Month: August 2022

Now that Q2 earnings season is officially over, and liquidity is especially dismal with more than half of Wall Street pros on vacation, the annual plenary of the global central bank cognoscenti kicks off in Jackson Hole this week. As DB’s Tim Wessel puts it, the main macro event of the deep dog days of summer – where this year’s theme is “Reassessing Constraints on the Economy and Policy” – will be kicked off by Jerome Powell’s remarks on Friday morning. Commenting on the week’s main event, Bloomberg’s Garfield Reynolds writes that equity investors may be more on edge than normal going into this year’s Jackson Hole gathering as there is plenty of anticipation Powell “will push back hard against the considerable loosening in financial conditions, a decent part of which has involved the strong rebound rallies in equities.”

As Reynolds further notes, the dollar just had its biggest weekly gain since the pandemic and the risks look skewed toward the upside as “stocks globally have been moving inversely in line with the dollar, so if the greenback busts out to fresh record highs it’s likely equities would make fresh lows” and “shares are a lot further away from this cycle’s troughs than the dollar is from recent peaks.”

That said, while the strength of the USD last week suggests that a J-Hole “Hawk-ano” is a popular market view, there are whispers that Powell will be more cognisant of the impact of USD strength on other economies and may therefore chose not to project an overly hawkish view. 

While we wait for J-Pow’s Friday comments, global production data will serve as suitable hors d’oeuvres throughout the week, while US PCE data on Friday will be a side dish commanding ample attention. Elsewhere, we receive the second estimate of 2Q US GDP; will the poor aftertaste of two consecutive quarterly retractions continue to overwhelm the otherwise supportive ingredients that comprise near-term growth?

Back to Jackson Hole, as the market looks for direction on the uncertain economic outlook and Fed reaction function, Chair Powell’s remarks are one of the key events that can jolt US policy expectations from their recent range, along with inflation and employment data preceding the September FOMC. Indeed, as DB notes, since the day of the July CPI print, 2yr Treasury yields are on net less than a basis point lower, while pricing of the September rate hike has oscillated in a narrow range that effectively has placed equal probabilities on a 50 or 75bp hike, as conviction around the terminal rate and intervening path of policy is low until the market can assess which way inflation (and the Fed) is breaking.

The Chair will likely strike an imposing tone against the inflationary scourge, all the more given his remarks last year noted the bout of inflationary pressure was likely to be a transitory phenomenon (important to keep in mind how much the policy outlook can evolve over a 12-month time frame, let alone when uncertainty is this high here). While the Fed has taken to emphasizing two-way risks around the tightening cycle, most visibly in the minutes at the July meeting, the easing of financial conditions since the July meeting may force the Chair to re-orient expectations away from the balance of risks back toward the primary objective of bringing inflation lower.

Elsewhere, tomorrow’s round of August PMI data will provide a snapshot as to how the Eurozone economy is has been holding up recently.  Germany’s July manufacturing PMI reading registered a 2-year low, signalling the acuteness of the headwinds already being felt. The release of Germany’s IFO survey later in the week is also expected to reflect further deterioration in business sentiment. Despite this, the ECB is expected to retain a hawkish tone in the face of strong price pressures. Although ECB President Lagarde will not be travelling to Jackson Hole this week, several members of the Governing Council will reportedly be there.  Their remarks are likely to set the tone for the ECB’s forthcoming September 8 policy meeting.

Executive Board member Schnabel will be the highest profile ECB speaker at the gathering, where focus is on calibrating the ECB’s next policy action. Before Schnabel, due on a panel Saturday, the ECB’s account of the July meeting’s 50bp hike will provide yet more detail into the super-sized kickoff to the ECB’s tightening cycle. Elsewhere in Europe, the looming energy crisis will remain top of mind. German Chancellor Scholz and Vice Chancellor Habeck are in Canada to try and plug the energy gap left by dwindling Russian gas supplies. Along with alternative imports, the government is still weighing whether to extend the life of heretofore condemned nuclear facilities if sufficient supplies cannot be secured.

There will also be a few interesting US data releases this week, which may color the tone that Powell takes this week. These include August US PMI, July new homes sales, durable goods orders, a Q2 GDP revision and some inflation data. The Bloomberg market consensus sees little scope for an alteration from the shockingly soft Q2 GDP plunge of -0.9% q/q saar. The Fed’s favored measure of inflation, the PCE deflator, is expected to show some moderation in price pressures.  The market median stands at 6.4% y/y, down from a June figure of 6.8% y/y.

