 Good morning. Welcome to CMC Markets on Friday the 26th of August and this quick look at the week ahead beginning the 29th of August with me Michael Hewson Haven't got off to a poor start to the week US markets finished yesterday with a fairly decent rebound Out of today's widely anticipated speech by Fed Chairman Jay Powell. Obviously as I record this video I won't know the contents of that speech. So to a certain extent I'm going to be guessing As to what he is likely to say But I think there's been an awful lot of what I would call Misunderstanding about what the Fed is likely to do over the course of the next 12 to 18 months I think sometimes it pays for central bankers to be deliberately ambiguous ambiguous When it comes to talking about monetary policy and that allows them the flexibility to argue they've been Misunderstood however, there wasn't really much to misunderstand When Powell said at the last press conference that the Fed was Where you know within the within the confines of where they thought the neutral rate would be IE between 2.25 percent to 2.5 percent I think certainly when you look at previous Fed chairman They've always in they've always employed that this policy of constructive ambiguity It's a fairly good effect. You know Alan Greenspan Once famously was quoted as saying I know you think you understand what you thought I said But I'm not sure if you realize that what you heard is not what I meant Now if you can take the bones out of you out of that you're a better person than me so When Powell said that the Fed funds rate was in the range of what they thought was neutral up between 2.25 percent to 1.5 percent Was he being serious? It's a remark. He was widely lambasted for and Since then a series of Fed policy makers have pushed back hard on that narrative. However That hasn't stopped the markets from taking the view that the Fed could well start cutting rates sometime next year In the current environment, I think that is highly highly unlikely and Today's speech by Powell could Reset that narrative now. Let's look at what markets have done this week I've talked a lot in recent days and weeks about this Move lower in equity markets and whether or not this is a bear market rally Certainly on the basis of this chart. It still is we've seen a little bit of a rebound in the last couple of days But overall what we've seen thus far hasn't really altered my view as that we could well see further downside, but only As long as we hold below the 200 day moving average and the trend line from the highs this year We found a bit of a base around about 1475 and obviously that is the next key support level And we are now starting to look a little bit oversold But the bias still remains very much towards the downside even though We have moved higher over the course of the past few weeks much will depend Obviously on what Powell says later today more importantly I think it's really about how we see your country policy going forward because If you look a headline CPI for the USA, yeah, it's dropped from 9.1 to 8.5 but that's just one month recent economic data has been Ambiguous at best weekly jobless claims and started to fall back. We've got non-farm payrolls coming up Next week and obviously that's the big data item that markets will probably be obsessing about when it comes to Whether we can expect to see a 75 basis point rate hike in September Or 50 maybe Powell's speech later today will give us clues about that as well But certainly in the overall scheme of things in terms of what markets have been doing We still remain very much in a downtrend and until such times as that trend line on the decks breaks On the upside here and goes towards the 200 day moving average and the S&P 500 does the same thing Whatever pal says We need to break the downtrend visit the downside bias that we've been in since the beginning of the year Everything else to from a technical standpoint. It's just noise. So What's the what's the big what's the big question an awful lot of people Well, all for a lot of Fed policy makers have been saying that they see the Fed funds rate by year-end between three and a half and four percent So that implies at least another one Hundred or a hundred and fifty basis points between now and the end of the year. There are only three more Fed meetings due by year-end September the 21st and there's one in November one in December So if you're going to deliver a hundred and fifty basis points between now and the end of the year Then at least one of those needs to be 75 basis points Why because Fed policy makers have said that they want to front load any rate hikes the bigger question is once The Fed funds rate is at near around four percent How long does it stay there? And this is where the market has become disconnected from reality It is unlikely that inflation will start to fall back fast enough for the Fed to even consider cutting rates in 2023 and this is possibly where the reset may come at the moment The market's surprising in the prospect that we could see rate cuts next year I don't believe that will happen an awful lot of people don't believe that will happen But the market for some reason thinks that it will it could be a case of We may be turning the playbook on its head rather than being lower for longer As has been the case over the course of the past ten years in terms of interest rates We could well be starting to pivot to hire the longer Over the course of the next 12 to 18 months And this is a message that I don't think the market has fully come to terms with so I'll be interested to see whether or not that dynamic shifts And I think an awful lot of that will depend on how the payrolls data that we we get to see Next week. We've also got the return of the ADP payrolls report After that payrolls report was suspended for the last couple of months while they refine or redefine the methodology But ultimately after the payrolls of last month, which came in at 528,000 blowing away Even the most optimistic of expectations Expectations for August are for a gain of 300,000 the unemployment rate to stay unchanged at 3.5 percent and for average hourly earnings To edge higher towards 5.3 percent from 5.2 Labor participation labor force participation is still fairly low You've got to sort of ask yourself at some point with the cost of living crisis whether this will start to go up Because at the moment it's showing little sign of doing so But if you're cash strapped and you've retired early from the workforce at some point a higher cost of living will probably mean That you may be compelled or feel compelled to start working again So we'd expect to see that to start to head up from the current 62.1% that is currently at the moment. So Got non-farm payrolls, that's due out on Friday the 2nd of September We've also got US consumer confidence on the 30th of August now that is likely to be Another disappointment and it doesn't really tell us anything when it comes to the overall picture as far as the US consumer is concerned Because retail sales have been fairly positive For pretty much all of this year bar for one month in May where we saw a minor contraction As far as the dollar is concerned, we still we've taken a little bit of a pause But we still remain very much in the uptrend that we've been over the course of the past few weeks and months and Ultimately, that's probably going to put further downward pressure on the euro As well as potentially