Dodging the recession bullet

Friday recap

Stocks skyrocketed on Friday after Jerome Powell finally let the cat out of the bag—yep, the Fed is ready to start slicing those interest rates. With the labour market cooling off and inflation finally inching closer to that elusive 2% target, Powell served up exactly what Wall Street had been drooling over. Right now, investors are in dreamland—having their cake, eating it too, and maybe even going back for seconds. The dream scenario? A series of rate cuts that somehow dodge the recession bullet. But here’s the kicker: the market’s next big move hinges on whether the latest US data points to a gentle slowdown or the first tremors of a full-blown recession. The stakes? They couldn’t be higher—are we in for a smooth landing or a fall headlong?

Leading up to Powell’s big moment, everyone on “The Street” was betting he’d play it safe, given the market’s aggressive appetite for 100bps of cuts by year-end. But Powell flipped the script, going full dove and catching even the most seasoned traders off guard. Sure, he didn’t stamp a guarantee on those 100bps cuts for 2024, but his tone? Pure dovish dynamite.

As the Fed shifts gears, seemingly cruising toward a neutral policy while fiscal expansion keeps the wheels greased, the dollar is taking a nosedive, and gold prices are ready to blast off. The chatter might be about whether we get 25 or 50 bps in September, but the plot twist is figuring out where Fed funds land next year.

Powell hinted at a 3% neutral rate, but let’s not kid ourselves—when he says they’ll do “everything we can” to protect the labour market, that could mean opening the floodgates. If that slow creep in unemployment, which Powell casually let slip, turns into a full-on job loss avalanche, the Fed might not just trim rates by 200 bps—they could be slashing 250 or even 300bps by next year.

So, don’t get bogged down in the short-term noise. This is about positioning yourself for the long haul because the Fed’s endgame could flip the entire script. Buckle up—the narrative is shifting fast, and the next big trade is waiting.

Macro week ahead

As we head into the final stretch before Labor Day, the markets are gearing up for the usual seasonal slump, with traders dialling back their participation and enthusiasm. This week's macro spotlight shines on US and European inflation data, but don't expect dramatic plot twists. The Fed's go-to inflation gauge, the core PCE, drops on Friday, and it's set to deliver a mild 0.2% increase for last month.

A tame print on the MoM core PCE won't shake the status quo. Powell laid it all out at Jackson Hole: rate cuts are on the horizon, and the only real suspense left is whether they'll start with 25 or 50 basis points and how much more easing we'll get before the ball drops on New Year’s Eve.

Unless Thursday’s second estimate of Q2 GDP delivers a shocking downward revision to spending or July’s personal consumption numbers throw a low-and-away curveball, the market will stick to its script—a 25bps cut in September. However, the real test of this assumption will be next week on September 6, when the August jobs report drops. Until then, expect the markets to drift, with any big moves likely stuck in the waiting room.

However, as the Federal Reserve's grip on global markets loosens, investors shift their focus to ASEAN markets. The weakening dollar provides a much-needed tailwind to the region's high-growth economies, making them an attractive destination for capital flows. As the Fed eases its stance, the door opens wider for ASEAN to shine globally.

Nvidia

Risk assets have been partying like it’s 1999, but this week, the real headliner takes the stage. The most anticipated earnings report of 2024 drops when Nvidia reveals its numbers, and all eyes are on the AI juggernaut. Let’s put this in perspective: Nvidia's stock has skyrocketed 170% in the past year and an eye-popping 3,000% over the past five years. These gains are the stuff of legend.

Don’t be intimidated by the high-tech wizardry behind Nvidia’s empire—their story is as simple as it gets. In a rapidly reshaped world by artificial intelligence, Nvidia isn’t just playing the game—they’re running the show. They make the absolute best AI chips on the planet, no contest. While everyone else is trying to catch up, Nvidia’s lapping the competition. Their chips aren’t just in demand; they’re the driving force behind the AI revolution.

