Wall Street’s Persistent Ascent: A Week Of Triumph And Tumult

A Broadening Rally: Double-Edged Sword for InvestorsWall Street stocks continued their relentless ascent on July 12, setting new record highs despite a late-session pullback. All three major indices celebrated weekly gains, buoyed by investor optimism in the face of anticipated easing in US monetary policy.Despite a steeper-than-expected 0.2% rise in US wholesale inflation in June and dour consumers, investor sentiment remained upbeat. The boost juice came from a benign consumer price index report on Thursday, heightening expectations for Federal Reserve interest rate cuts.A diversified stock rally ensued; however, investors heavily invested in S&P 500 index-tracking funds are not entirely enamoured. Case in point: On Thursday, market bets surged on Fed Chairman Jerome Powell cutting interest rates, leading to a notable shift in stock dynamics. Small caps and value shares, which have been hedge fund short-seller targets, rallied, with nearly 400 S&P 500 members posting gains. Yet, the tech giants, the main drivers of 2024’s market rally, fell, causing the index to dip.It’s all in the arithmetic. The S&P 500 and Nasdaq are tech-heavy, while the Russell 2000 isn’t. As investors pivot, will the Russell 2000 be a reliable lifeboat in the cooling US economy with personal spending on a downtrend?A Quick Tale of the TapeEquity markets rose last week alongside Fed Chair Powell’s testimony to Congress and encouraging US inflation data. The S&P 500 gained 0.9%, led by rate-sensitive stocks, while telecom services and the Nasdaq lagged. Powell noted that risks around inflation and growth are now more balanced. His remarks highlighted progress in lowering inflation and cooling the labour market, suggesting the Fed might reduce policy restraint. Still, it might be a case of too late, too little, as the US economy is on the cusp of a swoon.Policymakers must anticipate market conditions, as monetary policy effects lag behind current data. US real GDP growth has slowed, the unemployment rate has risen, and recent CPI reports indicate easing inflation. Treasury yields fell, and the market now fully prices in a 25 basis point rate cut in September. The coveted soft landing scenario hinges on timely policy easing.Forex: Japan’s Yen InterventionAccording to Bloomberg, Japan likely intervened in the currency markets to support the yen following US inflation data. This intervention, estimated at ¥3.5 trillion, aligns with rising expectations for a Federal Reserve rate cut. This move marks a strategic shift, leveraging favourable market conditions to make the intervention more effective.Japan’s Ministry of Finance (MoF) has adopted a new foreign exchange (FX) intervention strategy. Following this week’s soft US CPI report, the USD/JPY pair plunged around 2%, a steeper decline than any other USD cross as timely intervention kicked in.While Japan’s top currency official, Masato Kanda, remained coy and did not confirm MoF involvement, internal sources suggest that intervention occurred. Adding fuel to the fire, widespread reports indicated a “rate check” with traders Friday morning in Tokyo. If accurate, end-of-month data will likely confirm this speculation. Given the unusual drop in USD/JPY, we assume that the MoF intervened yesterday.This marks a notable shift in Japan’s FX intervention strategy. At the end of April, the MoF intervened before a Fed meeting, deploying JPY 9.8 trillion with limited success beyond the immediate aftermath. This time, the MoF waited for a USD-negative market event to bolster the yen through intervention. This strategy could make the intervention less conspicuous and potentially more effective by capitalizing on an already favourable market environment, leading to a rapid unwinding of JPY shorts.Still, the US CPI release was good news for the yen. A narrowing USD rate gap could pave the way for a lower USD/JPY. But freshly minted shorts must hope that FX intervention will not reduce the likelihood of the Bank of Japan hiking rates in July to support the yen.However, we suspect now is not the time for USD/JPY to enter a sustained downtrend, as speculative, carry-driven JPY selling has proven resilient to past interventions.Even as US Fed funds are projected to hit 3.70% in 2025, down from 4.0% just last week, it seems like a departure from my aggressive short USD calls, but it is what it is.So, I’ve been steering clear of loading up on US dollar shorts lately—don’t get me wrong, I’m not twiddling my thumbs. Most days, you’ll find me diving into the markets with all the intraday leverage I can muster. Take the other day, for instance, right after the EURJPY rate check and a little policy whisper in my ear; I decided to play the field by shorting both the Euro and the USD against the JPY for a quick spin.Looking ahead, I’m all about the careful picks for medium-term punts. One strategy that caught my eye