steelmaking in the South American nation.

China's overflow of goods abroad is set to change course in the next few years, according to Goldman Sachs analysts, though relief isn't likely for electric vehicles and steel.

The Biden administration is following the paper trails of some biodiesel producers amid heightened concern the fuels are at times being made with deceptive ingredients that violate federal law.

Source: Reuters

Risk Warnings and Disclaimers

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IC Markets

Economic

What happened in the Asia session?

The state of the labour market in New Zealand was mixed in the second quarter of 2024 as employment grew 0.4% QoQ, beating its estimate of a 0.2% decline while the unemployment rate edged higher from 4.4% in the first quarter to 4.6% in the second. Although the unemployment rate increased for the fifth consecutive quarter, it came in slightly lower than the forecast of 4.7%. The marginally better-than-anticipated data boosted the Kiwi as it surged past 0.5950 early this morning to rise towards the threshold of 0.6000.

What does it mean for the Europe & US sessions?

After declining 2.5% in May, industrial production is anticipated to rise 1.0% MoM in June. This sector continues to remain in contraction, weighing down overall economic activity in Germany. Should production output fall short of its forecast, the Euro could face selling pressures as European markets get under way.

PMI activity in Canada expanded strongly in June with a reading of 62.5, surging from 52.0 in May. July’s estimate of 60.0 points to another strong month of expansion and could potentially lift the Loonie and add downward pressure on USD/CAD later today.

The Dollar Index (DXY)

Key news events today

No major news events.

What can we expect from DXY today?

With no major news out of the U.S. today, the DXY could continue to edge higher, buoyed by the rebound in ISM Services PMI report on Monday and yesterday’s improved trade deficit figures. This index was trading around the 103-level as Asian markets came online – these are the support and resistance levels for today.

Support: 102.00

Resistance: 103.20

Central Bank Notes:

The Federal Funds Rate target range remained unchanged at 5.25% to 5.50% for the eighth meeting in a row.

The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run and judges that the risks to achieving its employment and inflation goals continue to move into better balance.

The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

Recent indicators suggest that economic activity has continued to expand at a solid pace while job gains have moderated, and the unemployment rate has moved up but remains low.

In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks and does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook and would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.

In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities. Beginning in June, the Committee slowed the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion.

The Committee will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities.

Next meeting runs from 17 to 18 September 2024.

Next 24 Hours Bias

Weak Bullish

Gold (XAU)

Key news events today

No major news events.

What can we expect from Gold today?

With no major news out of the U.S. today, spot prices for gold could drift lower as demand for the greenback appears to be returning. This precious metal was trading around $2,380/oz at the beginning of the Asia session – these are the support and resistance levels for today.

Support: $2,355/oz

Resistance: $2,420/oz

Next 24 Hours Bias

Weak Bearish

The Australian Dollar (AUD)

Key news events today

No major news events.

What can we expect from AUD today?

Following yesterday’s decision by the RBA to maintain its cash rate on hold at 4.35%, the Aussie climbed above the threshold of 0.6500 overnight. This currency pair was rising towards 0.6550 as Asian markets came online – these are the support and resistance levels for today.

Support: 0.6440

Resistance: 0.6570

Central Bank Notes:

The RBA kept the cash rate target unchanged at 4.35%, marking the sixth consecutive pause.

Inflation has fallen substantially since its peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance but it still remains above the midpoint of the 2 to 3% target range.

The CPI rose by 3.9% over the year to the June quarter, demonstrating that inflation is proving persistent. In year-ended terms, underlying inflation has now been above the midpoint of the target for 11 consecutive quarters while quarterly underlying CPI inflation has fallen very little over the past year.

The central forecasts set out in the latest SMP are for inflation to return to the target range of 2 to 3% in late 2025 and approach the midpoint in 2026. This represents a slightly slower return to target than forecast in May, based on estimates that the gap between aggregate demand and supply in the economy is larger than previously thought.

Momentum in economic activity has been weak, as evidenced by slow growth in GDP, a rise in the unemployment rate and reports that many businesses are under pressure. In addition, there is a risk that household consumption picks up more slowly than expected, resulting in continued subdued output growth and a noticeable deterioration in the labour market.

