New Home Sales • Friday

We look for a modest improvement in July. Unlike existing home sales, new home sales reflect transactions at the time of contract signing, indicative of mortgage rates during that current month. Mortgage rates continued to trend lower in July after starting to claw back in June, averaging 6.8% over the month. Although only a minor step down, it marked further progress away from the over 7.0% rates that prevailed in April and May. We forecast a 2.9% uptick in sales to a 635K-unit pace.

Riksbank Policy Rate • Tuesday

The Riksbank announces its monetary policy decision this week, an announcement at which we (and the consensus) expect Sweden's central bank to lower its policy rate a further 25 bps to 3.50%. The Riksbank held rates steady at 3.75% at its most recent meeting in June, but its statement and economic projections from that meeting were dovish in tone. Acknowledging slower underlying inflation and anticipating slower wage growth, Sweden's central bank lowered its core CPI forecasts as well as its projected policy rate path while saying that “the policy rate can be cut two or three times during the second half of the year.”

Since then, CPIF ex-energy inflation has slowed even further to 2.2% year-over-year in July, evidence of slower wage growth has begun to emerge and trends in economic activity have remained subdued. Against this backdrop, we fully expect the Riksbank to cut its policy rate by 25 bps at next week's meeting. Market participants might instead be more closely focused on the Riksbank's policy guidance. We expect the central bank will signal at least two more rate cuts over the rest of this year, with the risk tilted toward even more dovish guidance that signals rate cuts at each of the three remaining policy announcements during the rest of 2024.

Canada CPI • Tuesday

Canada's consumer price index for July, due for release this week, looms as a key data point ahead of the Bank of Canada's next monetary policy announcement in early September. The underlying trend in Canadian inflation has been on a decelerating path for several months, contributing to the 50 bps of rate cuts the central bank has delivered so far. To be sure, services inflation and hourly wage growth for permanent employees remain elevated, the former at 4.8% year-over-year in June and the latter at 5.2%. Still, the labor market appears to be softening and broader economic activity is relatively subdued, a factor that is contributing to lessening price pressures more broadly.

For July, the consensus forecast is for headline inflation to slow further to 2.4% and for core inflation measures to also decelerate, while the trimmed mean CPI is seen slowing to 2.8% and the median CPI is seen slowing to 2.5%. If realized, those readings would mean the average core CPI will have advanced at a 2.4% annualized pace over the past six months, only moderately in excess of the Bank of Canada's 2% inflation. Further evidence of contained inflation trends, combined with indications of a slowing in economic growth momentum, should be enough, in our opinion, for the Bank of Canada to deliver another 25 bps policy rate reduction at its early September monetary policy announcement.

Eurozone PMIs • Thursday

The Eurozone manufacturing and services PMIs are scheduled for release this week, figures that will be important not only for assessing the health of the region's economy, but also the likelihood that the European Central Bank will deliver another interest rate cut at its September monetary policy announcement.

The Eurozone economy showed improved momentum in early 2024, with GDP growth of 0.3% quarter-over-quarter in both Q1 and Q2. Slowing headline inflation, ongoing employment growth and improving real income trends helped to contribute to the Eurozone's firmer growth trends. That said, sentiment surveys have softened in recent months, reflecting ongoing headwinds in Germany's manufacturing sector and perhaps also temporary uncertainty surrounding the recent French elections.

For August, the outlook for Eurozone PMI surveys are mixed, with the consensus forecast for the manufacturing PMI to edge up to 45.9 and the services PMI expected to dip to 51.7. However, should the August PMIs show a sharp downside surprise, that could portend slower growth in the second half of this year, reinforcing the chances of a September rate cut, an outcome which is our base case. Significant strength in the PMI surveys, however, would leave the outlook for a September rate cut more clouded, especially if subsequent data releases point to wage growth and services inflation remaining elevated for the time being.