A notable event for the UK on Friday will be the announcement from Ofgem regarding how much average household energy bills are set to rise in October.  In recent weeks, estimates have only been headed one way and are currently pointing to annual bills rising to around GBP3,600, with more increases to follow next year.  Given the stark reality that energy bills will simply be unaffordable for some households this winter, Liz Truss, the favoured contender for the Tory party leadership, is now indicating that additional support could be at hand.  Earlier this month she had announced that she did not believe in “giving out handouts”.  On the back of the surge in the cost of living in the UK, workers at the port of Felixstowe, the biggest container facility in the country, have commenced an eight day walk out over pay.  The impact is likely to enhance supply side issues for businesses around the country.  Additionally, UK barristers are voting on proposals for an all-out strike next month as part of an ongoing dispute with government over pay and cuts to legal aid.  Having broken below the GBP/USD1.20 level last week, cable is holding well clear of that level this morning.

Wednesday will mark 6 months of war between Russia and the Ukraine.  The FT is reporting this morning that Moscow sees no possibility of a diplomatic solution to the end of the conflict, according to Russia’s permanent representative to the UN in Geneva.  These comments are a blow to hopes that the recent agreement to allow grain exports from Ukraine’s Black Sea ports could have formed the basis for a broader solution.

Courtesy of DB, here is a day-by-day calendar of events:

Monday August 22

• Data: US July Chicago Fed national activity index
• Earnings: Zoom, Palo Alto Networks

Tuesday August 23

• Data: US, Germany, France, Eurozone, UK, Japan August PMIs, US August Richmond Fed manufacturing index, July new home sales, Japan July nationwide department store sales, Eurozone August consumer confidence
• Central Banks: ECB’s Panetta speaks
• Earnings: XPeng, JD.com, Macy’s, Intuit

Wednesday August 24

• Data: US July durable goods orders, capital goods orders, pending home sales
• Central Banks: Fed’s Kashkari speaks
• Earnings: Royal Bank of Canada, Ping An, Salesforce, Snowflake, Autodesk

Thursday August 25

• Data: US 2Q second reading of GDP, core PCE, August Kansas City Fed Manufacturing Activity index, initial jobless claims, Japan July services PPI, Germany 2Q private consumption, government spending, capital investment, August Ifo survey, France August business and manufacturing confidence
• Central Banks: Jackson Hole Forum begins, BoJ’s Nakamura speaks, ECB’s account of July meeting
• Earnings: Fortum Oyj, Dollar Tree, Dollar General, Peloton, Affirm, Workday, Marvell Technology

Friday August 26

• Data: US July advance goods trade balance, wholesale inventories, personal income, personal spending, retail inventories, PCE deflator, final reading of August University of Michigan consumer survey, Japan August Tokyo CPI, Germany September GfK consumer confidence, France August consumer confidence, Eurozone July M3, Italy August consumer and manufacturing confidence, economic sentiment
• Central Banks: Fed Chair Powell speaks

Turning just to the US, Goldman writes that the key economic data releases this week are the durable goods report on Wednesday, the second Q2 GDP release on Thursday, and the core PCE inflation report on Friday. There are a few scheduled speaking engagements from Fed officials this week, including a speech by Fed Chair Jerome Powell on Friday at the Jackson Hole Economic Policy Symposium.

Monday, August 22

• There are no major economic data releases scheduled.

Tuesday, August 23

• 09:45 AM S&P Global US manufacturing PMI, August preliminary (consensus 51.9, last 52.2): S&P Global US services PMI, August preliminary (consensus 50.0, last 47.3)
• 10:00 AM Richmond Fed manufacturing index, August (consensus -5, last flat)
• 10:00 AM New home sales, July (GS -1.0%, consensus -2.5%, last -8.1%): We estimate that new home sales declined 1.0% in July, following an 8.1% decline in June.
• 07:00 PM Minneapolis Fed President Kashkari (FOMC non-voter) speaks: Minneapolis Fed President Neel Kashkari will take part in a Q&A session at the Wharton Minnesota Alumni Club. Audience Q&A is expected. In his last public appearance, on August 18th, President Kashkari emphasized that the FOMC needs to “get inflation down urgently,” and that this will require the Committee to “get demand down.” President Kashkari also noted that he “[doesn’t] know” whether the Fed “can bring inflation down without triggering a recession.”