Inflation in underlying terms remains too high, and the latest projections show that it will be some time yet before inflation is sustainably in the target range while recent data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out.

Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range and will rely upon the incoming data and the evolving assessment of risks to guide its decisions.

Next meeting is on 5 November 2024.

Next 24 Hours Bias

Weak Bullish

The Kiwi Dollar (NZD)

Key news events today

Labour Force Report (10:45 pm GMT 6th August)

What can we expect from NZD today?

Central Bank Notes:

The Monetary Policy Committee kept the OCR unchanged at 5.50% for the eighth meeting in a row and agreed that restrictive monetary policy is reducing domestic demand and consumer price inflation.

The Committee is confident that inflation will return to within its 1-3% target range over the second half of 2024.

The decline in inflation reflects receding domestic pricing pressures, as well as lower inflation for goods and services imported into New Zealand while recent monthly Selected Price Indexes suggest weakening in some of the more volatile inflation components, while survey measures of cost pressures and pricing intentions have continued to decline.

Non-performing bank loans and corporate insolvencies have increased from low levels in line with declining economic activity while bank credit growth also remains very subdued, in line with weakness in the domestic economy and low business and consumer confidence.

Next meeting is on 14 August 2024.

Next 24 Hours Bias

Medium Bullish

The Japanese Yen (JPY)

Key news events today

No major news events.

What can we expect from JPY today?

Demand for the yen was robust as USD/JPY briefly dipped under 142 on Monday but it retraced higher yesterday. Overhead pressures for this currency pair remain and it was trading around 144.75 as Asian markets came online – these are the support and resistance levels for today.

Support: 140.90

Resistance: 146.30

Central Bank Notes:

The Policy Board of the Bank of Japan decided, by a 7-2 majority vote, to set the following guideline for money market operations for the intermeeting period and decided on the following measures:

The Bank will encourage the uncollateralized overnight call rate to remain at around 0.25% while reducing its purchase amount of Japanese government bonds (JGB) by a unanimous vote;

The Bank decided, by a unanimous vote, on a plan to reduce the amount of its monthly outright purchases of JGBs so that it will be about 3 trillion yen in January-March 2026; the amount will be cut down by about 400 billion yen each calendar quarter in principle.

The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be at around 2.5% for fiscal 2024 and then be at around 2% for fiscal 2025 and 2026.

Meanwhile, underlying CPI inflation is expected to increase gradually, since it is projected that the output gap will improve and that medium- to long-term inflation expectations will rise with a virtuous cycle between wages and prices continuing to intensify.

In the second half of the projection period, it is likely to be at a level that is generally consistent with the price stability target of 2%.

Japan’s economy is likely to keep growing at a pace above its potential growth rate, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies against the background of factors such as accommodative financial conditions.

Next meeting is on 20 September 2024.

Next 24 Hours Bias

Weak Bullish

The Euro (EUR)

Key news events today

Germany Industrial Production (6:00 am GMT)

What can we expect from EUR today?

Central Bank Notes:

The Governing Council today decided to keep the three key ECB interest rates unchanged in July, following a 25 basis points cut in June.

Accordingly, the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 4.25%, 4.50% and 3.75% respectively.

Monetary policy is keeping financing conditions restrictive but at the same time, domestic price pressures are still high, services inflation is elevated and headline inflation is likely to remain above the target well into next year.

While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June.

The incoming information indicates that the euro area economy grew in the second quarter, but likely at a slower pace than in the first quarter.

Services continue to lead the recovery, while industrial production and goods exports have been weak – investment indicators point to muted growth in 2024, amid heightened uncertainty.

The Eurosystem no longer reinvests all of the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP), reducing the PEPP portfolio by €7.5 billion per month on average and the Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024.

The Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner and will keep policy rates sufficiently restrictive for as long as necessary to achieve this aim and is not pre-committing to a particular rate path.

Next meeting is on 12 September 2024.

Next 24 Hours Bias

Weak Bearish

The Swiss Franc (CHF)

Key news events today

No major news events.

What can we expect from CHF today?

The unemployment rate in Switzerland remained unchanged at 2.5% for the month of July to highlight a resilient labour market. Demand for the franc remains strong, limiting USD/CHF under the threshold of 0.8600. This currency pair was trading around 0.8550 at the beginning of the Asia session – these are the support and resistance levels for today.

