The Overnight Report: Fed Sep Cut Coming

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By Chris Weston, Head of Research, Pepperstone

Good morning.

US equity has held in well, and again the intraday price action in the S&P500, NAS100 and Dow has been choppy and lacked any real lasting trend, where low volumes were a clear theme.

For those wanting trending conditions in the price action, the Russell 2k (R2K) was the US equity index of choice, and we’ve seen US small caps working well on the day, with the R2K closing on its highs, with the cash market filling the 1 Aug gap lower. A break above 2190 in the R2K futures and this index could see real momentum build and see traders really gravitate towards the small-cap space once again.

While we did see choppy trade in the S&P500, the bulls will still claim the session as a small win. Not just because we saw a positive close, but participation was solid with 80% of S&P500 stocks closing higher, and despite crude falling a further -1.7%, the S&P500 energy sector even closed unchanged. Banks underperformed, with the XLF/SPY ratio -0.5%, although the smaller and regional US banks held in well, with the KRE ETF +0.6%. We also saw a decent amount of short covering, with the high short-interest names easily outperforming.  

One could argue US equity caught tailwinds from the US Treasury market, where yields are modestly lower across the curve. The buying has been centred in the short-term durations though, with the US 2yr Treasury closing out -5bp to 3.93%. US swaps price -33bp of cuts for the Sept FOMC meeting, which rather simplistically implies a 25% chance of a -50bp cut. Further out we see 4x -25bp cuts priced by December, and 8x -25bp cuts implied by July 2025.

The focus of the day was on the revisions to the payroll’s growth, as well as the July FOMC minutes. Neither have offered traders much in the way of signal and despite the strong focus, I am not sure we’ve learnt a whole lot of new intel.

The FOMC minutes have signalled that a cut is coming in September, but as detailed (in the swaps pricing), imminent easing is fully priced and aligned with recent individual Fed speeches. The BLS may have revised its payrolls growth lower by a total of -818k jobs, but if you’re calling for a -25bp cut from the Fed in September you’ve probably not altered that call based on these revisions lower, and if you have a -50bp cut pencilled in you’re probably feeling a touch more confident.

What is most important is how it affects the upcoming US nonfarm payrolls prints, and that may be an interesting factor.

In the session ahead we see manufacturing and services PMIs in the US, UK, and Europe, with US weekly jobless claims also in the mix these data points have the potential to rock the FX world, and an oversold USD could easily react to better data.

In commodity markets, crude continues to find sellers with price falling consistently through US trade, while gasoline is now trending firmly lower on the daily timeframes. We see the crude price now pulling right into the support zone, where the buyers stated a strong case in both June and August will it hold once again? It’s a set-up that needs close attention, as a break below these lows, and I’d be looking for US$68/bbl in WTI crude.

Gold remains front and centre too, and once again moves below US$2500/bbl were well supported, but there is indecision from both the bulls and the bears to really state their case. Perhaps the new signal comes from today’s data, perhaps from Powell tomorrow, but for now gold is looking for new inspiration to make a move.

On the calendar today:

-Eurozone August PMI

-UK Aug PMI

-US August PMI

-US Jackson Hole Symposium Aug 22-24

-US July existing home sales

Earnings reports:

-Australian Clinical Labs ((ACL))

-ARN Media ((A1N))

-Auckland International Airport ((AIA))

-Eagers Automotive ((APE))

-Autosports Group ((ASG))

-Capitol Health ((CAJ))

-Codan ((CDA))

Plus lots more, see: https://fnarena.com/index.php/reporting_season/

Corporate news in Australia:

-ASIC is preparing to scrutinise data centre developer AirTrunk’s ((MQG)) ((GDC)) pending $20b sale as part of its investigation into private market transactions

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.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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