The Overnight Report: Soft Landing Confidence

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By Chris Weston, Head of Research, Pepperstone

Good morning.

The market has seen good news rolling in from multiple sources and the collective has responded emphatically Many bought the rip after the initial dip, but now the systematic market players (CTA’s) are weighing in on the long side, while the volatility-dynamic funds will start to move cash back into equity.

The chase is on, and while there are always risks that could impact, there is little in the data flow now to really derail sentiment in the immediate near-term.

As the week has rolled on, traders have grown less concerned about right-tail risk (i.e. inflation) but now the left-tail risk growth is in a better spot and the consensus is again subscribing to the soft landing’ thesis. Given the rally in risk, it’s here where recession hedges, placed in response to the week’s mini-panic, really start to impact portfolio returns if you’re an active manager and need to beat a benchmark, that obviously matters.

US data thematic of a soft landing’ scenario

Consumption was always a major focal point, and whether retail sales are a true representation of aggregate demand mattered little today. The market looked at the 1% m/m increase in US retail sales (+0.4% increase in the control group’ element) for what it was and as a wholly positive outcome.

Weekly jobless claims came in at 227k and did their part to further lift sentiment, and this was further backed by Walmart, which reported better comp sales and lifted its profit outlook opining the company sees a stable consumer going forward, which, if the Fed did listen into the earnings call, is exactly what they would want to hear.  

The move in risk from the data was clear-cut, and traders had to respond and react dynamically. S&P500 futures ripped from 5490 to 5571, where once again the sellers stood aside and pulled the bulk of orders to higher levels. On the daily timeframe, we see S&P500 futures above the 50-day MA and now see a test of the 5600-pivot high (1 August) Subsequently, a break of 5600 and the probability of new all-time highs in US equity becomes real.

We can look at the broad quality of the move in US equity, as this can help with our probabilistic assessment and how the journey from A to B, moves towards wherever C could be. Granted, tech and consumer discretionary smashed it on the day, but small caps have worked incredibly well too (the Russell 2k closed +2.5%), which is what you’d want to see when US data are far better than expected. Participation in the rally was solid, with 82% of S&P500 stocks higher on the day, with S&P500 cyclical sectors recording the biggest outperformance relative to S&P500 defensives of the year.

Momentum favours the brave in these times, and for those whose strategy is to buy high and sell higher (strength beget strength), this is the market environment to play out your edge. Consider that since 2020 the S&P500 has closed the 7th day lower in 52% of the 21 occurrences, but in the five days following for 6 consecutive days of higher closes, the index is higher in about 2-in-3 of those 21 occurrences.  

The moves in US Treasuries and rates were punchy, with the US 2-year Treasury +14bp on the day to 4.09%, and with a less pronounced sell-off in the long-end of the Treasury curve, we’ve seen a solid bear flattening of the US 2s v 10s yield curve to -18bp (+6bp on the day) with curve steepeners’ (i.e. funds buying the 2yr and selling the 10yr Treasury) another classic US recession hedge.

We see US interest rate swaps implying -29bp of cuts now for the September FOMC meeting, where a -25bp cut seems the obvious play, as the data just aren’t there to warrant a -50b cut. Notably, the only real landmine between now and the 18 September FOMC meeting is the US nonfarm payrolls on 6 September. Fed chair Jay Powell speaks at Jackson Hole next Friday and should guide to a -25bp cut and giving the Fed optionality for further cuts in the meetings ahead.

The ASX200 will open on a strong note too, and traders can think about a tilt at 8k, although that is a factor for next week, but we should see materials fire up, and for those selling banks because of historically high valuation, well, they should become more expensive today. 

On the calendar today:

-Amcor ((AMC)) earnings report

-Arafura Rare Earths ((ARU)) earnings report

-ASX ((ASX)) earnings report

-Charter Hall Retail REIT ((CQR)) earnings report

-Domain Holdings Australia ((DHG)) earnings report

-GQG Partners ((GQG)) earnings report

-National Australia Bank ((NAB)) quarterly trading update

-QBE Insurance ((QBE)) ex-div 24c (20%)

-NZ 2Q PPI

-NZ July PMI

-UK July retail sales

-US July housing starts

-US University of Michigan sentiment

Corporate news in Australia:

-Alex Waislitz and Antony Catalano increased their stake in Southern Cross Media ((SXL)) and are reportedly considering a takeover with ARN Media ((A1N))

-CommBank ((CBA)) is selling its ultra-high-net-worth advice business, Commonwealth Private Advice

-Magellan Financial Group ((MFG)) has acquired a 29.5% stake in Vinva for $138.5m, forming a strategic partnership

The Australian share market over the past thirty days

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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