Support: 0.8450

Resistance: 0.8600

Central Bank Notes:

The SNB eased monetary policy by lowering its key policy rate by 25 basis points for the second consecutive meeting, going from 1.50% to 1.25% in June.

The underlying inflationary pressure has decreased again compared to the previous quarter but inflation had risen slightly since the last monetary policy assessment, and stood at 1.4% in May.

The inflation forecast puts average annual inflation at 1.3% for 2024, 1.1% for 2025 and 1.0% for 2026, based on the assumption that the SNB policy rate is 1.25% over the entire forecast horizon.

Swiss GDP growth was moderate in the first quarter of 2024 with the services sector continuing to expand, while manufacturing stagnated.

Growth is likely to remain moderate in Switzerland in the coming quarters as the SNB anticipates GDP growth of around 1% this year while currently expecting growth of around 1.5% for 2025.

Next meeting is on 26 September 2024.

Next 24 Hours Bias

Weak Bullish

The Pound (GBP)

Key news events today

No major news events.

What can we expect from GBP today?

Despite yesterday’s stronger-than-expected construction PMI result, it was not enough to prevent the Pound from losing ground as Cable fell below the threshold of 1.2700 overnight. This currency pair was trading around 1.2690 as Asian markets came online – these are the support and resistance levels for today.

Support: 1.2620

Resistance: 1.2740

Central Bank Notes:

The Bank of England’s Monetary Policy Committee (MPC) voted by a majority of 5-to-4 to reduce its Official Bank Rate by 25 basis points to 5.00% on 1st August 2024.

Five members preferred to reduce the Bank Rate by 25 basis points to 5%, an increase of two from the previous meeting while four members preferred to maintain the Bank Rate at 5.25%.

Twelve-month CPI inflation was at the MPC’s 2% target in both May and June but it is expected to increase to around 2.75% in the second half of this year as declines in energy prices last year fall out of the annual comparison, revealing more clearly the prevailing persistence of domestic inflationary pressures. Private sector regular average weekly earnings growth has fallen to 5.6% in the three months to May, and services consumer price inflation has declined to 5.7% in June.

GDP has picked up quite sharply so far this year, but underlying momentum appears weaker. GDP had grown by 0.7% in 2024 Q1, with that strength appearing to have continued into Q2. Growth in the first half of the year had been stronger than expected at the time of the May Report.

Business surveys had continued to point to underlying growth of around 0.3% per quarter, somewhat weaker than headline GDP growth. A margin of slack should emerge in the economy as GDP falls below potential and the labour market eases further.

The Committee noted that it is now appropriate to reduce slightly the degree of policy restrictiveness but monetary policy will need to continue to remain restrictive for sufficiently long until the risks to inflation returning sustainably to the 2% target in the medium term have dissipated further.

The Committee continues to monitor closely the risks of inflation persistence and will decide the appropriate degree of monetary policy restrictiveness at each meeting.

Next meeting is on 19 September 2024.

Next 24 Hours Bias

Weak Bearish

The Canadian Dollar (CAD)

Key news events today

Ivey PMI (2:00 pm GMT)

What can we expect from CAD today?

Central Bank Notes:

The Bank of Canada reduced its target for the overnight rate by 25 basis points to 4.50% while continuing its policy of balance sheet normalization.

Canada’s economic growth likely picked up to about 1.5% through the first half of this year and is forecasted to increase in the second half of 2024 and through 2025.

Overall, the Bank forecasts GDP growth of 1.2% in 2024, 2.1% in 2025, and 2.4% in 2026, reflecting stronger exports and a recovery in household spending and business investment as borrowing costs ease.

CPI inflation moderated to 2.7% in June after increasing in May as broad inflationary pressures eased.

The Bank’s preferred measures of core inflation have been below 3% for several months and the breadth of price increases across components of the CPI is now near its historical norm but shelter price inflation remains high, driven by rent and mortgage interest costs, and is still the biggest contributor to total inflation.

These preferred measures of core inflation are expected to slow to about 2.5% in the second half of 2024 and ease gradually through 2025 and CPI inflation is expected to come down below core inflation in the second half of this year, largely because of base year effects on gasoline prices.

