Will Dollar and Stocks Focus on Fed's Favorite Inflation Figure after Powell's Dovish Tone?

Will Dollar and Stocks Focus on Fed's Favorite Inflation Figure after Powell's Dovish Tone?

A late-in-the-week rally for the Dow and other major US indices fueled by Powell’s Jackson Hole speech restored summer doldrum conditions. What does next week’s calendar present for bullish or bearish charge?

Talking Points:

• Summer doldrums are holding strong thanks to a Fed rate cut expectation resurgence that does little for trend but cuts tentative risk aversion traction
• Systemic fundamental themes are untethered with interest in tariffs, economic activity and even interest rates notably dropping in Google Trends
• Top event risk for the week ahead is more about targeted volatility with a high bar for trend development: US consumer confidence; NVDA earnings and the PCE report

Late Reassurance on Risk Appetite Caps Latent Volatility Potential

The markets were saved from a tepid retreat in risk appetite that prevailed through much of last week thanks to a favorable interpretation of Fed Chairman Jerome Powell’s keynote from the Jackson Hole Economic Symposium Friday morning. Both the S&P 500 and Nasdaq 100, carved out one of their biggest daily rallies in three months Friday when the central banker’s statement signaled to eager speculators that a -25 basis point (bp) rate cut on September 17th – what would be the first reduction of 2025 for the Fed – was a high probability. From Fed Fund futures, the probability of a reduction at the next meeting rose from a 75 percent probability the day before to 91 percent. That is a jump, but still heavily expected. Looking further out, aggregate rate cuts through year end only modestly shifted away from a single -25bp over the next four months to -50bp and a modest chance of -75bp. How much of a discount is there to be unwound…especially as benchmark indices are pressing record highs?

VIX Volatility Index and S&P 500 (Daily)

 

Source: TradingView, John Kicklighter 

 

 

Plenty of Event Risk But Not a Receptive Theme to Threaten Systemic Trend

Instead of the backdrop flipping the proverbial switch for a strong bullish wave, it seems more likely that a mild build up of tentative risk was flushed; and the backdrop of the summer doldrums was allowed to once again pacify the masses. Functionally, this should could be read as an environment where there remains a reticence to commit to strong runs – bullish or bearish – until either a genuine systemic shift occurs or liquidity returns.

Calendar of Top Global Macro Event Risk

  

Source: John Kicklighter

 

 

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US Consumer Confidence Increasingly Important

With an appreciate for the higher threshold for stirring trend, there are still a few high profile events on the docket ahead that should be monitored for high localized volatility potential and at least the capacity to spark a larger fundamental fire. The first of the systemically relevant items on the calendar that market participants should monitor is the Conference Board’s consumer confidence index for August. The University of Michigan’s measure of the same roused the attention and concern of a nascent bearish concern with its first retreat in three months and a noticeable jump in inflation expectations that complicates the Fed’s and White House’s interpretations for monetary policy moving forward.

With the pressure from President Trump increasing on Fed Chairman Powell and crew to significantly cut interest rates with the caveat that data is coming under serious scrutiny, sentiment reports be prove more difficult to refute as a reflection of the constituency rather than an (accused) distorted picture from a government agency data collection. Generally, the correlation between the Conference Board and University of Michigan headline series is strong. The core component measures – like inflation – due have greater variance between them however. Either a strong weakening or strengthening from this report could prompt market movement and a fresh run of social media posts.

Charge of Conference Board and University of Michigan Consumer Confidence (Monthly)

  

Source: MacroMicro.com, University of Michigan, Conference Board 

 

 

 

Nvidia Earnings a Statement on the Stock Market and Sentiment

The next big ticket item that rises to the occasion of global market sentiment is arguably the Wednesday (after the US close) release of Nvidia earnings. The stats are all there with NVDA representing the largest market cap public company in the world with a break neck pace of growth over the past few years and the symbolic leader of the essentially faith-based charge in Artificial Intelligence interest. Given the concentration in both tech and market cap appetite through equity markets, there is an innate influence behind this particular earnings report. Beyond the leader board standing and speculative course setting though, we are also at the end of earnings season with the benchmarks at – or very near – their record highs.

 

Notably, through the end of this past week, NVDA managed a rally alongside its compatriots but it was still well off its record high. That can be treated as a potential ‘discount’ position for the crowd that supports a bid through complacent conditions. Ultimately, the expectations for a beat on earnings expectations and a robust forecast will be high despite the already buoyant forecasts. That said, the greater potential for a significant market move from the event risk would be a short fall. It is a particularly small probability, but that would translate into a significantly larger move.

Chart of Nvidia and S&P 500 with 20-Day Correlation (Daily)

   

Source: TradingView 

 

 

 

 

Anticipation into Week’s Ending US Inflation Report

Arguably the most potent scheduled event over the coming week is also one of the last to cross the wires: the United States Personal Consumption Expenditures (PCE) deflator report for July. While the market puts far greater weight behind the CPI (consumer price index) reading owing to its earlier release a healthy headline presence, the PCE is the Federal Reserve’s preferred measure of inflation. That is a particular important figure to track in our current conditions. The FOMC minutes last week indicated that the central bank’s participants suggested risk to inflation was greater than risk to economic activity / labor conditions. President Trump was seemingly so put out by employment and price data that he fired the head of the Bureau of Labor Statistics.

The PCE series is a Bureau of Economic Analysis data reading. Will it be a new target? Generally, the CPI and PCE enjoy a strong correlation and the former is the earlier release. Expectations for the July update will track the earlier series’ release, but that also means that the bigger market reaction would come with a meaningful shortfall. Then again, a strong report could in turn push the White House to ever-more extreme actions to shape policy. All of this has to be taken into context of a report that will cross the wires at the end of the trading week, but it is also so prominent that it may unmoor market traction to other fundamental pressures in anticipation of what the Friday release may offer.

 

Chart of US CPI and PCE Deflator Inflation Indicators (Monthly)

 

Source: St Louis Federal Reserve Economic Database, US BEA, US BLS 

 

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--- Written by John Kicklighter, Global Head of Content