University of Michigan

Jonny Hart looks back on the week’s business and markets news with OANDA Senior Market Analyst Ed Moya in New York.  This week they talk about another hot inflation report, JPMorgan Earnings, University of Michigan inflation expectations, crude’s bad week, and crypto resilience.  They also discuss what the week ahead has in store for financial markets. This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Analyzing Friday's trades: GBP/USD on 30M chart     On Friday, the GBP/USD pair traded flat with a slight bearish bias. The new, upcoming, ascending trend line has not been broken. At the moment, the price has only tested it. However, since the market has entered a flat phase, breaking this trend line will not be a strong signal for a trend reversal.   Of course, the British currency cannot continue to rise indefinitely, especially considering the lack of reasons and grounds for such a move. A correction should start sooner or later, but it is extremely difficult to predict when it will start because the market is currently hardly reacting to fundamental and macroeconomic factors, as confirmed by the entire week.   There was only one report on Friday, and it was the consumer sentiment from the University of Michigan in the US. This indicator unexpectedly showed a much stronger increase than forecasted and... triggered a 20-25 point rise in the dollar. As before, all reports in favor of the dollar were ignored, while any reason to buy the British pound was used to its fullest extent, resulting in a 200% increase.   GBP/USD on 5M chart A huge number of signals materialized on the 5M chart, while the movement was sideways and volatility was only 55 pips, which is very low for the pound. Therefore, almost any level that the price encountered automatically became a source of false signals. Thus, beginners could attempt to execute one or two signals during the European trading session. It is highly likely that the first one resulted in a small loss, while the second one was closed at breakeven when the stop loss was triggered. It was quite challenging to expect other results in a flat market. Trading tips on Monday: As seen on the 30M chart, the GBP/USD pair continues to show strong growth despite the Friday flat. Even if the price consolidates below the trend line, it does not mean that a downtrend is brewing, as traders remain bullish, and crossing the trend line during a flat phase is not a strong signal. The key levels on the 5M chart are 1.2779-1.2801, 1.2848-1.2860, 1.2913, 1.2981-1.2993, 1.3043, 1.3107, 1.3145, 1.3210, 1.3241, 1.3272. When the price moves 20 pips in the right direction after opening a trade, a stop loss can be set at breakeven.   On Monday, there are no important events lined up in the UK or the US, but it is extremely difficult to predict the price movement in conditions of extreme overbought levels and without any news. It could be a correction, a continuation of the rise, or a flat market.     Basic trading rules: 1) The strength of the signal depends on the time period during which the signal was formed (a rebound or a break). The shorter this period, the stronger the signal. 2) If two or more trades were opened at some level following false signals, i.e. those signals that did not lead the price to Take Profit level or the nearest target levels, then any consequent signals near this level should be ignored. 3) During the flat trend, any currency pair may form a lot of false signals or do not produce any signals at all. In any case, the flat trend is not the best condition for trading. 4) Trades are opened in the time period between the beginning of the European session and until the middle of the American one when all deals should be closed manually. 5) We can pay attention to the MACD signals in the 30M time frame only if there is good volatility and a definite trend confirmed by a trend line or a trend channel. 6) If two key levels are too close to each other (about 5-15 pips), then this is a support or resistance area.   How to read charts: Support and Resistance price levels can serve as targets when buying or selling. You can place Take Profit levels near them. Red lines are channels or trend lines that display the current trend and show which direction is better to trade. MACD indicator (14,22,3) is a histogram and a signal line showing when it is better to enter the market when they cross. This indicator is better to be used in combination with trend channels or trend lines. Important speeches and reports that are always reflected in the economic calendars can greatly influence the movement of a currency pair. Therefore, during such events, it is recommended to trade as carefully as possible or exit the market in order to avoid a sharp price reversal against the previous movement. Beginners should remember that every trade cannot be profitable. The development of a reliable strategy and money management are the key to success in trading over a long period of time.