There are signs of slack in the labour market with the unemployment rate rising to 6.4%, as employment continues to grow more slowly than the labour force and job seekers taking longer to find work. Wage growth is showing some signs of moderation, but remains elevated.

The Governing Council’s future monetary policy decisions will be guided by incoming information and assessment of their implications for the inflation outlook.

Recent data has increased the council’s confidence that inflation will continue to move towards the 2% target. Nonetheless, risks to the inflation outlook remain.

Next meeting is on 4 September 2024.

Next 24 Hours Bias

Medium Bearish

Oil

Key news events today

EIA Crude Oil Inventories (2:30 pm GMT)

What can we expect from Oil today?

After declining for the past five consecutive weeks, the API crude oil stock experienced a surprise build as 0.18M barrels of crude were added to storage – analysts were expecting a drawdown of 0.7M barrels. Oil prices, which were already under pressure since the second week of July, edged lower with WTI oil falling under the $74-mark for the third time this week. The EIA inventories are expected to see a decline of 1.6M later today but that may not be enough to support prices – barring any escalation in the geo-political conflict in the Middle East.

Next 24 Hours Bias

Weak Bearish

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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FastBull Featured

Daily News

[Quick Facts]

1. JPMorgan sees a 35% chance of a U.S. recession by year-end.

2. BOC July meeting minutes show concern about future consumer spending.

3. BOJ's Summary of Opinions: A small rate hike won't have tightening effects.

4. U.S. crude oil stocks fall for the sixth straight week.

5. European stocks posted their biggest one-day gain since November.

[News Details]

JPMorgan sees a 35% chance of a U.S. recession by year-end

JPMorgan Chase now sees a 35% chance that the U.S. economy will tip into a recession by the end of this year, up from 25% as of the start of last month. U.S. news "hints at a sharper-than-expected weakening in labor demand and early signs of labor shedding," JPMorgan economists led by Bruce Kasman wrote in a note to clients Wednesday.

The team still sees a 45% chance of the economy falling into recession by the second half of 2025. "We just slightly raised our assessment of the risk of a recession, while making a more significant adjustment to our interest rate outlook," Kasman and his colleagues wrote. JPMorgan now sees only a 30% chance that the Fed and other central banks will keep rates high for the long term, down from 50% two months ago. With U.S. inflationary pressures falling, JPMorgan expects the Fed to cut rates by 50 basis points each in September and November.

BOC July meeting minutes show concern about future consumer spending

Bank of Canada (BOC) released the minutes of its July policy meeting on August 7, which showed growing concern about slower-than-expected economic growth.

The economy was growing at a slower pace than population growth, leading to oversupply in the economy and weakness in the labor market. This could further weaken the labor market, hit consumption, and put downward pressure on growth and inflation.

Governing Council members agreed that they would weigh factors that could bring inflation below target against factors that could keep it above target.

If inflation continued to ease as forecast, it would be appropriate to further lower the policy rate. The Bank of Canada was concerned that a weak employment outlook could hamper the recovery in consumption and, in turn, economic growth.

Several indicators showed that labor market slack had emerged. Some members noted that further weakness could delay a rebound in consumer spending, which in turn would put pressure on growth and inflation.

BOJ's Summary of Opinions: A small rate hike won't have tightening effects

The Bank Of Japan (BOJ) on Thursday released its Summary of Opinions at the Monetary Policy Meeting on July 31. Some members noted that raising the rate at a moderate pace means an adjustment in the degree of monetary accommodation, which will not have monetary tightening effects. Given that the economic and price trends are in line with expectations, it is appropriate for the BOJ to raise the interest rate. Some suggested that the neutral rate should be at least around 1%. To avoid rapid rate hikes, the BOJ needs to raise the policy rate in a timely and gradual manner. Even if the nominal interest rate reaches 0.25%, it is still a highly accommodative level, and there is no change in the BOJ's stance to firmly support the economy.