the pound Let's look at the euro at the moment because as we can see from this chart here looks fairly similar to the DAX actually But we found a bit of a base at 99, but we are currently Currently struggling to move back above Parity We could well move squeeze all the way back to the 50-day moving average But ultimately while we remain in this downtrend the longer-term target for euro dollar remains For a move towards 96 20 while in this downtrend that we've been in over the course of the past few days The trend is your friend and at the moment looking to sell euro strength into resistance Similar sort of thing for the pound the pound continues to suffer Seeing the increase in any in the energy price cap Today to just over three and a half thousand pounds. Obviously that's going to be a Significant headwind going forward Hopefully the well the government will bring in measures to try and mitigate some of that But ultimately I think not only in Europe, but also here in the UK It's going to be a long hard winter with electricity prices in Europe soaring But also here in the UK UK natural gas prices Rising to another record high this week above 600 so The outlook continues to look fairly bleak Economically, there was a little bit of a rebound earlier this week on the back of a China stimulus plan of 146 billion dollars infrastructure investment You know, is that likely to shift the mood when it comes to Recovery in the global economy. It's unlikely because while China continues to impose Stop-start lockdown procedures on its population. They can throw a hell of a lot more money at it and it won't make a difference It's going to be very very difficult as a China Chinese economy to recover until they drop the zero COVID policy Which doesn't look likely in the short to medium term So any talk of China stimulus package is if you get a rally in equity markets, it's probably an opportunity to fade it Because ultimately I don't think that no matter what type of stimulus Chinese government implements It's not going to make any difference if you continue to lock down your population At the drop of the hat or at the drop of the single infection It's just not you know, people aren't people aren't going to take any notes of that terms of Brent crude prices Seen a bit of a move higher earlier this week on the back of the fact that OPEC suggested that they might cut production To my mind if they do that, they'll probably cause the very recession that hopefully They are trying to avoid but certainly concerns about demand destruction and now more front of mine than they were a few weeks ago So, you know, while we could we'll see prices move back to $120 $130 a barrel if they do that will just exacerbate the slowdown in the economy that is coming our way winter is coming and I don't think any amount of Mitigation is going to change that as for equity markets pussy 100 continues to remain Range bound don't see that changing anytime soon decent support around about 7,400 Resistance to 7,600 certainly the bias for the short to medium term While we remain below the trend lines that I drew over on the Dax in the S&P Still remain very much tilted towards the downside similar sort of story for the Nasdaq Yes, we've broken the downtrend line, but we haven't broken about 200-day moving average Consequently that means that any upside break in the Nasdaq I'm not in time I'm not inclined to trust it because I haven't seen confirmation in the Dax or the S&P Though although we are finding support in and around 12,900 why because it was support here. It was resistance here It's now support in and around these levels sort of here So keep an eye on that level, but if we get a spike in yields or further upper pressure on yields Then we could well see this start to roll Over in terms of what else is due out Next week. We've got the latest EU flash CPI number for August We're already at record highs of 8.9% for the July numbers this Months August number could we'll see headline CPI Move much closer to 10% Forecasts are currently for a flash CPI number of around about 9% for the EU I think that's a little bit on the optimistic side I think it's probably going to be a lot higher than that Certainly if you look at some of the numbers that are becoming out of mainland Europe Germany could well head up towards 7.8 or 8% Could have had up towards 9% from 8.5% who's reading the wrong column there Which would suggest that if we get a sharp jump in German CPI Then you could well see a similar sort of jump In the headline number for EU CPI So that would suggest to me that from 8.9% we could well see a move up to 9.5% Particularly in the context of the moves that we've seen up in energy prices Also got UK lending data for July Seen a slowdown in mortgage approvals over the course of the last few months In June mortgage approvals slipped to the lowest levels in two years coming in at 63,700 We've obviously since then seen a 50 basis point rate hike delivered In August and the possibility that we've got another one coming in September So it's likely you'll probably see another slowdown there Net consumer credit has been rising Which is a little bit concerning that jumped sharply to 1.8 billion In June from 0.9 billion in May So it doubled The likelihood is that we could well see that rise again As more and more consumers start to borrow To basically pay day to day bills to your utility bills petrol prices and what have you We're already seeing that in the US consumer credit for the first six months of this year Has absolutely exploded and the only way to explain that Is really to I think argue that people are putting an awful lot more On their credit card than was the case Six to twelve months ago. So that is a concern Going forward in terms of the earnings numbers. There's not really that much to talk about We've got broad comms Third quarter numbers earlier this year. They agreed to deal to pay 61 billion dollars for cloud care company vm Where as a part of its strategy to reduce its reliance on the surgeon semiconductor revenues Which according to broad comm CEO hop 10 won't last as capacity gets added to the market We're certainly seeing have some evidence of that within videos numbers earlier this week Where they downgraded their q3 guidance and we've also got numbers from hp and We know we already know that was we're seeing a little bit of a slowdown In the pc pc business A lot for a lot for people a lot for a lot for people are buying and not buying as many Desktop or laptop products. We're already seeing a slowdown in gaming consoles as well And microsoft has already said that it's starting to see a slowdown in pc sales as well. So Those are the sort of two that I would pay particular attention to as well as best buy on the 30th august us electronics retailer Walmart and target was saying that some they were seeing a slowdown in spending on High margin items. So obviously electricals are probably higher margin than food and groceries and what have you So it'll be interesting to see whether or not best buy Signal that they're seeing a little bit of a slowdown in discretionary consumer spending on That particular score. So That's pretty much it for This week. Ladies and gentlemen, I hope you all have an enjoyable bank holiday weekend Otherwise, please join me next week for non farm payrolls webinar. Which starts one o'clock on Friday the 2nd of september in the meantime. Have a great weekend and speak to you next week