Interest Rate Watch

Fishing in Jackson Hole for Clues About the Fed Rate Path

While the data calendar will be rather light this week, there will be plenty to chew on when it comes to interest rates as FOMC Chair Powell delivers his annual speech at Jackson Hole. The Chair's address at the Kansas City Fed's annual Economic Policy Symposium has grown to become the most-anticipated Fed speech of the year. The heightened interest stems from a history of various chairs using the forum to deliver significant policy messages during one of the longer calendar stretches between scheduled meetings. These include Ben Bernanke signaling support for additional rounds of quantitative easing in 2010 and 2012, as well as Powell announcing a new FOMC policy framework in 2020, and then delivering pointed remarks in 2022 that the Committee would do what is necessary to restore price stability even if it causes some pain.

While not every speech by Fed Chairs at Jackson Hole makes waves, we see the potential for Powell's address this year to signal another important policy shift. The FOMC has held the fed funds rate at 5.25%–5.50%, its highest level since 2001, for more than a year now in an effort to corral decades-high inflation. Since the FOMC last adjusted its policy rate in July 2023, inflation has fallen significantly, even though it has not returned all the way back to the FOMC's 2% target. The core PCE deflator has declined from a year-over-year rate of 4.2% to 2.6% and is likely to remain near that 12-month pace through the end of the year by our estimates. As a result, there has been passive tightening in monetary policy over the past year when looking at the fed funds rate on an inflation-adjusted basis (chart).

Inflation is not the only part of the FOMC's mandate that looks materially different from when the Committee first lifted the fed funds rate to its current range. By a host of measures, labor market conditions have softened over the past year, and according to Chair Powell the jobs market is no longer overheated. Notably, payroll employment growth averaged 264K jobs per month in the 12 months through July 2023, but has slowed to an average pace of 209K in the past 12 months (and likely even less once benchmark revisions are factored in). Meantime, the unemployment rate has risen from 3.5% a year ago to 4.3%. That puts it at the top end of the FOMC's central tendency estimate of the longer-run unemployment rate, implying further loosening in the jobs market would be undesirable.

Chair Powell's Jackson Hole address, therefore, could be used to take the next step toward a rate cut by suggesting that, amid the evolution of the economy over the past year, the increasingly restrictive stance of policy, when viewed through the lens of the real fed funds rate, may no longer be appropriate. The July FOMC statement and Chair Powell's post-meeting conference illustrated that the risks to the Fed's mandates are no longer all about inflation given the improvement on the price front and cooler state of the jobs market.

As such, Powell may frame possible easing in terms of a risk-management approach to policy. With economic growth still strong and inflation not fully snuffed out, we would expect Powell to suggest that any easing at this juncture would be a dialing-back of policy restriction, with the policy setting normalizing alongside economic conditions. While his speech is likely to hint that a rate cut is coming as soon as the FOMC's next meeting, we expect him to stop short of offering any clues as to the size of a potential rate adjustment, since there is another month of employment and inflation data still to come before the Committee's September 17–18 meeting.

Topic of the Week

Lower Income Household Liquidity Crunch

Amid a slowdown in the labor market, the staying power of the consumer is once again central to the economic outlook. However, consumer purchasing power may be dwindling for lower income households. A notable trend has appeared in the Fed's distributional financial accounts data in recent quarters,with lower income households facing an increasingly constrained availability of liquid assets. The story has been that, broadly, households have thus far maintained spending growth at a solid clip, evident in both sustained personal spending and retail sales that have demonstrated surprising strength as of late. Even so, under the hood, lower income households have been drawing on liquid reserves to help maintain spending. These liquid assets, which include cash, checking deposits, savings deposits and money market shares, are important to the outlook for real personal consumption expenditures, as they are the assets most easily deployed for spending.

Early in the pandemic, households across the income spectrum bolstered their liquid asset reserves. This was due to an infusion of fiscal stimulus and an environment in which certain experiential services spending, such as eating out and concerts, was not possible, causing forced thrift among households. Beginning in early 2022, both lower and higher income households' liquid assets started to decline on a real basis, which continued for over a year for both types of households, though it began diverging in mid-2023. At that point, higher income households resumed bolstering their liquid assets, driven primarily by money market inflows, while lower income households' balances stagnated.

