Michael Brown
DIGEST – Stocks stuttered once again yesterday, while the dollar rolled over as well, and Treasuries caught a haven bid amid broad-based risk aversion, as the BoE stood pat. Today, a light docket rounds out the week.
WHERE WE STAND – It’s been one of those weeks, yet again.
It did seem, for a brief time, that things were looking somewhat calmer yesterday, until stocks took a lurch lower once again, sparking haven demand pretty much everywhere else, though yet again there was little by way of obvious catalyst behind that sharp equity downside.
Clearly, sentiment remains very fragile indeed, be that as a result of continued jitters over the AI frenzy, those warnings about a pullback from bank CEOs earlier in the week, or potentially just a reflection of the market at large having come a very long way, in a very short space of time. Concurrently, my belief remains that the fundamental bull case is a strong one, with the policy backdrop becoming increasingly loose, earnings growth robust, and the underlying economy resilient. Add to that, corporate buybacks coming into the market once more post-earnings, and a calmer tone on trade, and the path of least resistance continues to lead higher in my view.
Outside of the equity complex, it was broadly a risk-averse day, with traditional havens such as Treasuries, the JPY, and the CHF rallying in chunky fashion. The move in Treasuries was, perhaps, the most notable, with benchmark yields falling as much as 8bp at the front-end of the curve, and near-term Fed policy expectations repricing dovishly too.
The Challenger layoffs data will have helped this move along, with layoffs last month printing at their highest level since March, with the firm citing AI-related job cuts as the primary reason for this surge. While we can’t entirely ignore the data, I am tempted to take it with a bit of a ‘pinch of salt’, given that the series is very volatile indeed, and that state-level jobless claims data has yet to show a similar uptick in joblessness.
Maybe of more interest than what found haven demand yesterday, was what didn’t. Namely, gold, and the dollar. While the greenback’s slump can be explained away by that modest dovish Fed repricing, the headwinds facing gold are a little more perplexing. This $4,000/oz handle is proving a very tough nut to crack indeed, though at the same time downside has been relatively limited, and with demand for diversification from reserve allocators having hardly gone away, the bull case remains a solid one to me.
Switching gears, we also had a Bank of England decision yesterday.
As expected, the MPC held Bank Rate steady at 4.00%, albeit via the narrowest possible 5-4 margin, with those 4 dissenters instead preferring an immediate 25bp cut. Although the statement saw a dovish change to the Committee’s guidance, with the statement now explicitly noting that Bank Rate is likely to ‘continue on a gradual downward path’ if further disinflationary progress is made, removing the prior reference to a ‘careful’ pace of easing.
Still, Governor Bailey noted, at the press conference, that policymakers not only need to ensure that the downwards path of inflation becomes more established before delivering another rate reduction, but also that the MPC want to see ‘more evidence’ of inflation being past its peak before pulling the trigger once again. Hence, for the time being, I retain my base case that the MPC shan’t deliver another 25bp cut until next February, having accumulated three further CPI reports by then, and delivering that cut in conjunction with an updated round of economic forecasts. The risk, though, of a December cut is clearly now more significant, especially if labour market slack were to emerge in a more rapid fashion.
With the ‘Old Lady’ out of the way, though, GBP & Gilt traders can turn their attention back to the Budget at the end of the month – at least that’ll cheer us all up…not.
LOOK AHEAD – It was meant to be ‘Jobs Day’ today, but due to the ongoing government shutdown, it isn’t.
As a result, we’ve got a light-ish docket ahead to see out the week. The latest Canadian job stats are due at lunchtime, with employment set to have dipped by 5k last month, but unemployment set to have held steady at 7.1%, though with the BoC’s easing cycle done & dusted it’s tough to imagine the figures having much impact. The same can be said of this afternoon’s UMich sentiment survey which, with a sample of under 500 people that remains highly skewed by political allegiance, I still believe adds next-to-no value when it comes to building a picture of the US economic backdrop.
With that said, all that’s left to do for the week is to provide my usual warning as to potential gapping risk on Sunday night/Monday morning on the back of any unexpected headlines, and to then begin to think of an appropriate beverage with which to see in the weekend a little later on.
Brown is Senior Research Strategist at Pepperstone