FX Daily: Dollar benefits from a lack of alternatives The US remains on an encouraging disinflation track, but the dollar is not turning lower. This is, in our view, due to a lack of attractive alternatives given warning growth signals in other parts of the world (such as the eurozone and China). Evidence of a US economic slowdown is needed to bring USD substantially lower.   USD: Disinflation not enough for the bears July’s US inflation numbers released yesterday were largely in line with expectations, reassuring markets that there are no setbacks in the disinflationary process for now. Core inflation inched lower from 4.8% to 4.7%, while the headline rate suffered a rebound (from 3.0% to 3.2%) due to a reduced base effect compared to previous months, which was still smaller than the consensus of 3.3%. With the exception of resilience in housing prices, price pressures clearly abated across all components. All in all, the US report offered reasons for the Fed and for risk assets to cheer, as the chance of another rate hike declined further. Equities rallied and the US yield curve re-steepened: the dollar should have dropped across the board in this scenario. However, the post-CPI picture in FX was actually more mixed. This was a testament to how currencies are not uniquely driven by US news at the moment. The Japanese yen drop was not a surprise, given abating bond and FX volatility, equity outperformance and carry-trade revamp, but FX markets seemed lightly impacted by CPI figures and the subsequent risk-on environment, as many high-beta currencies failed to hang on to gains. From a dollar point of view, we think the recent price action denotes a reluctance to rotate away from the greenback given the emergence of concerning stories in other parts of the world. This is not to say that the activity outlook in the US is particularly bright – jobless claims touched a one-month high yesterday, and the outlook remains very vulnerable to deteriorated credit dynamics – but if economic slowdown alarms are flashing yellow in Washington, they are flashing amber in Frankfurt and Beijing. Chinese real estate developer Garden reported a record net loss of up to $7.6bn during the first half of the year yesterday, at a time when China’s officials are trying to calm investors’ nerves about another potential property crisis. Back to the US, PPI and the University of Michigan inflation expectation figures out today will clarify how far the disinflation story has gone in July, but we still sense a substantial dollar decline is not on the cards for the moment, or at least until compelling evidence of slowing US activity makes the prospect of Fed cuts less remote. DXY may consolidate above 102.00 over the next few days.

Asia Morning Bites Tokyo inflation for August dips slightly on base effects. Asian markets await the outcome of Powell's Jackson Hole speech.   Global Macro and Markets Global markets:  Pre-speech nerves? US equities reversed Wednesday’s gains on Thursday. The S&P 500 dropped by 1.35% while the NASDAQ fell 1.87%. Equity futures are non-committal ahead of Powell’s speech today.  Chinese stocks put in a rare up-day on Thursday. The CSI 300 rose 0.73%, and the Hang Seng index rose 2.05%, though this may have been following the earlier US lead, and could reverse today. US Treasury yields moved a little higher yesterday after Wednesday’s large falls. The 2Y yield is back above 5% now at 5.023%, while the 10Y yield regained 4.5bp to reach 4.237%. That’s still about 13 bp off the recent high.  The increase in yields was enough to push the USD stronger against the G-10 currencies yesterday, and EURUSD is now down to 1.0799. The AUD reversed all of Wednesday’s gains falling to 0.6415, Cable has dropped below 1.26 and the JPY is back up again to just under 146. In Asia, the KRW benefited from the BoK’s hawkish pause, and has gapped down more than a per cent to 1322.35. The TWD was also among the gainers, moving down to 31.786. The VND was weaker again yesterday, rising to 24008 as it looks to recalibrate against the CNY against which it has appreciated this year. The CNY was roughly unchanged on the day at just under 7.28.   G-7 macro:  Today’s Powell speech will get a great deal of scrutiny and there has already been a lot written about what he will say, with the majority view being that he will tread a cautious path with respect to any further potential tightening, looking for confirmation from the totality of the data before committing to any additional hikes. Lots of comparisons to the Greenspan “risk management” era are being wheeled out. At the same time, the Fed pundits are also saying that he will not want to suggest that there is any pre-set path for easing. We will know soon enough how well markets take his comments. The fact that this speech is scripted, and there is no Q&A means that room for going "off-piste" is limited. Besides this, and all the other Fed speakers this weekend, the University of Michigan publishes its August consumer confidence and inflation expectations surveys. Sentiment has been picking up recently, while the inflation expectations numbers have eased back slightly. Yesterday’s data was mixed. Weaker durable goods figures but lower jobless claims.   