Wednesday, August 24

• 08:30 AM Durable goods orders, July preliminary (GS +2.0%, consensus +0.8%, last +2.0%); Durable goods orders ex-transportation, July preliminary (GS +0.3%, consensus +0.1%, last +0.4%); Core capital goods orders, July preliminary (GS +0.4%, consensus +0.3%, last +0.7%); Core capital goods shipments, July preliminary (GS +0.6%, consensus +0.3%, last +0.7%): We estimate that durable goods orders rose 2.0% in the preliminary July report, reflecting strong commercial aircraft orders. We also expect a continued solid rise in shipments of core capital goods (+0.6%), but we assume a more moderate rise in new orders for that category (+0.4%) due to mixed foreign demand.
• 10:00 AM Pending home sales, July (GS -0.5%, consensus -2.5%, last -8.6%); We estimate pending home sales declined 0.5% in July, following an 8.6% decline in June.

Thursday, August 25

• 08:30 AM GDP, Q2 second release (GS -0.6%, consensus -0.9%, last -0.9%); Personal consumption, Q2 second release (GS +1.5%, consensus +1.5%, last +1.0%): We estimate a three-tenths upward revision to Q2 GDP growth to -0.6% (qoq ar), mainly reflecting the upward revisions in the July retail sales report. We also assume a boost from a post-Omicron rebound in recreation and travel categories, based on last Friday’s Quarterly Services Survey (QSS). However, we expect a downward revision to healthcare services consumption, reflecting the softer QSS details for that category.
• 08:30 AM Initial jobless claims, week ended August 20 (GS 247k, consensus 252k, last 250k); Continuing jobless claims, week ended August 13 (consensus 1,443k, last 1,437k): We estimate initial jobless claims declined to 247k in the week ended August 20.
• 11:00 AM Kansas City Fed manufacturing index, August (consensus NA, last 13)

Friday, August 26

• 08:30 AM Personal income, July (GS +0.6%, consensus +0.6%, last +0.6%); Personal spending, July (GS +0.6%, consensus +0.5%, last +1.1%); PCE price index, July (GS +0.05%, consensus +0.1%, last +0.95%); PCE price index (yoy), July (GS +6.39%, consensus +6.4%, last +6.76%); Core PCE price index, July (GS +0.22%, consensus +0.3%, last +0.59%); Core PCE price index (yoy), July (GS +4.69%, consensus +4.7%, last +4.79%): Based on details in the PPI, CPI, and import prices reports, we estimate that the core PCE price index rose by 0.22% month-over-month in July, corresponding to a 4.69% increase from a year earlier. Additionally, we expect that the headline PCE price index increased by 0.05% in July, corresponding to a +6.76% increase from a year earlier. We expect that personal income and personal spending both increased by 0.6%.
• 08:30 AM Advance goods trade balance, July (GS -$97.1bn, consensus -$98.3bn, last -$98.6bn): We estimate that the goods trade deficit decreased by $1.5bn to $97.1bn in July compared to the final June report, reflecting a decrease in imports.
• 08:30 AM Wholesale inventories, July preliminary (consensus +1.4%, last +1.8%)
• 10:00 AM University of Michigan consumer sentiment, August final (GS 56.0, consensus 55.3, last 55.1): University of Michigan 5-10 year inflation expectations, August final (GS 3.0%, consensus NA, last 3.0%): We expect the University of Michigan consumer sentiment index rose to 56.0 and that the 5-10 year inflation expectations measure remained unchanged at 3.0% in the final August reading.
• 10:00 AM Fed Chair Powell (FOMC voter) speaks: Federal Reserve Chair Jerome Powell will deliver a speech titled “The Economic Outlook” at the Kansas City Federal Reserve Bank’s annual Economic Symposium in Jackson Hole. The topic of the conference this year is “Reassessing Constraints on the Economy and Policy.” Text and media Q&A are expected. At the press conference following the July FOMC meeting, Chair Powell endorsed the message from the June dot plot—which is consistent with our forecast for an additional 100bp of rate hikes in 2022—as the “best guide” we currently have for the near-term policy path. Chair Powell also noted that 75bp hikes are “unusually large” and that “as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases.”

Source: DB, Goldman, BofA

After Liz Cheney’s devastating primary defeat last Tuesday, the deposed neocon princess held her chin high as she entered the first stage of grief – denial – suggesting she could primary Trump in 2024, and comparing herself to Abraham Lincoln in a cringeworthy concession speech that rewrote history to fit her narrative.

