Today's FSI First Word note will include a short video update. We discuss: Fed Chair Powell's speech last Friday at Jackson Hole was constructive to our view, because he emphasized data dependence. We expect this week to show markets need to calibrate lower their views on inflation and labor market strength. This should be supportive of stocks (Duration: 9:11).
This week is the final week of August and perhaps one of the least liquid weeks as many investors head for vacation into Labor Day. There is a significant slate of macro data coming this week, much of which we expect to show both strong disinflationary forces (July PCE) and a softening jobs market (JOLTS and August jobs report). So overall, we anticipate the coming week to lean "dovish" for those economists and investors data dependent (including Fed).
* Stocks actually rose 1% last week but it felt like a mixed bag overall.
* Fed Chair Powell's speech at Jackson Hole, in my view, was actually very constructive and supportive of our view that the Fed and FOMC remain data dependent. And we expect incoming data in coming months to tilt heavily "disinflation" and "softer jobs market," and the upshot is the Fed is not likely to raise rates again for this cycle. That is, we think probabilities favor no hike in September nor November.
* But many economists and markets saw a "hawkish" bias in Powell's speech (even JPMorgan cited their AI-based NLP leaned "hawkish") but we think this is because "hammers see nails" -- meaning, the majority of economists and investors lean hawkish, so their bias is to see hawkish details.
* Thus, it is not a surprise to us that odds of a September and November hike rose this past week:
-- Sept hike odds rose from 12% to 21%
-- Nov hike odds rose from 30% to 42%
-- Wow.
* These are certainly eye-opening increases in hike expectations. But the move in US 10-year yields have been far more modest. In fact, in the past week, US 10-year yields fell from 4.25% to 4.23% and as JPMorgan Fixed Income Strategists note, they see yields as fundamentally "rich" (too high) and if incoming data is soft, they see yields falling. That is consistent with our view and we anticipate the same.
* There is a lot of key data coming this week:
-- 8/29 9am ET: June Case-Shiller Home prices <-could be "hawkish"
-- 8/29 10am ET: JOLTS July <- likely soft = dovish
-- 8/30 8:15am ET: ADP Aug jobs <- likely mixed
-- 8/31 8:30am ET: July PCE deflator <- KEY likely soft = dovish
-- 9/1 8:30am ET: August jobs report <- KEY likely soft = dovish
-- 9/1 10am ET: Aug ISM manufacturing <- likely better = neutral
* There are many key reports next week. But the two that will sway the Fed most, arguably, are the July PCE deflator (inflation) and August NFP jobs report. We think payrolls will be soft and later this week, we will have a fuller view on this. JOLTS matters and we expect this to lean soft.
* So overall, the cadence of data this week is expected to be softer, which will lean dovish. And the path dependent views will likely course calibrate dovish. We think this will be supportive of stocks.
BOTTOM LINE: While stocks need to demonstrate resilience, we lean overall positive into this week.
Our Head of Technical Strategy, Mark Newton, sees equities as still not having proven a sustainable low is in place. And this makes sense given markets have been in a downtrend since July and a key level is around S&P 500 4,460. As shown below, this is the intersection of the 20 DMA and 50 DMA currently and sits about 55 points above Friday's close of 4,405.
* Our view remains constructive as we believe Powell's speech confirms our view that Fed thinking will tilt dovish if incoming data is dovish, which we expect this week.
* This means we anticipate odds of a September and November hike to fall this week, from the current 21% and 42%, respectively. In fact, we expect both to eventually move towards zero.
* This should be a positive effect on yields (lower) and on equities (higher).
* But we also know that this is the final week of August, so markets are less liquid.
* And August is historically a tough month, which we have seen on ample display this month.
That said, while acknowledging the technical hurdles, we lean positive this week. But respecting that this is a volatile week.
