Equity futures are kicking upward and the dollar is rising in the run-up to the North American open after Nvidia reported stronger-than-expected second quarter earnings and issued a remarkably-positive sales forecast. With the tech-heavy Nasdaq and the S&P 500 widening the US performance differential relative to global markets, investor demand for the greenback is intensifying – but we note that this could prove dangerous in the months ahead if the sector fails to deliver on its promise. As the corporate raider Carl Icahn once put it, “Some people get rich studying artificial intelligence. Me, I make money studying natural stupidity”.
Long-term Treasury yields are also firming somewhat as traders brace for tomorrow’s comments from Federal Reserve chair Jerome Powell, who is expected to articulate a “higher for longer” message in his address at the annual Jackson Hole Economic Symposium. Broader implied currency market volatility is relatively restrained, suggesting that faith in the Fed’s capacity to steer the economy toward a “soft landing” remains unbowed.
North America
Last night’s Republican debate was full of sound and fury, signifying nothing – other than that Trump remains in the lead. The candidates expressed little in the way of economic policy views, and most raised their hands to say they’d support the former president as party nominee even if he was convicted of some of the more than 90 criminal charges that have been brought in separate cases across four jurisdictions. Vivek Ramaswamy, who arguably left the biggest impression on the debate stage, has previously suggested that the Federal Reserve should abandon its use of consumer price indices, instead stabilizing the value of the dollar relative to a basket of prices including gold, silver, nickel, agriculture, and farm materials – an idea that should be highly amusing to anyone who has ever traded commodities.
The number of Americans submitting initial claims for jobless benefits fell to 230,000 last week, down from a revised 240,000 in the prior week. Continuing claims numbers – which arguably provide a cleaner read on deeper fundamentals – hovered above pre-pandemic averages at 1.7 million, suggesting that the economy’s job creation engine has lost some momentum.
Durable-goods orders fell -5.2 percent in July from the prior month as commercial aircraft purchases fell, but the ex-transportation gauge climbed 0.5 percent, suggesting that underlying demand remained relatively healthy. Core capital goods orders, often considered a proxy for business investment, grew just 0.1 percent as higher interest costs weighed on corporate spending plans.
Still ahead today, the Philly Fed’s Harker and Boston’s Susan Collins will speak, helping set the stage for tomorrow’s appearance from Chair Powell. Former committee hawk – and frequent catalyst for market volatility – James Bullard told Bloomberg this morning that the economy’s recent “reacceleration could put upward pressure on inflation, stem the disinflation that we’re seeing, and instead delay plans for the Fed to change policy”.
For much of the last few years, a strong open in US equity markets might have propelled the Canadian dollar higher. But oil prices are gradually reassuming their importance in driving price action, with the 90-day rolling correlation between the exchange rate and West Texas Intermediate now exceeding its correlation with the S&P 500, meaning that global marginal demand forecasts – heavily driven by developments in the Chinese economy – are keeping the “petroloonie” anchored around the 1.35 handle against the dollar.
Yesterday’s retail spending report provided worrisome evidence of a slowdown in household consumption – yet with consumers shifting toward higher outlays on services, it’s difficult to tell whether June’s 0.8-percent drop in ex-auto sales is indicative of a broader decline in overall spending. We think a slowdown is underway – and the reaction in currency markets certainly suggests that others are persuaded of this – but we remain reluctant to bet against the sheer bullheadedness of Canadian consumers, who have driven household indebtedness to chart-topping levels over the last two decades.
Europe
The euro bounced off its 200-day moving average last night and is staging a modest rebound as natural gas prices slump and expectations rise ahead of tomorrow’s speech from European Central Bank President Lagarde. Reports from Australia are suggesting that a strike at the country’s biggest export facility could soon be resolved, easing stress on global prices and limiting the impact on key European benchmarks ahead of the critical winter season. Lagarde’s comments could help steer forecasts for the central bank’s September meeting, with markets currently unconvinced of the need for another rate hike amid clear evidence of an economic slowdown.
The pound is slipping with gilt yields as traders ratchet the odds on further monetary tightening from the Bank of England ever lower. Ten-year rates have fallen sharply since yesterday’s early-August purchasing manager index data pointed to an imminent economic downturn, and market expectations for the peak in policy rates have dropped from above 6 percent to less than 5.75 percent.
Asia Pacific
China’s renminbi is again shedding any pretence of being a free-floating currency, with the People’s Bank of China stage-managing liquidity conditions to keep the exchange rate below 7.30 to the dollar. State-owned banks are keeping yuan borrowing costs elevated as they work to make short positions more expensive and lower demand for the dollar, while official signalling efforts – expressed through the official fix – are making it clear that policymakers are unwilling to allow further rapid depreciation.
At a meeting in Johannesburg, Brazil, Russia, India, China, and South Africa agreed to expand the BRICS group by another six members and deepen the use of local currencies in conducting intra-bloc trade. Invites will be extended to Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates, with the combined organization making up roughly 29 percent of nominal global gross domestic product. But the group, formed after former Goldman Sachs economist Jim O’Neill coined the “BRIC” acronym to describe the biggest and fastest growing emerging market economies in November 2001, has largely struggled to achieve its potential in the the decades since. Political divides have deepened between democrats and autocrats, China’s economic performance has vastly outstripped fellow members – which even today, generate less than 8 percent of global output – and investment returns have badly lagged developed markets. Currency performance has been downright terrible, with nominal exchange rates underperforming the dollar. We wish the citizens of the BRICS-plus group of nations the best of luck, but suspect that a club for autocrats isn’t likely to succeed in overturning the global economic order anytime soon.