On Sunday, Cheney entered the second phase of grief following her 37-point loss to attorney Harriet Hageman – anger.

In an interview with ABC‘s “This Week,” Cheney blamed “very sick” Republicans for booting her out of the Senate (Of course, the Wyoming Republican Party had long since disowned Cheney for voting to impeach Trump).

“It says that clearly his hold is very strong among some portions of the Republican Party,” Cheney said, referring to Trump – before dismissing her crushing defeat as an outlier.

“My state of Wyoming is not necessarily a representative, sort of, you know, sample of the party,” to which anchor Jon Karl shot back that it’s one of the most red states in the country.

And I think it says a couple of things: I think it says people continue to believe the lie, they continue to believe what he’s saying, which is very dangerous,” she continued. “I think it also tells you that large portions of our party, including the leadership of our party, is very sick.”

As the Washington Examiner notes:

Cheney, the daughter of former Vice President Dick Cheney, was the No. 3 House Republican and was a staunch ally of the 45th president. She broke with Trump after he began denying the outcome of the 2020 election and fully denounced him after the Jan. 6 Capitol riot.

Trump’s most loyal congressional allies tried to oust Cheney from her leadership position in February 2021, but the vote to remove her as House GOP Conference chair was unsuccessful. Her standing with GOP colleagues weakened in the months that followed, as members grew frustrated with her continued comments regarding the former president and her support for House Speaker Nancy Pelosi’s (D-CA) Jan. 6 commission.

Cheney also said that GOP “election denier” Senators like Josh Hawley and Ted Cruz have “made themselves unfit for future office,” because they “took steps that fundamentally threatened the constitutional order and structure in the aftermath of the last election.”

GOP Sens. Josh Hawley and Ted Cruz have “made themselves unfit for future office,” Rep. Liz Cheney tells @jonkarl.

“Both of whom took steps that fundamentally threatened the constitutional order and structure in the aftermath of the last election.” https://t.co/GZnTSt8z8T pic.twitter.com/JACJ4G2PiL

— ABC News Politics (@ABCPolitics) August 21, 2022

Which is odd because we don’t recall Cheney denouncing Democrats for “fundamentally threatening the constitutional order” when they denied the results of the 2016 election. 

Oh look at this— here’s 10 minutes of Democrats denying election results: pic.twitter.com/I0oUumk68d

— Steve Guest (@SteveGuest) August 21, 2022

Take it away, Vox (!?!):

“The bad news for Never Trump Republicans this week wasn’t just that Liz Cheney lost the primary for her Wyoming congressional seat on Tuesday. It wasn’t even that she lost by such an overwhelming margin. It was that her loss fit a pattern in which the GOP’s voters have roundly rejected Republican after Republican who voted to impeach Trump. Only two of the 10 House Republicans who did so will even be on the ballot in November — one of whom is running in a district that Joe Biden won by more than 10 percentage points in 2020.

It’s clear at this point that the Republican Party is a pro-Trump party, and that its voters recoil from candidates who are ardently opposed to the former president. The results of this primary season — and Cheney’s loss in particular — show a Never Trump wing on the verge of extinction.”

We can’t wait for the bargaining stage…

Authored by Katabella Roberts via The Epoch Times,

Elon Musk announced on Sunday that the price of Tesla’s Full Self-Driving system (FSD) will increase by $3,000 next month, the second time it has risen in price this year.

Musk took to Twitter to announce the cost increase, which comes as the electric vehicle maker began rolling out its FSD Beta software update release version 10.69. Consumers will see the price rise as of Sept. 5, Musk said.

“After wide release of FSD Beta 10.69.2, price of FSD will rise to $15k in North America on September 5th. Current price will be honored for orders made before Sept 5th, but delivered later,” the businessman wrote.

“Note, you can upgrade your existing car to FSD in 2 mins via the Tesla app,” he added.

Every new Tesla vehicle comes with a driver assistance package called Autopilot, which the company says aims to reduce the driver’s overall workload.

That package contains features such as “Traffic-Aware Cruise Control” through which Tesla vehicles can automatically detect stop signs and traffic lights and automatically slow the vehicle down, as well as  “Autosteer.”

These rely on eight external cameras fitted in the vehicle along with “powerful vision processing,” sensors, and various software to ensure the vehicle remains within a clearly marked lane and at the same speed as surrounding traffic.

