The Overnight Report: Powell’s Pushmi-Pullyu

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US markets trode water as Friday's Jackson Hole speech from Fed Chair Powell keeps a lid on activity.

The ASX200 hit another consecutive intraday high yesterday and with futures pointing to a weak start, can heavyweights CSL and BHP results turn sentiment around?

Good Morning,

Another day, another  intraday record high was set on Monday. The ASX200 rose 21 points or 0.2% to close at 8,959 with telcos and technology stocks leading the gains, supported by banks. Miners and energy stocks weighed on the index.

As the reporting season cranks up, index heavyweights CSL ((CSL)) and BHP Group ((BHP)) report today.

What happened overnight, NAB Markets Today Research, extract

A quiet start to the week with markets clearly treading water ahead of Fed Chair Powell’s Jackson Hole address on Friday. Instead, focus overnight was on the Trump-Zelensky meeting alongside European leaders.

Media report the tone was warm with more discussions around security guarantees. However, Trump did say “I think the European nations will take a lot of the burden” and that any peace deal is likely to include exchanges of territory. It is still very uncertain whether a deal will be coming. Trump said he would call Putin following the meeting. Oil prices rose (Brent up 1.1% to US$66.55) as headlines hit and gold was steady at US$3,333.

Equity markets saw minimal movements. The S&P500 and NASDAQ were flat and the EuroStoxx50 fell -0.3%. In FX, the USD (DXY) rose 0.3% with most major pairs lower. The AUD also fell -0.2% to 0.6493. 

Yields were slightly higher overnight with the US 10yr yield up 1.8bps to 4.33%. As noted previously, markets are treading water ahead of Chair Powell’s Jackson Hole speech on Friday. Going into Jackson Hole, markets price -20.9bps of cuts for September and a cumulative -53.3bps by the end of the year. Across the pond UK Gilt yields are under some focus with the 30yr inflation-linked bond rising to 2.56%, its highest level since 1998 and surpassing the peak level reached during the Truss-related market meltdown in 2022.

UK yields have been trending higher since the market settled after that episode, in the face of continuing pressure on the UK’s fiscal accounts and lingering inflation risk. Higher rates haven’t just been a UK phenomenon, with nominal 30-year government rates in Germany and France reaching 14-year highs at the end of last week. Lingering inflation risk is also being touted by some for why central banks should not be cutting, and in some cases should actually be hiking.

Data has been sparse with only release being US NAHB homebuilders’ sentiment ticking lower to 32 vs. 34 expected and 33 previously, and remaining at its lowest levels in two and a half years.

Also sparse has been Fed speak, though the Fed’s Bostic (2027 voter) noted he was open to cutting rates soon, but still sees just one cut this year. “Today, I think my strategic approach would be ‘move and wait”. 

Bloomberg covers a listening and speaking tour that Bostic conducted in his Fed district, picking up anecdotes of tariff pass through (one firm was absorbing about half of the tariff cost), but also notions that the level of rates is restrictive with one regional bank noting customers falling behind in debt payments.

Steve Sosnick, Interactive broker: Powell’s Pushmi-Pullyu Swansong extract

It is customary for many to think the end of summer represents some sort of quiet period in US markets. Unfortunately, that is rarely the case. Some of the blame goes to public school calendars, many of which show school days resuming before Labor Day, meaning that parents must enjoy their vacations some time before then. 

Some of the blame goes to major US companies like Walmart and Home Depot, which release earnings this week, and the all-important Nvidia which follows next week. But the main culprit is the Kansas City Federal Reserve Bank, which sponsors its Jackson Hole Economic Symposium in late August each year. This Friday’s address by Chair Powell is even more awaited than usual.

My children have outgrown the need for me to care about school calendars (except to know when to adjust my commuting time to account for potential stopped school buses), but no investor can afford to be unconcerned about the events that are due in the coming days. 

The bulk of earnings season is behind us, but we get key readings of consumer behavior when Home Depot reports tomorrow, Lowe’s, Target, and TJ Maxx report on Wednesday, and Walmart reports on Thursday. There has been no shortage of informed opinions about the health of the US consumer and how tariffs might be influencing their sentiment, but the top- and bottom-line results from key retailers will offer some definitive proof. 

Despite the aforementioned earnings and the impromptu pan-European summit at the White House today, the key market event this week is Powell’s speech. 

Indeed, there will be plenty of other important economic discussions occurring at the conference, but those are typically always sideshows for the main event, the speech from the Chair of the Federal Reserve. 

The stakes this year are especially high. It is clear this will be Powell’s last opportunity to be this event’s keynote speaker –-no one doubts he will be replaced by May when his term expires-– and it comes at a time when investors are looking for clues to how the Fed might navigate the tricky economic crosscurrents that have recently arisen.

Put simply, the Fed’s dual mandate is at risk of being pushed or pulled in opposite directions.  As the Chicago Fed’s wesbite explains:

Our two goals of price stability and maximum sustainable employment are known collectively as the “dual mandate.” 

Recent economic reports have threatened both the “price stability” and “maximum sustainable employment” goals. The shocking revisions to May and June Nonfarm Payrolls that accompanied the July report at the beginning of this month clearly accelerated the pre-existing concerns about the health of the labor economy. It punctured the narrative a steady, if uninspiring jobs market, and hastened calls for rate cuts at the September 17th meeting.

Unfortunately, prices are not fully cooperating. Inflation pressures are not anywhere close to what we experienced just a few years ago, but they have never fully met the Fed’s 2% target. 