U.S. crude oil stocks fall for the sixth straight week

The U.S. Energy Information Administration (EIA) report shows that for the week ending August 2, U.S. commercial crude oil stocks excluding the Strategic Petroleum Reserve fell by 3.728 million barrels or 0.86% to 429 million barrels, far exceeding the market's expected reduction of 700,000 barrels. This brings the total crude stocks to the lowest level since the week ending February 2, 2024. The Strategic Petroleum Reserve increased by 736,000 barrels, the highest level since the week ending December 16, 2022. Despite crude oil production hitting a historic high, the oil market continues to face challenges from weak demand and potential increased supply from OPEC+ starting next quarter.

European stocks posted their biggest one-day gain since November

European stocks posted their biggest gain since November as the global rally gained momentum following Monday's plunge. The STOXX Europe 600 index was up 1.5% to 495.96 points by the close in Paris, rallying for a second straight day. Banking stocks were the biggest gainers, while healthcare shares lagged after drugmaker Novo Nordisk reported disappointing sales for its best-selling weight-loss drug Wegovy.

The stock market's decline extended from last Thursday to this Monday, after a surprise interest rate hike by the Bank of Japan led traders to close their arbitrage trades, triggering global sell-offs. The market began to recover on Tuesday, and the rally gained momentum on Wednesday after the BOJ deputy governor said the Bank would not raise interest rates if the market was unstable.

[Today's Focus]

UTC+8 10:40 Reserve Bank of Australia Governor Bullock Speaks

UTC+8 20:30 U.S. Initial Jobless Claims

UTC+8 03:00 Next Day: Richmond Fed President Barkin Participates in a Fireside Chat

Risk Warnings and Disclaimers

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Cohen

Economic

Commodity

Well, as you know, markets have experienced spectacular moves this week.

Japan's Nikkei is leading on that front…down 12% on Monday but up 11% on Tuesday!

Incredible whipsaw action. That's not what you want to see when you have a large chunk of your life savings tied up in equities.

As measured by the VIX below, volatility has declined over the last 12 months… But it spiked dramatically this week, returning to levels not seen since 2022. Global Financial Meltdown? Don't Count on It_1

Global Financial Meltdown? Don't Count on It_1

A financial crisis looms?

This week marks the tragic 79th anniversary of the bombing of Hiroshima and Nagasaki; it's perhaps weirdly fitting that Japan's Nikkei experienced one of the most tumultuous weeks in its history.

Monday's collapse followed a rise in the Japanese Yen as the BOJ (Bank of Japan) announced its intention to raise rates for the first time in over a decade.

The announcement followed weak job data in the US and escalations in the Middle East over the weekend.

In other words, Monday morning was a perfect storm of bad news events.

And the market reacted accordingly.

While I'm not a macroeconomic expert, I sense déjà vu in this latest market action… We've been here several times before.

In early 2023, global markets sat on the brink after the failure of Silicon Valley Bank.

As commentators reminisced about the 2008 Lehman Brothers collapse, investors waited fearfully for contagion to take hold and a broad US banking failure.

Of course, that never took place.

Those same anxious feelings culminated in June 2022, when inflation spiked as high as 9.1 percent in the US, raising fears that interest rates could reach double figures.

Again, that never happened; rates simply adjusted to their long-term mean.

This latest market shock feels reminiscent of these prior events, which hit suddenly and from a point of low volatility.

I don't believe this will be the 'global recession maker' some make it out to be.

The BOJ is caving in already

In response to Monday's wild market moves, the BOJ announced yesterday that it would hold off on hiking rates.

But don't get carried away with this dovish pivot…August is traditionally a volatile month in global markets — traders delight, investors fright.

I suspect we will see further whipsaw action over August and perhaps into September as the recovery falters and other unseen risks emerge.

But looking beyond these potentially volatile weeks, a strong set-up could be in play as we approach 2025.

'Real' rate cuts will finally materialise in the US…this could deliver sustained relief for markets that have misinterpreted the Fed's cutting intentions over the last 18 months.

By November, a new US President will have been elected…markets hate uncertainty; right now, there is no clarity on who will win this year's election.

But this great unknown will finally have settled before the year is out.

Both events could usher in a rosy period for markets moving into 2025 and beyond.

So, what sectors should you target?

Here's a graph I like to dig up for my paid readers every time the market slips into a deeply pessimistic phase:

Source: Bloomberg & GR Models

It demonstrates the deep value offered by commodities relative to US equities.