Japan: Tokyo inflation eased to 2.9% YoY in August (vs 3.2% July, 3.0% market consensus) mainly due to base effects and lower energy prices. Utility prices dropped to -15.0%YoY from the previous month’s -10.8%. However, core inflation excluding fresh food and energy stayed at 4.0%YoY as expected for the second month, the highest level for decades. Demand side pressures are clearly building up, suggested by inflation increases in entertainment (5.7%), transport & communication (3.6%), and medical care (2.8%). On a monthly comparison, goods prices dropped -0.1% MoM sa while services prices stayed flat. Also, higher than expected PPI services inflation (1.7% YoY in July vs revised 1.4% June, 1.3% market consensus) also reinforced the same message.   There are risks on both sides in the near future. On the downside, entertainment price pressures will be partially reduced as the summer holiday season ends. On the upside: The energy subsidy program will come to an end by September; Recent renewed JPY weakness; and rises in pipeline service prices. We believe that upward pressures will likely build a bit more significantly at least for the next few months and push up inflation again. We think inflation will exceed the BoJ’s outlook for this year and next year and core inflation excluding fresh food and energy will likely stay in the 3% range by the end of this year.   Singapore:  July industrial production is set for release today.  We expect another month of contraction, tracing the struggles faced by non-oil domestic exports, which were down 20.2%YoY for the same month.  We can expect industrial production to stay subdued until we see a turn in NODX, which should also weigh on 3Q growth.   What to look out for: Jackson Hole conference Malaysia CPI inflation (25 August) Singapore industrial production (25 August) US Univ of Michigan Sentiment (25 August)

Next to Italy, Portugal has also been ramping up its funding via the retail sector, although to a greater degree via short-dated instruments – savings certificates. From mid-2022 until mid-2023, their outstanding amount has increased from just over €30bn to almost €46bn. That does not appear much in absolute terms, but it means that the retail segment went from making up 11% to 15.6% of direct state debt. The last time we observed a share that high was in 2008.   Portugal ramped up its share of (short-term) retail debt instruments   It is likely no coincidence that the outperformance of Portuguese government bonds versus Spanish bonds or the overall resilience of Italian spreads versus Bunds occurred alongside a larger reliance on domestic households for funding. To be sure, it is not the only driver as for instance in the summer of 2022, the European Central Bank also revealed its Transmission Protection Instrument. But it can also be a supportive factor going into a renewed debate around the speed of the ECB's quantitative tightening.     Next week: ECB meeting and US inflation Next week is a busy one for markets, the key event being the ECB meeting on Thursday. It will be a close call, but overall we think the chance that we get another hike is greater than markets think. The upside for rates still seems somewhat limited, because it would be pulling forward the hike that markets currently view as happening before year-end with a chance of roughly 70%. We doubt that markets would readily embrace the idea of further tightening on top of that. They could sense that this is the likely end of the cycle as concerns about macro weakness gain more weight, also in the ECB’s own deliberations. Still, the ECB will probably want to counter the notion that this is the definitive end. The degree to which this is successful will determine how much of a bear flattening we could get in the case of a hike. A renewed focus on QT, in particular, could help prop up longer rates. In the US, the upcoming week will be about inflation dynamics. The CPI release is the key event here ahead of the FOMC meeting the following week. The headline is seen picking up to 3.6%, but we think that is largely in the price already. More important is what happens to the core rate, which is seen dropping to 4.3% from 4.7% year-on-year, with the month-on-month rate steady at 0.2%. We will also see the release of producer and import prices as well as the University of Michigan consumer sentiment survey with its reading on inflation expectations. The ISM services this week has highlighted lingering inflation risks, even if the overall dynamics are gradually improving. In terms of market impact, the inflation narrative seems to be driving the curve more from the front end as it determines whether more near-term action from the Fed is required.   Today's events and market view The ECB is already in its pre-meeting blackout period, and the Fed will follow this weekend. The data calendar is light today which may leave markets with more room to contemplate the busy week ahead with a US inflation theme and the chance for another, possibly final ECB hike. We think markets are still trading with an upward bias to rates. The different backdrops against which the next policy meetings are held, a position of macro strength versus a position of growing weakness, has seen UST rates more buoyant again, with the 10-year yield gap over Bunds creeping wider again to 166bp.   