Liquidity measures are difficult to concretely estimate with precision due to the data being subject to large revisions at times. A simple linear trend analysis suggests that real liquid assets for households below the 80th percentile of the income distribution are now about $500 billion, or over 10%, below where they would have been had they continued on their trend from 2016–2019 in the absence of the pandemic. Meanwhile, liquid assets for households in the top 20% of the income distribution are over $1.6 trillion, or 20%, above where they would have been following their 2016–2019 linear trend. The staying power for middle and lower income households is not as robust as it is for higher income households who have liquid assets that have increased significantly since the pandemic.

A recent research note from the Federal Reserve Bank of San Francisco corroborates this finding. Perhaps even more cautionary than our simple linear trend analysis, economists at the SF Fed estimate that real liquid assets for all households are now below where they would have been in a scenario without the pandemic. The upshot of both analyses is that middle to low income households are not as flush with cash as they once were.

Just seven weeks ago they were net short to the tune of 184,000 contracts. That was their biggest short position in 17 years, a $14 billion bet against the currency. The scale and speed of the bullish momentum shift in July and so far this month is historic.

A short position is essentially a bet that an asset will fall in value, and a long position is a wager its price will rise.

The bar to extending long yen positions and for further yen appreciation may be higher. The U.S. economy is still growing at a decent clip - a 2% annualized rate, according to the Atlanta Fed GDPNow model's latest estimate - and the dollar's interest rate and yield advantage over the yen remains substantial.

Source: Reuters

Iron Ore

Natural Gas

China Soybeans

Nuclear Power

Mexican Oil

Source: Bloomberg

Data this week was about as good as even the most optimistic bull might have hoped for and any remaining bearish technical signals were put to rest with the S&P500's (SPY) move through 5390-400. There have now been 7 higher closes in a row and it appears a new leg of the bull market is underway.

The early resumption of the rally may be frustrating for many who missed the bottom. I'm unfortunately in this camp - after calling the top and a correction to 5265, I was all set to load up again, but of course the market didn't give me a nice little dip to buy. The "crash" on August 5th got me overly cautious and I am now underinvested. I'd love to see another big dip, but I'm also looking at alternative ways to buy, even when the S&P500 is approaching its all-time high; it doesn't tend to give buyers a second chance.

This week's article will identify new inflection points. These can help keep you on the right side of the trend and can be used to enter trades with minimal risk, even when the market has moved a long way. Various techniques will be applied to multiple timeframes in a top-down process which also considers the major market drivers. The aim is to provide an actionable guide with directional bias, important levels, and expectations for future price action.

S&P 500 Monthly

The August bar has not only traded back into the July range above 5390, but is now back in positive territory. There are still 2 full weeks to go until the monthly close, but at this juncture, a bullish bar has formed and only a close below 5390 will shift it neutral/bearish.

I'm slightly surprised at the brevity of the correction in August. The monthly exhaustion took 8-9 months to set up, and came in confluence with a weekly signal and the major Fib extension at 5638. It was a full house of bearish signals and might still have some lingering effects which cap the gains over 5669.

The next major target is the 6124 level. This is a measured move where the 2022-2024 rally will be equal in size to the 2020-2022 rally. It is unlikely to be reached this side of the election, but is a possible destination at some point in this bull market.

SPX Monthly (Tradingview)

5638 and the 5669 are major resistance points.

5390 and the August low of 5119 are initial supports.

The August bar will complete the upside Demark exhaustion count. It may have played out already with the correction of nearly 10%, but its effect could linger and limit rallies ahead of the election.

S&P 500 Weekly

Last week's article highlighted the need for a "higher low, higher high and higher close over 5344, ideally 5400" to confirm a reversal. These were provided emphatically in a very bullish weekly bar. The close at the highs suggests the rally will follow through early next week.

The comparison with the initial drop from the 2022 top (highlighted) is still valid, but less compelling with this week's strong action. A large drop next week would be needed to keep this comparison relevant,

SPX Weekly (Tradingview)

Initial resistance comes in at 5566 and is likely to be tested early next week.