The chart, from the Wall Street investment firm Goehring & Rozencwajg, compares the relationship between the Dow Jones Industrial Average and various commodity indexes over the past century.

The commodity index includes energy, grains, precious and base metals.

Some commodities, including gold, already trade at all-time highs, so they may not represent the value demonstrated here. The same could be said for copper and silver, trading around elevated levels.

But others, including food, industrial and critical minerals, oil and gas, hover around multi-year lows.

This index encapsulates the full spectrum of the commodity market…and right now, the resource market is considered extremely cheap.

Periods below 75 on the chart typically represent bear markets for commodities. The chart shows that 1929, the 1960s, 1999, and the early 2020s were the most undervalued years for commodities.

As you can see, we began to exit a deep trough in 2023.

All roads lead to commodities in 2025

Despite the long-term set-up and strong value, global volatility will undoubtedly affect commodity markets.

We witnessed this on Monday's dramatic worldwide sell-off, with silver futures falling especially hard by more than 4%.

Yet other commodities performed relatively well; copper futures closed flat for the day, and gold fell a modest 1 percent. Meanwhile, iron ore was up more than 1 percent!

This may signal relative strength against the broader market… Fundamentally, much of that strength exists in their deep value.

Take the tech giant NVIDIA, which trades on a Price-to-Earnings multiple of 62. Meanwhile, Australia's iron ore giant, Fortescue Metals, trades on a multiple below 10!

Monday's events demonstrate that large institutional investors could start to unwind their massive holdings away from richly valued mega-tech firms into value plays like commodities.

A recent regulatory filing showed Warren Buffett offloaded over 50% of his Berkshire stake in the US$3.2 trillion tech giant Apple since the start of the year.

Most of those proceeds are going into Berkshire's enormous cash hoard.

However, oil stocks are among the few items on Buffett's buy list… His 30 percent purchase of Occidental Petroleum in June confirms where the 'Oracle' sees value in the market.

As an investor, you should be paying attention.

The oil and gas sector represents exceptional value, especially within the junior sector…with a pullback underway, now could be a great time to investigate this poorly understood market as part of a long-term strategy.

Source: FTD

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Goldman Sachs

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A tide of investment is pouring into generative artificial intelligence. Will it be worth it?

“That’s the center of all debate right now,” says Sung Cho of Goldman Sachs Asset Management. Investment is flowing into everything from the silicon underpinning the training of artificial intelligence models to the power companies that supply electricity to acres of data centers.

To see where the industry is headed, Cho and Brook Dane, portfolio managers on the Fundamental Equity team in Goldman Sachs Asset Management, met with executives from 20 leading technology companies driving AI innovation. Those conversations — with public and private firms, from semiconductor makers to software giants — indicate that some companies are already generating returns from AI, and some would buy even more AI hardware if they could get their hands on it.

“Our confidence continues to increase that this technology cycle is real,” Dane says. “It's going to be big, as they say.”

But there are also risks. Cho and Dane say it’s possible that the large language models being built by a handful of companies will find they are competing in a winner-takes-all market. The use cases, or killer apps, that fully justify the intense investment are yet to emerge. They also point out that, in a year in which US stock indexes have set successive record highs, no rally in tech stocks ever goes in a straight line. “You get these waves of both investment-digestion and hype-reality,” Dane says. “And the two of them play out across a multi-year horizon.”

Cho and Dane’s insights come as Goldman Sachs Research recently published an examination of the immense amount of investment in AI, featuring interviews with Daron Acemoglu, Institute Professor at MIT, and Jim Covello, Goldman Sachs' Head of Global Equity Research. The report, titled “Gen AI: too much spend, too little benefit?” notes that mega tech firms, corporations, and utilities are set to spend around $1 trillion on capital expenditures in the coming years to support AI.

We spoke with Goldman Sachs Asset Management’s Cho and Dane about the prospects for the industry’s return on its investments, whether this trend is primarily playing out in public or in private markets, and the companies that can hope to capitalize on the AI boom.

How much investment are you seeing in these models? And do you think it's realistic to see a return on investment that justifies that capital anytime soon?

Sung Cho: That’s the center of all debate right now.

Brook Dane: The biggest question in the marketplace right now is: Are we getting a return on the investment? I’m reasonably comfortable that we are seeing that return. And there are a couple of data points I'm looking at that give me comfort.

