Powell is optimistic

Thoughts of the Day

US Federal Reserve chair, Jerome Powell, said yesterday that the economy is back on the disinflationary trend and the risk of a slowdown in the jobs market is as important as the risk of a resurgence in inflation. This is a touch more dovish than most of the comments that we have heard from the other Fed officials.
Even though the odds of a Fed rate cut have been decreasing since the start of the year, the US stock markets have been grinding higher all year. If the odds of the Fed cutting rates should start to rise, all the bears on the sidelines will have to throw in the towel and jump on the bandwagon soon.

This is an abridged version of our CIO’s daily writeup for the day, to view the full version, please login or subscribe to a membership plan.

Tradertainment

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Bright lights, big danger?

People exposed to bright light between 12:30 and 6 a.m. are at greater risk of developing Type 2 diabetes, regardless of how much light they are exposed to during the day, new research suggests.
The findings, published in the Lancet Regional Health—Europe, relied on data from about 85,000 study participants. A wrist sensor, worn for one week, monitored their light exposure throughout the day.

Researchers collected 13 million hours of light sensor information and tracked participants for nine years to observe whether or not they developed Type 2 diabetes.

In relation to light, researchers explain that nighttime exposure can disrupt the body’s 24-hour biological clock, leading to changes in insulin secretion and glucose metabolization.

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Day Ahead

  • The FOMC Minutes for the Federal Reserve June meeting will be released.
  • [US Labour] The ADP Employment Change is expected to show +170k jobs being added to the economy vs +152k previously.
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What Happened Yesterday

Market Movements as of New York Close 2 Jul 24
  • [Fedspeak]
    Goolsbee (2025 voter, known dove): “I see some warning signs from the real economy weakening. As inflation comes down, policy gets more tight. If we were using the measures on housing inflation that they use in Europe, we would be at 2% already.”
    (Goolsbee continues to tilt dovishly as he did previously.)
  • The annual inflation rate in the Euro Area decreased to +2.5% in June 2024 as expected, following a brief rise to 2.6% in May, according to preliminary estimates. In contrast, the annual core inflation rate, which excludes energy, food, alcohol, and tobacco, unexpectedly stayed at +2.9%, above the anticipated +2.8%. On a monthly basis, the Consumer Price Index (CPI) increased by +0.2%, same as the rise observed in May. The Euro Area unemployment rate remained at 6.4% as expected. Reaction in the EURUSD was muted.
  • The US JOLTS job openings showed that the number of job openings increased by +221,000 from the previous month to 8.140 million (vs 7.91 million expected) in May 2024.This follows a downward revision of April’s figures to 7.919 million, which marked a three-year low. The US Dollar Index rose +0.14% from 105.75 to 105.90 in immediate reaction.
  • The US stock market opened lower from Monday. It then rose steadily through the New York session following Powell’s comment that the Fed has made progress on inflation (Headline 1). The S&P 500 close +0.62% higher on the day (high: +0.63%, low: -0.30%), the Dow Jones rose +0.41% (high: +0.44%, low: -0.21%) while the Nasdaq increased +1.01% (high: +1.02%, low: -0.36%)
  • The crypto market traded weak with Bitcoin down -1.25% and Ether down -0.66%.

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Headlines & Market Impact

Powell says Fed has made ‘quite a bit of progress’ on inflation but needs more confidence before cutting

Notable Snippet:  Federal Reserve Chair Jerome Powell expressed satisfaction Tuesday with the progress on inflation over the past year but said he wants to see more before being confident enough to start cutting interest rates.

“We’ve made quite a bit of progress in bringing inflation back down to our target,” Powell said at a central banking forum in Sintra, Portugal.

“The last [inflation] reading and the one before it to a lesser extent, suggest that we are getting back on the disinflationary path. We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy,” he added.

While Powell said he sees progress on inflation, he’s wary of moving too soon and threatening the downward path of price increases, which hit their highest pace since the early 1980s two years ago.

“We’re well aware that if we go too soon, that we can undo the good work we’ve done,” he said. “If we do it too late, we could unnecessarily undermine the recovery and the expansion.”

Risks of moving too late as opposed to too soon have come into better balance this year as inflation has ebbed and the economy and labour market have stayed strong, Powell added. By contrast, the Fed spent much of the past year worried that cutting rates too soon and allowing inflation to resume its upward trek posed a greater risk.

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Hedge funds dump tech stocks at fastest pace since 2016, bank shows

Notable Snippet:  Global hedge funds in June sold U.S. shares of technology, media and telecommunications (TMT) companies at the fastest pace since 2016, mainly driven by semiconductor stocks, Goldman Sachs said in note.

The sales could indicate that portfolio managers have become more bearish on tech stocks, after the sector’s powerful rally in the first half of the year, although the note does not provide any reason behind the trend.

The bank, which compiles its clients’ positioning for the data, said semiconductor and software were the top two most sold sectors in June, while hedge funds increased their allocation to tech hardware and electronic equipment.

Tech stocks led the S&P 500 index’s (.SPX) strong performance in the first half of the year, with artificial intelligence chipmaker Nvidia (NVDA.O) up 150% and generating 30% of the index’s 15% return.

Overall, Goldman Sachs said hedge funds net sold global equities for a third straight month, almost entirely driven by short sellers who borrowed shares to sell on bets that the price will decline, enabling them to buy them back for less.

“This month’s notional net selling was the largest since June 2022,” the bank said in the note.

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U.S. adds six companies to trade restriction list, four for training China’s military

Notable Snippet: The United States added six companies to its trade restriction list on Tuesday, including four for their links to the training of China’s military forces, according to a government posting.

Two of the companies are in China, one in South Africa, two in the United Arab Emirates and one in Britain.

Global Training Solutions Limited and Smartech Future Limited, both in China, as well as Grace Air (Pty) Ltd and Livingston Aerospace Limited of the United Kingdom, were added over their ties to the Test Flying Academy of South Africa and the training of China’s military forces using Western and NATO sources, the posting said.

The Test Flying Academy of South Africa was put on the Entity List, as it is known, last year for training Chinese military pilots using Western and North Atlantic Treaty Organization sources.

UAE companies Mega Fast Cargo and Mega Technique General Trading were added for evasive conduct, and Mega Fast Cargo for shipping U.S.-origin goods to Russia, the posting said.

Companies on the Entity List, which is overseen by the U.S. Commerce Department, require licences to ship U.S. goods and technology to them, which are likely to be denied.

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Sentiment

FX

Stock Indices

Best,
Phan Vee Leung
CIO & Founder, TrackRecord