US industry posts solid gains, inflation expectations plunge Another respectable industrial production report while the University of Michigan reported a big plunge in inflation expectations. All this should be music to the ears of the Federal Reserve as it seeks a soft landing for the economy and a return to 2% inflation.   Decent industrial output, but strike action could weigh in coming months As with the retail sales report, the US industrial production number beat expectations in August, but the downward revisions to July means that on balance the level of activity is broadly in line with what was expected. This has been a bit of a trend of late with big prints subsequently getting some chunky downward revisions, be it in manufacturing, consumer spending, jobs or GDP. In terms of today’s numbers, US industrial production rose 0.4% in August versus the 01% expected, but there was a 0.3pp downward revision to July's growth (from 1% to 0.7%). Manufacturing rose 0.1% as expected, but there was a 0.1pp downward revisions to July from 0.5% to 0.4% growth. Auto output fell 5% month-on-month after a 5.1% jump the previous month with manufacturing ex vehicles rising 0.7%, led by a 2% jump in machinery manufacturing. Outside of manufacturing, which makes up 74% of total industrial output, utilities output rose 0.9% while mining increased 1.4%.  On balance the report is OK and is stronger than what is implied by the manufacturing ISM report, which has been in contraction territory for 10 consecutive months. However, auto output is up near record highs. Strip this out and the chart below shows there is a much tighter relationship between the ISM and non-auto related manufacturing. Today’s report won’t swing the Fed debate in either direction meaningfully. The key story for manufacturing next month will be how much the UAW strike action hits output. So far it is starting out modestly with just 12,700 on strike, but could quickly escalate and hit output hard.   ISM manufacturing index versus non-auto manufacturing output (YoY%)   US consumer inflation expectations fall sharply University of Michigan confidence fell more than expected to 67.7 from 69.5 (consensus 69.0). The perception on current conditions fell six points while expectations rose 0.8 points. Remember this index is much more responsive to inflation-related issues while the Conference Board measure of confidence is more reflective of the labour market (hence why the Conference Board suggests everything is great, with unemployment below 4%, yet the University of Michigan measure of sentiment suggests the world is on the cusp of falling apart).   Rising gasoline prices are the likely culprit depressing today's report as households feel the hit to spending power it generates elsewhere. Yet, rather bizarrely, we have some big declines in inflation expectations which should be music to the ears of the Fed. 1Y inflation expectations are down to 3.1% from 3.5% – it is actually below the current level of inflation – while 5-10Y expectations dropped from 3% to 2.7%. Both are really big surprises, but the usual caveat applies that they use fairly small sample sizes and things can swing. Nonethless, on balance this is further evidence that backs the Federal Reserve's claims that it can achieve a soft landing for the economy while returning inflation sustainably to target.

According to the latest CFTC report, the past week was relatively calm in the futures market. One notable change was the value of the net short yen by position, which corrected by 1.2 billion, while changes in other currencies were minimal. The US dollar's net positioning, after sharply rising the previous week, saw a 0.3 billion correction, bringing it to 8.5 billion, indicating a firm speculative positioning for the dollar. Other factors that supported the greenback are the drop in the number of long positions in oil and especially gold, with a weekly change of -4.8 billion, implying further declines. This often signifies growing bullish sentiment for the US dollar.   The University of Michigan's Consumer Sentiment Index fell to 63.0 in October, the reading was below the forecast of 67.2, reaching the lowest level since May. This marks the third consecutive decline and can be largely attributed to rising gas prices and a decline in the stock market. However, consumer spending remains at a good level despite weaker sentiment in recent months. China's consumer price index remained flat from a year earlier in September, while the Producer Price Index fell by 2.5% as concerns linger about weak demand. Both figures were slightly below consensus estimates. This week's data on industrial production, retail sales, and third-quarter GDP will provide a clearer picture of the impact of the government's additional stimulus measures. The conflict between Israel and Hamas has quickly escalated into the bloodiest clash in the past 50 years from both sides. As both Israel and Iran are minor natural gas exporters, European natural gas prices rose by about 40% last week. Oil markets remain calmer due to reduced demand and excess production capacity. US consumer price inflation for September shows headline prices rose 0.4% month-on-month (consensus 0.3%), and the core index slowed down from 4.3% year-on-year to 4.1% year-on-year, which is a positive sign for the Federal Reserve. There is growing confidence that the Fed's rate hike cycle is coming to an end.   The British pound corrected slightly above the resistance level at 1.2305 and then resumed its decline. It is assumed that the local peak has been formed, and the sell-off will continue, with the nearest target being 1.2033 (the low from October 4). In case it breaks below this level, selling pressure may intensify, with the long-term target being 1.1740/90.  

