Markets don’t have too much time to digest the wild ride and choppy price action we experienced last week as we get some meaty US data in the coming days. Maybe that’s a good thing, but we cannot reiterate enough that summer markets..are summer markets. There is generally limited liquidity, so volumes are reduced as important trading desks are mostly on holiday. That means we can get whippy, and head-scratching moves which have little specific rhyme or reason.
The best explanation is probably a perfect storm in thin markets, with the carry trade unwind, rogue NFP data, geopolitical tensions, an AI reality check and Warren Buffet all pitching in. The former is the big theme to watch and whether a hawkish BoJ and dovish Fed continue with diverging rate policy paths. USD/JPY hasn’t made back levels seen before NFP, so we will be closely watching this and respective central bank commentary.
Stock markets have filled the gap from manic Monday’s volatility though bond markets still see more rate cuts than before those moves. The reaction to the weekly initial jobless claims data was instructive and seemed a natural overreaction to the first, more encouraging piece of data after the disappointment of the NFP report. But really those numbers still show difficulties in the workforce.
It also means we could see sharpened volatility around the US data this week which includes CPI, retail sales and PPI. Even small (second decimal of a percentage point) deviations from the consensus 0.2% m/m could be seized upon. Any upside surprise would be a clear-cut dollar positive, as equities would sell off. However, short-dated US Treasuries could also come under pressure on hawkish Fed repricing, unlike in the first unemployment-driven stock market rout.
The middle of the month means a UK data dump with attention on inflation and wage growth. Sterling retraced nearly all of its July gains but has bounced off support around its 100-day SMA at 1.2684. There is another set of jobs and inflation reports the week before the September Bank of England meeting. Wednesday’s RBNZ meeting could see volatility in NZD as there are mixed views regarding a possible rate cut even though money markets are more convinced of a move, which is likely a hangover from last Monday’s gyrations. The kiwi has rebounded solidly since the spike low down to 0.5849 but faces resistance around 0.6050.