That didn’t prevent the FOMC from cutting rates -1% during 2024, but they have refrained from any cuts so far this year. Uncertainty regarding tariffs has sidelined the Fed so far this year, and it still might be too soon to know their effects upon price levels and buyer behavior since most were finalized less than two weeks ago (with China and Mexico among the remaining outliers). 

Furthermore, the inflation data is moving in the wrong direction recently. Many of us were shocked by Thursday’s 0.9% jumps in Headline and Core CPI, even if stock markets basically yawned anyway. But while other measures like CPI and the Fed’s preferred PCE Core have been more subdued, they too have been edging steadily higher. 

On a 3-month annualized basis, Core CPI is showing 2.72% inflation. The problem is that readings have risen by 0.13%, 0.23% and 0.32% over that period. The PCE Core is more subdued, but still directionally challenged. It has risen by a modest 2.56%, but its last three reports also show a steady rise; in this case from 0.18% to 0.20% to 0.26%. 

Bear in mind too that the Fed will learn once more about labor and prices before its next meeting. The August jobs report is due on September 5th, after Core PCE on August 29th and before PPI and CPI on September 10th and 11th, respectively.  It is difficult to imagine that the Chair will not reiterate its data-dependency.

And of course, there is the wild card of a “lame duck” address. Powell has been on the receiving end of a relatively constant stream of criticism from the President. I don’t have enough of a read on the Chair’s personality to make a reasonable assessment about how he might react when given center stage. 

After prior Jackson Hole conferences, we have described Powell as “Goldilocks in a Suit” [2021], as “Goldilocks feeding the bears” [2022], and as “Sinatra singing ‘My Way'”. [2023]. 

In short, he can be anywhere from even-handed to strident. My gut tells me the latter approach is somewhat more likely based upon the data and his desire to show a strong backbone under pressure. 

But when that data pushes and pulls in opposite directions, like Dr. Doolittle’s fictional animal, traders should be prepared for almost anything. 

Corporate news in Australia 

-REA Group ((REA)) has named Cameron McIntyre as the new CEO, formerly of CAR Group ((CAR)).

-China’s Mengniu Dairy is selling its US$257m NZ manufacturing facility to a2 Milk ((A2M)).

-Nine Entertainment ((NEC)) is considering the sale of talkback radio for net $60m as it continues to streamline its businesses to more TV and publishing.

-Ares Management is appraising Aurizon Holding’s ((AZJ)) $8bn Qld railway track network.

-Bank of Montreal is reported as considering a stockbroking beachhead in Australia and has been in discussions with Euroz Hartleys which is valued at $150m on the ASX. No suggestion a deal has been signed.

-Arafura Rare Earths ((ARU)) is raising $80m in an institutional placement.

-Magnetic Resources ((MAU)) launched a capital raising for $30m.

On the calendar today:

-NZ 2Q PPI

-EZ June ECB CA

-US July Building Permits

-US July Housing starts

-AMPLITUDE ENERGY LIMITED ((AEL)) earnings report

-ARB CORPORATION LIMITED ((ARB)) earnings report

-BHP GROUP LIMITED ((BHP)) earnings report

-BRAVURA SOLUTIONS LIMITED ((BVS)) ex-div 1.79c

-BRAVURA SOLUTIONS LIMITED ((BVS)) ex-div 2.92c

-CHALLENGER LIMITED ((CGF)) earnings report

-CENTURIA INDUSTRIAL REIT ((CIP)) earnings report

-CENTURIA CAPITAL GROUP ((CNI)) earnings report

-COMPUTERSHARE LIMITED ((CPU)) ex-div 48.00c (100%)

-CSL LIMITED ((CSL)) earnings report

-CLEANAWAY WASTE MANAGEMENT LIMITED ((CWY)) earnings report

-DETERRA ROYALTIES LIMITED ((DRR)) earnings report

-HMC CAPITAL LIMITED ((HMC)) earnings report

-HUB24 LIMITED ((HUB)) earnings report

-HUMM GROUP LIMITED ((HUM)) earnings report

-INGENIA COMMUNITIES GROUP ((INA)) earnings report

-JUDO CAPITAL HOLDINGS LIMITED ((JDO)) earnings report

-MACMAHON HOLDINGS LIMITED ((MAH)) earnings report

-MONADELPHOUS GROUP LIMITED ((MND)) earnings report

-MYER HOLDINGS LIMITED ((MYR)) earnings report

-MYSTATE LIMITED ((MYS)) earnings report

-QBE INSURANCE GROUP LIMITED ((QBE)) ex-div 31.00c (25%)

-REGION GROUP ((RGN)) earnings report

-RELIANCE WORLDWIDE CORP. LIMITED ((RWC)) earnings report

-SEEK LIMITED ((SEK)) earnings report

-SIMS LIMITED ((SGM)) earnings report

-SRG GLOBAL LIMITED ((SRG)) earnings report

-SERVICE STREAM LIMITED ((SSM)) earnings report

-SUNCORP GROUP LIMITED ((SUN)) ex-div 49.00c (100%)

-SOLVAR LIMITED ((SVR)) earnings report

-TASMEA LIMITED ((TEA)) earnings report

-WOODSIDE ENERGY GROUP LIMITED ((WDS)) earnings report

-XRF SCIENTIFIC LIMITED ((XRF)) earnings report

-YANCOAL AUSTRALIA LIMITED ((YAL)) earnings report

FNArena’s four-weekly calendar: https://fnarena.com/index.php/financial-news/calendar/

The Australian share market over the past thirty days…

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