Markets reassured by the Powell put

A look at the day ahead in European and global markets by Wayne Cole.

Asia has seen an extension of the Powell rally so far Monday, with yields and the dollar falling and most stocks moving higher. The main exception to this is the Nikkei, which really doesn’t like the yen’s climb to 144.00 per dollar.

Oil prices rose 0.7% after Israel and Hezbollah exchanged rocket salvos and airstrikes on Sunday, raising concerns about possible supply disruptions if the conflict escalates.

Powell put the cat among the pigeons with his sudden emphasis on the health of the labor market over inflation, essentially saying the Fed will not tolerate a weaker employment outlook. That lowered the bar for an outsized 50 basis point cut in September, with futures now implying a 38% chance of such a move and a 103 basis point easing by Christmas.

The ten-year yield of 3.79% is only 10 basis points below the two-year yield and it may not be long before the curve becomes quite positive. Indeed, it is surprising that this has not happened yet, especially given the sheer scale of government bond issuance, and suggests that something extra is keeping long-term interest rates low.

Time is also running out before the inverted curve can predict a recession, although the Atlanta Fed’s GDPNow measure has slowed from 2.4% at mid-month to 2.0% on an annual basis. Real consumer spending figures on Friday will help refine that figure, and could even be more important than the core PCE deflator given Powell’s focus on growth and jobs.

Preliminary estimates for EU inflation will also be released on Friday and analysts expect it will be favorable enough for the ECB to cut as expected on September 19.

The other major event of the week is Nvidia’s results on Wednesday, where it will need to beat consensus by a wide margin to justify its stratospheric price-to-earnings ratio of 37 forward earnings.

The markets are expecting revenue of $28.8 billion and a third quarter forecast of about $32 billion, and should exceed that by at least a few billion. Options imply that a move of 9% or more is likely after the results; a serious amount of cash considering its market cap of almost $3.2 trillion.

Key developments that could impact the markets on Monday:

– Riksbank publishes minutes of monetary policy meeting

– German business climate Ifo for August

– US Durable Goods Orders, Dallas Fed Manufacturing Survey

– President Mary Daly of the Federal Reserve Bank of San Francisco speaks

(by Wayne Cole; editing by Muralikumar Anantharaman)