Rates Spark: A 30yr headache The tail on the US 30yr auction was big. Effectively a 5bp concession to secondary was required to get the paper away. Hence the ratchet higher in yields. The front end too is feeling renewed pressure from the Fed. No easy ride here for players tempted to trade this from the long side post payrolls. We maintain a non-conviction preference to go the other way.   Difficult to ignore a 5bp tail at auction The US 30yr auction tailed dramatically – by over 5bp. The tail on the 10yr on the previous day was largely ignored, at least initially. But a tail this big could not be. Still the reaction was quite spectacular. Things, however, calmed after the impact break back above 4.8%. But still, we now have the 30yr yield in the 4.75% area and the 10yr in the 4.65% area, with the latter well back above the 4.5% level that has acted as a bit of a floor since hitting it after payrolls. In fact, we are now back in the area we were at just before last Friday’s payrolls report.   Excess liquidity falling, but value in the 2yr now at above 5% And as expected, no surprises from Powell at the IMF conference. It’s clear that the Federal Reserve wants to maintain a tightening impulse. This makes sense, as any hint of neutrality would hasten a market dash to discount rate cuts. There is also the risk that the Fed is not just saying stuff, but could in fact hike again if needed. Next week’s CPI report is likely to show that headline inflation is homing in on 3%, but the issue is core which will still be in the 4% area, as is core PCE. With inflation here, the Fed is nowhere near caving into the rate hike talk. The 2yr US yield popped back above 5% following Powell's speech. But if there was an area of the curve where we feel relatively comfortable to be long it’s a 5% handle on the 2yr. The funds rate today is 5.33%, only slightly above. And even if there were one more hike, the bigger moves would be to the downside on a one year forward basis. If the Fed gets to 3% by mid-2025 (our view), then the breakeven US 2yr yield is 4.5%. Given that, the 5% handle on the 2yr looks generous, and incorporates much less interest rate risk than longs right out the yield curve. On the front end, we also saw an historic day of sorts, as the cash going back to the Federal Reserve on the reverse repo facility dropped below US$1trn. That is still a large volume of excess liquidity in the system, but it has come down from the US$2.25trn area since the summer is a precipitous manner. A lot of this reflects the build in the Treasury cash balance, from close to zero in the summer before the debt ceiling was lifted, to near US$800bn now. Going forward, the bulk of the fall in usage of the reverse repo facility will come from ongoing quantitative tightening.   The deterioration in Treasuries liquidity is worth noting and it is worrying Even though we still have ample liquidity conditions based off these measures, and some US$3.3trn of bank reserves, there has been a material deterioration in liquidity in US Treasuries. The Bloomberg measure of Treasury market liquidity based off persistent dislocations from fair value is at an extreme right now. It is even more extreme than seen during the pandemic. The big movements seen in long dated yields is reflective of this too, where volumes have been less impressive than the big price movements might suggest. It is tough to stay in the trades in long dates in these circumstances. Given that the 4.5% level has not been crashed though, we maintain a preference for a heavy market here where yields can test the upside. Part of the reasoning here is a lack of rationale to capitulate lower in long dated yields. That will come, but it’s not yet a conviction bet.   The day ahead The day ahead is light for data. The main focus ahead of the weekend will be on the University of Michigan readings. Expectations are well below average, and are expected to remain so. Inflation expectations are expected to remain on the high side though, with the 1yr inflation expectation at 4% and the 5-10yr expectation at 3%. There are a few Fed speakers too to be aware of, with Logan, Bostic and Daly due to speak. And in the eurozone we expect to hear from Lagarde and Nagel. We are not expecting a lot of fireworks from this lot at this juncture. The (net) hawkish pressure will be sustained.