However, investors aren’t exactly lounging around, counting their profits just yet. There’s plenty of nail-biting as they wonder if the Fed’s rate-cutting spree will be enough to keep Nvidia’s sky-high valuations—and the broader Magnificent 7 complex—from crashing back down to Earth. The big question is whether the Fed’s dovish dance can keep the party going or if those lofty stock prices are about to face a harsh reality check.

Oil markets

Another weekend, another flare-up in the Middle East. Israel, claiming to preempt an attack on its territory, has reignited fears of a wider regional war. For months now, oil traders have been waking up every Monday, wondering if this is the spark that will light the fuse to a full-blown escalation. It’s been like living in a geopolitical teeter-totter—one minute, tensions put a bid under the oil market, and the next, cooler heads manage to keep things from tipping over. But with the situation looking more acute than ever, the burning question remains: Will this be the event that turns the smouldering tinderbox into a raging inferno?

After last week's steep mid-week tumble in oil prices, we've seen a solid short-covering rally fueled by the hope that the world feels a bit friendlier when the dollar's taking a breather. In simpler terms, risk sentiment tends to get a little cozier when the greenback is down, and lower oil prices in local currencies don’t hurt either.

But don’t let this brief reprieve fool you—crude is hitting another rough patch, with WTI hovering around the $75/bbl mark after a shaky rebound from early-August turmoil. When  Middle East tensions cool, the spotlight shifts to the growing uncertainties around global oil supply and demand.

The outlook isn’t exactly rosy. The International Energy Agency’s (IEA) August Oil Market Report kept its forecast for global oil demand growth at just under 1.0 mb/d for both 2024 and 2025—a downgrade from April’s more optimistic projections. The report's tone? Let’s just say the risks are starting to pile up on the downside.

China, the world's second-largest oil consumer and the biggest driver of global demand growth, saw oil demand shrink for the third straight month in June, and preliminary trade data for July isn’t looking any better. The rapid rise of electric vehicles, now making up over 50% of new car sales in China, is raising red flags that the country might hit peak oil demand much sooner than anyone expected.

On the flip side, American drivers have been burning rubber, providing a temporary cushion against China’s decline. But with the summer driving season coming to a close, that support might soon run out of gas.

This softer global demand outlook is definitely not what OPEC+ had in mind for 2024. The cartel is now caught in a tricky balancing act as it mulls over rolling back production cuts, including phasing out an additional 2.2 mb/d of voluntary cuts in the fall. OPEC+ has been more bullish on global demand than the IEA, but the longer they keep their production strategy under wraps, the more jittery the market could get about rising supply risks. And let’s be real, that uncertainty might just keep the pressure on crude prices for a while longer.

Forex

Over the past few weeks, the market has seemingly been happy to play the reversion game, selling the US dollar into any hint of strength. But as any seasoned trader knows—especially when dealing with consecutive lower highs—that strategy’s well eventually runs dry.

Leading up to Jackson Hole, even the streets season FX veterans got caught up in the buzz, expecting Powell to push back on the 100 bp cut chatter instead of sticking with the analysis that the Fed is on a clear path to easing. It’s a textbook example of how quickly strategies can pivot and why staying on your toes is crucial.

Forex market calls have been primarily anchored in where Eurodollar futures on the IMM should be trading—these are the very futures that feed into the Fed Watch tool, not to be confused with EUR/USD futures. The Chicago IMM is the birthplace of the most significant market moves. If the IMM is underpricing a 50 bp cut in September at just 34.5%, it would be logical for players to buy that contract, effectively setting up to lend at that rate, which should lead to selling dollars. As the likelihood of deeper cuts climbs the curve, the dollar should weaken, providing a solid framework for a long-term dollar-selling strategy. Of course, the market can turn on a dime, but with the Fed leaning towards more easing, the path seems clear.

While dollar strength might be tempting to sell into, it’s wise to keep some powder dry until after the NFP, which will tip the scales toward 75 bp, 100 bp, or even 125 bp cuts for 2024, with implications stretching out to July 2025.