First: We spent a lot of time on this trip talking with the CFO of a hyperscaler who had just come back from their strategic planning, where they're doing their one-, three-, five-year forward looks. This person talked very openly, not with any kind of numbers whatsoever, about how they were doing the RoI calculations across the clusters where they were deploying GPUs and how they were finding it very accretive from a return standpoint.

Now, this company is already running massive inferencing (using already-trained AI models to reason or make predictions) workloads across their infrastructure for recommendation engines. They’re seeing results in terms of increases in time spent on their platforms, as these models have predicted, with the next piece of content.

So for them, the RoI calculation is probably the simplest to calculate, because you can deploy a cluster, you can do a more sophisticated algorithm that can then lead to more time spent, which can lead to more advertising surface, which can then drive revenue.

The second thing, and this is from following the industry over the long term and having had lots of recent discussions with another hyperscaler around their capital spending plans: We know how disciplined they have always been historically, and how they're seeing both incremental revenue pick up, and seeing the incremental returns that they get out of their capital spending. This CFO is emphatic that they have the money, and if they could get more GPUs to deploy they would.

Having known this person for 20 years, and understanding how they approach capital budgets, how they spend their capital — this person wouldn't be doing that if there wasn't a genuine, real, tangible return that they can see in front of them. And they’re pretty emphatic.

But it's early, and the other downside is that for these frontier models you can't fall off the front end of the wave. You can't be the fourth frontier model that doesn't spend the incremental $1 billion dollars to get your model to be better. So for those guys, there’s a bit of an arms race here, and there's a little bit of a leap of faith embedded in that.

Sung, what’s your view on the RoI question?

Sung Cho: This is one of the most important questions. And that's what's going to dictate the direction of markets over the next six to 12 months at least, and whether tech continues to outperform or not.

Obviously with any RoI question, you have to understand the scale of what's been invested so far. If you look at NVIDIA's revenues in calendar year 2022, they did $26 billion dollars in revenue. And they did $26 billion dollars in revenue this most recent quarter. So in basically two years, NVIDIA has quadrupled its revenues. If you compare what's being spent on NVIDIA to total cloud capital expenditures, nearly 50% is going into NVIDIA chips.

So the investment in AI has been massive. And if you think about RoI, the starting point is around the “I,” which has been very, very high.

If you are a bull, the most important thing here, and Brook mentioned this, is that right now there's a race to see who can build the best foundational model (general purpose models that can be applied to many applications). That race isn't going to slow down anytime soon. From an RoI perspective, if you look at it over the next one or two years, maybe the RoI isn't great. But if you have a return stream of 20 years associated with your building the best tech stack today, then certainly you could justify the investment.

On the flip side, NVIDIA thinks they're going get one million times more efficient at processing AI over the next decade. That's one million times on the same kind of chip infrastructure. And also, when you speak to them, you understand that the infrastructure that's being built for training right now is also the same infrastructure we're going to use for inference. So as the world moves from training to inference, it’s going to be fungible. It's not like you have to build an entirely new infrastructure for inference.

And we look around and we say: OK, there are some cool applications. But there isn't this killer application that's consuming a lot of capacity right away.

So we understand the reasons why there’s so much investment in AI. There could be a pause in the near term, obviously, and that's going to dictate the shorter-term direction of markets. But I think we're both confident over any medium- to long-term horizon that AI remains one of the biggest trends we've seen in our history. And so I think it really just depends on your time frame. But we understand deeply both sides of the argument.

So where does the market and focus go from here?

Brook Dane: To Sung’s point, and that is a massively important point, no tech cycle goes up in a linear fashion. They just don't. You get these waves of both investment-digestion and hype-reality. And the two of them play out across a multi-year horizon.

Our perspective right now is that we're putting all this infrastructure in place to run these things. And we're seeing incredible improvements in how these models perform and what they can do. But, as Sung mentioned, we really need to see, at some point over the next year to year-and-a-half, applications that use this technology in a way that's more profound than coding and customer service chatbots.

If this ends up just doing coding and customer service, we're massively overspending on this. Again, I think both of us are very convinced that, over the intermediate term, we're going to see those applications and those use cases. And it's going to profoundly change how all of us do our work.

