JPM sees a resumption of Fed easing with hiring in the labour market slowing. “Money markets are pricing in a 90% chance of a cut next month, at September’s meeting, which would be a resumption of easing after a 9-month pause. This setup supports our call to be long duration [and bonds], despite some increased concerns over Fed independence and credibility with respect to potentially higher inflation, as well as for renewed USD weakness. After the firming during July, DXY appears to be losing steam again.”
It’s a big week for the US dollar, which notably reversed course in recent weeks with a rebound rally fizzling out. Whilst more technical evidence is needed, the rally in the dollar that began last month is now looking fatigued and showing signs of fizzling out. Depending on the inflation print this week, any cooler data could see the dollar index reassert on the downside and break below the previous June lows.
JPM noted that on equities, “the question is what will the cuts mean at the index level, and also for sector leadership. This is especially given the significant rebound in Cyclical sectors since April, in both the US and in Europe which has opened up a gap with bond yields”.
Equity benchmarks are expensive and risk a pullback if there is any delay to anticipated Fed cuts. However, as outlined above, any pullback will be mitigated by the large liquidity and underweight equity positions identified in the BoA survey. These institutions will likely buy into any selloff if Fed cuts are pushed out into later this year.
In terms of the US dollar index, a big struggle is playing out on the charts with downward pressure and resistance significant at the 100 level, where the recent rally stalled. However, the real battle is going to be the big support coming in from the 20-year primary uptrend – in place since the previous bear market low back in 2011. If the primary trendline is broken, I would expect the dollar index to enter another downward cycle with the key supports at 92 coming into focus. This is one chart to watch closely – given the significant ramifications for commodities, precious metals and international & emerging markets.
Carpe Diem
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