THE MACRO SETUP OVERVIEW:
Another week, another rally to all-time highs for the major US indexes
Crude oil and copper prices steam higher, signaling growth is back in favor
The US Dollar is following Fed rate hike odds, which aren’t moving up
END OF SUMMER, LIFE AFTER JACKSON HOLE
In this week’s edition of The Macro Setup, featuring Dan Nathan and Guy Adami, we discussed the impact of last week’s Federal Reserve’s Jackson Hole Economic Policy Symposium across various assets classes, including US stocks, the US Dollar, and commodities.
As anticipated during last week’s edition of The Macro Setup, Fed Chair Jerome Powell didn’t pull the trigger on a taper announcement at Jackson Hole. Perhaps it was the fact that the event moved to a virtual setting signaled hesitation among policymakers, or simply because the FOMC typically uses its quarterly meetings with fresh Summary of Economic Projections to make significant policy changes.
Regardless, ‘risk’ is back ‘on’ for financial markets as we may be in a bit of a ‘sweet spot.’ After all, Powell et al hinted very strongly that the conditions for a taper announcement have been effectively met, signaling confidence in the US economy’s near-term trajectory, but nevertheless continue to pour more stimulus into markets. Are US stock markets getting frothy? Perhaps, particularly as the major indexes rack up scary statistics not seen since 1987 – or even 1929.
As the Fed has taken painstaking efforts to differentiate between tapering and tightening, the US Dollar (via the DXY Index) has been more closely following Fed rate hike odds (vis-à-vis Eurodollar spreads) rather than the US Treasury 2s5s10s butterfly. The combination of constrained Fed hike odds and a lack of steepening in the US yield curve have curated a difficult environment for the greenback.
It does indeed appear that the DXY Index experienced a false bullish breakout earlier in August, underscored by the ongoing reversal in EUR/USD rates. It still remains the case that USD/JPY could continue to frustrate traders, which has been grinding sideways as US stock indexes gain while markets produce lower US rates.
*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, among others, please watch the video embedded at the top of this article.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (September 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [WHITE]: Daily Rate Chart (January 2021 to August 2021) (Chart 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (JULY 2020 TO AUGUST 2021) (CHART 2)
EUR/USD PRICE TECHNICAL ANALYSIS: DAILY CHART (MARCH 2020 TO AUGUST 2021) (CHART 3)
--- Written by Christopher Vecchio, CFA, Senior Strategist