But I think the whole market is trying to figure out what else needs to take place for new applications and use cases to develop, and what you will see coming out the other side. So we're in that period right now where we need to see progress on that.

It sounds like you're saying this is a winner-takes-all market. Is this like the development of the internet, where there’s going to be a dominant player as we have seen in search or email platforms?

Brook Dane: This is another big topic.

Sung Cho: We know there's not going to be more than four. There's nobody else that can compete. The only companies that can make this level of investment are Meta, Google, OpenAI, and Anthropic.

Brook Dane: But what we don't know yet is: As these models mature, and as you stop seeing these step-function increases, which will happen at some point, will the best model three years from now be so much better than everybody else's model that it takes 80% of the market share? Or do we have four really good models, and people will use them for different use cases, in different areas, and in different ways? Will we have four models at scale?

If there are four equally robust models, you would think that gets commoditized pretty quickly. Whereas if one of them becomes the clear, dominant leader, then it's going to have incredible economics. We don't know that answer yet.

But what we do know is that none of the four can afford to fall off the pace of innovation. Because if you do, if you stop at this first-year-college-student level of intelligence, and the other guys become Phd-level intelligence, it may be hard for you to have a market if they're that much better, and they're riding the efficiency and the cost curves down faster than you are.

Sung Cho: What I think is going to happen over time is: There are going to be vertical specialists. And so I think the race beyond just raw speed and intelligence is: How can we build models that are much more efficient for specific subsectors and use cases?

Our colleagues in Goldman Sachs Research have said AI favors the big tech incumbent companies. I'm hearing the same thing from you today. Do you see anything challenging that narrative?

Sung Cho: From an infrastructure perspective, the race is largely over.

But in terms of building out vertical and industry specific LLMs and models, and a lot of edge-use cases, I don't think that's been settled yet, and I think that's where a lot of the innovation is going to come.

Brook Dane: And what I would add there is that I don't think this market is just the handful of mega-cap names as the winners. Essentially the most important thing beyond the model training piece here is: What data do you have that's unique, that you can bring to bear to help clients?

So what we're really looking for, on that software layer, is companies that have deep proprietary data that they can use to create differentiated use cases and experiences.

But this is largely a public markets phenomenon from an investment opportunity perspective. There's not going to be a host of private companies that emerge to disrupt the structures of these industries.

So to sum up: What’s your biggest takeaway from this research?

Sung Cho: My main takeaway is a little bit more specific to semiconductors. NVIDIA obviously has been dominating the AI silicon landscape for the better part of two years. But now there are real alternatives that are going to start to hit the marketplace. And I think there's a real debate as to whether NVIDIA is going to continue to maintain a 100% share or they're going to start to cede some of that share to others. And we're starting to believe that there are going to be other beneficiaries beyond just NVIDIA over the next couple of years.

Brook Dane: My main takeaway is that we are very early in a very profound, hugely impactful, technology transition, and there’s confidence that the state of these models and how they're moving forward is going to drive the structural changes that we have all been thinking and hoping were going to play out.

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IC Markets Europe Fundamental Forecast | 7 August 2024

What happened in the Asia session?

What does it mean for the Europe & US sessions?

The Dollar Index (DXY)

Gold (XAU)

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Oil

August 8th Financial News

[Quick Facts]

[News Details]

[Today's Focus]

Global Financial Meltdown? Don't Count on It

A financial crisis looms?

The BOJ is caving in already

So, what sectors should you target?

Source: Bloomberg & GR Models

All roads lead to commodities in 2025

Source: FTD

Will The $1 Trillion of Generative AI Investment Pay Off?

How much investment are you seeing in these models? And do you think it's realistic to see a return on investment that justifies that capital anytime soon?

Sung, what’s your view on the RoI question?

So where does the market and focus go from here?

It sounds like you're saying this is a winner-takes-all market. Is this like the development of the internet, where there’s going to be a dominant player as we have seen in search or email platforms?

Our colleagues in Goldman Sachs Research have said AI favors the big tech incumbent companies. I'm hearing the same thing from you today. Do you see anything challenging that narrative?

So to sum up: What’s your biggest takeaway from this research?

Risk Disclosure

Bullock's Speech