Analysis of macroeconomic reports:   There are several macroeconomic events on Friday, with the most important ones in the United Kingdom. In the UK, reports on quarterly GDP and industrial production for September will be published. The industrial production report is not crucial, but in the case of a significant deviation of the actual value from the forecast, market reaction is possible. The same goes for the GDP report. If its value matches the forecast, no reaction is expected, despite the importance of this report. In the United States, the University of Michigan's consumer sentiment index will be published, which is also a secondary report. Analysis of fundamental events: From Friday's fundamental events, we can highlight the speeches by representatives of the Federal Reserve's monetary committee, Logan and Bostic. However, Fed Chair Jerome Powell has already spoken twice this week. If his first speech did not touch on monetary policy, in the second one, he noted that the key rate may rise again if the situation requires it. Therefore, we probably won't hear anything more important than these statements.     General conclusion: On Friday, there will be interesting events, but in general, they may not lead to significant price changes. On Thursday, Powell's speech supported the dollar, but the US currency should continue to rise in the coming weeks even without the help of the Fed chairman. On Friday, only the British reports have a real chance of influencing the movement of the GBP/USD pair. And the pound may pull the euro along with it. But this is only during the European session.   Basic rules of a trading system: 1) Signal strength is determined by the time taken for its formation (either a bounce or level breach). A shorter formation time indicates a stronger signal. 2) If two or more trades around a certain level are initiated based on false signals, subsequent signals from that level should be disregarded. 3) In a flat market, any currency pair can produce multiple false signals or none at all. In any case, the flat trend is not the best condition for trading. 4) Trading activities are confined between the onset of the European session and mid-way through the U.S. session, post which all open trades should be manually closed. 5) On the 30-minute timeframe, trades based on MACD signals are only advisable amidst substantial volatility and an established trend, confirmed either by a trend line or trend channel. 6) If two levels lie closely together (ranging from 5 to 15 pips apart), they should be considered as a support or resistance zone.   How to read charts: Support and Resistance price levels can serve as targets when buying or selling. You can place Take Profit levels near them. Red lines represent channels or trend lines, depicting the current market trend and indicating the preferable trading direction. The MACD(14,22,3) indicator, encompassing both the histogram and signal line, acts as an auxiliary tool and can also be used as a signal source. Significant speeches and reports (always noted in the news calendar) can profoundly influence the price dynamics. Hence, trading during their release calls for heightened caution. It may be reasonable to exit the market to prevent abrupt price reversals against the prevailing trend. Beginning traders should always remember that not every trade will yield profit. Establishing a clear strategy coupled with sound money management is the cornerstone of sustained trading success.

FX Daily: No turkey for dollar bears The Thanksgiving holiday means thin volumes and no US data releases today. We expect some stabilisation in EUR/USD after strong jobless claims fuelled the dollar rebound. Still, eurozone PMIs might trigger some fresh position-squaring events. In Sweden, we are slightly in favour of a Riksbank hike today, but it is a very close call given krona strength.   USD: Stronger into the Thanksgiving holiday The dollar rose for a second consecutive session yesterday, this time helped by a surprise drop in initial jobless claims to 209k from 233k: an indication of good labour market resilience ahead of the 8 December payrolls data, which will be key in setting the tone for FX into Christmas. University of Michigan inflation expectations were revised higher, although durable goods orders came in softer than expected in October, which probably limited the scope of the market impact of jobless claims. Today, FX flows will be subdued due to the Thanksgiving holiday. Equity and bond markets are closed, and there are no data releases in the US. Part of the rebound in the dollar observed over the past two sessions (especially on Tuesday) may well be related to some profit-taking on risk-on trades and more defensive positioning ahead of Thanksgiving. We think DXY can find some stabilisation around 104.00 into the weekend amid thinner trading volumes and a lack of market-moving data releases in the US.