Despite a bank holiday for the UK, trading volumes were elevated as investors had more time to appreciate the dovishness of Fed Chair Powell’s speech on Friday. US stocks rallied to fresh record highs as demand for tech stocks returned on expectations that the Fed is very far away from interest rate increases.
After Friday’s dovish tapering speech by Fed Chair Powell, a September taper seems very unlikely. The Fed is behind the curve and a pullback in the stock market will have to wait. The earliest taper seems like it could be in November and when that happens, fixed income volatility will be extreme. The Fed is buying both all the TIPS and Mortgage back securities and until they taper, real rates will remain heavy.
The economy has hit peak growth, but the outlook is still solid despite some growing risks over COVID concerns, expiration of unemployment benefits, and the overall impact from Hurricane IDA. Hurricane IDA left over 1 million Americans without power, and it will take a while to completely assess the damage.
The Dallas Fed Manufacturing report showed a steeper-than-expected decline as employers continue to struggle to find workers. Texas business executives are struggling to fill vacancies as workers look for more pay and while some lack skills. This report does not bode well for the Fed reaching substantial progress in the labor market recovery anytime soon.
Pending homes sales also posted a second consecutive drop as tight inventories and surging prices continue to cool the hot housing market. The July month-over-month reading fell 1.8%, much worse than the expected 0.3% gain. The housing market is stabilizing and despite the current delta variant wave, demand for homes should normalize now.
The dollar was in for a choppy session given thin conditions as UK banks closed for a summer bank holiday and month-end rebalancing flows. Treasury yields will remain heavy and that should prevent the dollar from appreciating much further.
Crude prices are stuck in wait-and-see mode until the energy traders have a better handle of what will be the full impact of Hurricane Ida with US production. Hurricane Ida pummeled Louisiana as a category strength hurricane, forcing over 1.74 million bpd, or 95% of Gulf of Mexico crude and natural gas platforms to shut-in.
Airlines across the board are cutting their schedules and the plateau for air travel is in place. Southwest announced bookings have shown down. Concerns are brewing that we might not see strong holiday demand.
With the oil market still heavily in deficit, expectations are still high for OPEC+ to agree on Wednesday that the cartel can move forward with its planned October hike. The delta variant peak across much of the Southern states appears to be in place and that should support a steady improvement for reopening by October. With lots of demand uncertainty, OPEC+ can afford to be patient since peak driving season is behind us, corporate travel is not bouncing back just yet, and with an uncertain holiday travel season outlook. OPEC+ has built in enough of a cushion that this market is still nowhere near having supply concerns.
WTI crude should find some short-term resistance at the $70.50 level, but eventually will make a run at the July high.
The liquidity wave may last much longer and that should do wonders for gold. Fixed income traders are buying ahead of the Fed and that is why Treasury yields will remain grounded. The playbook for gold is simple, the Fed has made it clear interest rate hikes are far away and that should prevent Treasury yields from taking off, thus denting demand for non-interest-bearing bullion.
Gold prices were unable to benefit from the broad risk-on rally that Fed Chair Powell triggered because demand for stocks were too good. Gold hit some key technical levels and will likely struggle in the short-term as investors prefer to go overweight with mega-cap tech stocks.
Institutional investors are taking a break with Bitcoin as the world’s largest cryptocurrency is losing momentum. The headlines are plentiful for Bitcoin, but not inspiring enough to take prices back above the $50,000 level: India is eyeing a central bank digital currency (CBDC), several tokens from Ethereum’s blockchain are surging, Cuba has laid out plans to legalize crypto transactions, and as El Salvador moves forward in facilitating Bitcoin transactions.
Bitcoin is stuck, waiting a fresh catalyst and will likely struggle in the short-term if demand for US stocks remains strong.
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