recently? Cross-currency maneuvers, like going long on AUDNZD. This pair’s like the tortoise in the race—slow and steady until suddenly, boom! It rockets off when there’s a hint of policy divergence.Despite taking a break from the commentary grind, I’m always just a stone’s throw away from my trusty trading setup. Because let’s face it, the market waits for no one, not even during commentary vacations!Oil Markets: The Never-Ending RollercoasterCrude oil prices have been on a wild ride, recently reaching $87 per barrel for Brent crude, a notable rebound from below $79 just a few weeks ago. This resurgence follows OPEC+’s surprising decision to gradually ease 2.2 million barrels per day (mb/d) of voluntary production cuts starting in October.Several factors drive this price surge, including the U.S. summer driving season and persistent tightness in the global oil supply-demand balance. But found a happy median at Brent $85 per barrel heading into the weekend.Looking forward, volatility is likely to persist. Prices could spike temporarily if geopolitical tensions in the Middle East or Russia disrupt supply or if global monetary easing accelerates. Conversely, concerns about slowing demand from China, increased U.S. crude production or internal disagreements within OPEC+ could unsettle the market.However, in a massive departure from the usual bearish outlook (recall we pivoted on the dip in June), our view remains neutral to bullish for crude oil prices, supported by OPEC+’s commitment to withhold 5.9 mb/d, representing 5.4% of the global oil supply, with Saudi Arabia playing a pivotal role. Riyadh’s focus on maintaining high oil prices aligns with its ambitious Vision 2030 economic diversification plan, necessitating robust fiscal revenues. Despite some speculation, Saudi Arabia is unlikely to abruptly change course, given ongoing pressures to accelerate infrastructure projects linked to Vision 2030.Intra-OPEC+ tensions are expected to continue, particularly with members like Iraq and the UAE keen to increase production. Nonetheless, the cartel’s track record of effectively managing prices suggests a strategy of cautious recalibration rather than sudden policy shifts.In conclusion, while OPEC+ plans to ease production cuts starting this fall gradually, any adjustments are likely to be conservative and phased out over time.NUTS & BOLTS: Deciphering Economic SignalsThe buzz is palpable, and it’s not just about the odds on whether Biden will bow out or Trump will surge ahead in the 2024 Presidential Election—though PredictIt’s latest stats are enough to keep any political junkie on edge. With Biden’s chances dwindling (22%) and Trump’s gaining (60%), the election drama adds uncertainty to what has been, let’s face it, a year as riveting as watching paint dry.But let’s shift gears to the economic front, where the real action is brewing. After a year of playing it safe with tight monetary policies, Fed Chair Jay Powell and the FOMC are mulling over a rate cut. In his recent testimony, Powell hinted that the Fed’s focus isn’t solely fixed on inflation these days. With signs of cooling in the US labor market, the Fed faces a delicate balancing act. Cut rates too late, risking recession and job losses; cut too early, risking inflation and market exuberance.Powell underscored the Fed’s shift to acknowledging “two-sided” risks, emphasizing the need for convincing “good inflation data” to justify a rate cut. The June employment figures caught Powell’s attention, with the unemployment rate edging up to 4.1%, nearing the threshold that historically triggers recession fears under the Sahm Rule. Developed by economist Claudia Sahm, this rule suggests recession when the unemployment rate rises 0.5% from its recent low over twelve months—a figure nearing that mark in June.The Sahm Rule paints a cautious picture in tandem with indicators like the inverted Treasury yield curve and the Conference Board’s Leading Economic Index. Despite record-high stock prices, the foundation of the Goldilocks soft-landing narrative appears more fragile than consensus might think.Powell’s mantra remains clear: timing a rate cut hinges on data. The June CPI report, signalling low inflation, aligns with market expectations. Fed funds futures now fully price in a September rate cut and potentially more by year-end, marking a sharp shift from earlier caution.The Fed’s cautious stance has pivoted towards addressing labour market slack and diminishing inflation risks. Driven by compelling economic indicators, the case for rate cuts has strengthened since June. As Powell navigates these economic waters, the Fed’s next moves could redefine market expectations and economic outcomes in the coming months.TWEET OF THE WEEKBless his doomsday soul; Albert Edwards has been on a roll this week.More By This Author:Forex: Yen Takes Center Stage With Bank Of Japan In Rate Check Mode
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