The 20-week MA and low of last week are initial support at 5324.

Next week will be bar 2 (of a possible 9) in a new upside Demark exhaustion count.

S&P 500 Daily

The S&P500 is nearly back where the 3-day crash (if we can call it that) originated at 5566. It's obvious resistance, but so was the 5390-400 area which was cut through last week like it was nothing. This is similar action to early November '23 and to early May '24 when the rally gapped over resistance points and maintained strong momentum.

Rallies tend to slow when they reach the area of the preceding top and a clean break of 5669 looks unlikely. Expect shallow dips until this level is reached.

SPX Daily (Tradingview)

5566-85 is the first resistance, then the 5669 peak.

On the downside, the gap at 5500 is potential support, followed by 5463-70 at the high volume area. The 5390-400 area is still relevant; a break below this level would put the recovery into question.

An upside Demark exhaustion will be on bar 7 (of 9) on Monday. A reaction is often seen on bars 8 or 9 which means a pause/dip gets more likely from Tuesday onwards.

Drivers/Events

The data was so good this week, a 50bps cut in September has been priced out and the odds of a 25bps move have risen to 75%. US Core PPI came in at 0.0% when 0.2% was expected, CPI stayed at 0.2%, but most important of all, Unemployment Claims came in lower than expected at 227K, some way from the danger area of 250K. Panic over the labour market seems premature. Importantly, yields moved lower again, this time for the right reasons (low inflation).

Data next week is on the quiet side and should allow the current move higher to continue. FOMC Minutes are due for release Wednesday while Thursday will bring PMIs and Unemployment Claims - the stronger the better for the S&P500. Fed Chair Powell is scheduled to talk at the Jackson Hole Symposium on Friday. While no surprises are expected, it will be interesting to hear the Fed's view on recent events; will they push back on the dovish repricing and expectations for aggressive cuts? Probably not.

While the data may be positive, concerns over valuations, the economy and the election could cap the upside. Remember the July top formed on good news (CPI), and the August bottom came when things looked their worst. The reaction to data often depends on the technical context (positioning).

Probable Moves Next Week(s)

The bullish bigger picture view is firmly intact and it seems the expected H2 correction has played out already. New all-time highs are expected in the coming weeks, although the trend above 5669 may be limited by the continued effect of the monthly exhaustion signal and concerns over the labour market/economy. Election uncertainty is also likely to cap rallies. I'm anticipating an initial break of 5669 will fail and then lead to a much slower drift higher to form a wedge pattern.

Short-term, resistance at 5566-85 should be reached early next week. A daily exhaustion signal should then lead to a pause and dip, but 5500 ideally holds to set up continuation to 5669 where a longer consolidation is likely. Assuming this scenario plays out reasonably well, I would buy near 5500 and add if 5463-70 is reached.

Should 5390-400 break, it would mean my conclusions of a strong move to 5669 are wrong and the S&P500 is still in a correctional phase. Although this would be disappointing, it could provide an opportunity to buy during a deeper dip and I may get a second chance after all.

Source: SEEKINGALPHA

Source: Bloomberg

Record output from solar and wind farms plus the highest hydro generation total since 2016 have been the main drivers of the clean power surge, which allowed generators to slash natural gas-fired output by 60% from the January to July period in 2023.

Portugal's power firms have also lifted total electricity generation by 7% to the highest since 2021, demonstrating that a multi-pronged approach to boosting clean generation can trigger rapid progress against energy transition targets.

Turnaround

That fossil-fired total is down 59% from the same period in 2023, and is the lowest on record.

Hydro Help

Through the first seven months of 2024, pumped storage output was up 67% to 172,758 megawatt hours (MWh), while run-of-river generation was 70% higher at 259,415 MWh, according to LSEG.

All told, the cumulative gains in Portugal's hydro generation allowed hydropower's share of the electricity generation mix to average 35.3% so far this year, compared to 20.7% during the same period in 2023, Ember's data shows.

Source: Reuters