Cost Increases Continued

However, Tesla’s higher-priced driver assistance package is the FSD, which includes additional features such as “Traffic and Stop Sign Control” and “Navigate on Autopilot” as well as “Autopark” among others.

It also offers a feature called “Smart Summon” which allows drivers to summon their vehicle to come to find them via Tesla’s mobile app, navigating through “more complex environments and parking spaces” as it does so.

FSD, although an upgrade from the standard package that comes with every new Tesla, still requires the driver’s active supervision and does not make the vehicle fully autonomous.

Currently, Tesla’s FSD software costs $12,000 or consumers can purchase a subscription of $199 per month.

…

Read more here…

A startling new report forecasts the inflation rate in the UK could spike to 18% for the first time in nearly half a century due to surging energy costs in the upcoming winter season. 

Benjamin Nabarro, the chief UK economist at Citi, told clients Monday that it expects CPI inflation to hit a mindboggling 18.6% in January due to soaring natural gas and power costs. 

Nabarro predicted the retail energy price cap would be increased to £4,567 in January and then £5,816 in April, compared with £1,971 in August. Here’s what he told clients:

Our latest estimate, updated for the further 25% and 7% rally in UK gas and electricity prices last week, points to a further upside shift in UK inflation.

Accounting for these developments, as well as updating our own weights for CPI/ RPI and honing our own accounting for curve backwardation, we now expect CPI inflation to peak at over 18% in January. RPI inflation, we think, will peak at over 20%.

The last time CPI printed above 18% was during the stagflationary years of the mid-1970s (more precisely 1976) after an oil supply shock led to soaring energy prices worldwide. 

Currently, the CPI stands at 10.1% in July for the first time in four decades, primarily driven by skyrocketing food and fuel prices as households crumble under the weight of the cost of living crisis. 

Meanwhile, high inflation pushed the UK Misery Index, an economic indicator to gauge how the average person is doing, to three-decade highs, a sign discontent is emerging. 

One of those signs is more than 100,000 people signed up to join a movement to skip out on paying their power bills beginning on Oct. 1. 

😮 1.7 million planning to cancel direct debits to energy companies!

💪 On our own we’re weak, but collectively we are unstoppable. We just need to find each other and do this together.

Pledge to strike now 👉 https://t.co/RYOlAVoLqd https://t.co/xpYT0V47T9

— Don’t Pay. (@dontpayuk) August 21, 2022

There’s also been a series of large-scale strikes as working poor demand higher wages as inflation crushes their financial well-being. The latest strike could paralyze the country’s largest containerized port this week. 

Citi’s Nabarro also warned that “the risks remain skewed to the upside,” the Bank of England could raise interest rates to 6%-7% “should signs of more embedded inflation emerge.” 

BOE predicted earlier this month that inflation would peak around 13% by the end of the year. Rate traders have expected interest rates to top out at about 3.5%. 

Nabarro said the government could introduce a support package next month through tax cuts in an emergency budget. 

If Citi is right about its inflation forecast, it will continue obliterating living standards, resulting in social instabilities. 

Meanwhile, Germany’s inflation rate could surge above 10% this fall — the highest in seven decades — due to the energy squeeze, the country’s central bank chief Joachim Nagel told the Rheinische Post. 

“The issue of inflation will not go away in 2023,” Nagel said, according to an official transcript from the German central bank. “Supply bottlenecks and geopolitical tensions are likely to continue.”

He said the German central bank predicted in a June forecast that 2023 inflation would reach 4.5%, though he now believes the rate would be steady above 6%. 

“As the energy crisis deepens, a recession appears likely next winter,” Nagel warned. 

Europe is on the cusp of a dark winter of high inflation, energy shortages, and stagflation, a toxic cocktail that could send some EU member countries into recession while their respective central banks continue to hike rates to quell inflation — this in itself is policy error. 

Authored by Khaled Abu Toameh via The Gatestone Institute,

• “First, Biden decided to waive the demand to include the role of Iran’s terrorists in the region in the talks [in Vienna]… Biden decided not to address this issue at all, nor the role of terrorist militias affiliated with Iran in the Arab countries.” — Sayed Zahra, deputy editor of the Gulf’s Akhbar Al-Khaleej, August 20, 2022.

• The second demand Biden gave up, according to Zahra, includes the issue of Iran’s ballistic missile program and the threat it poses to the security and stability of the region, the US itself and its interests.

• “The issue is not whether the agreement is signed or not…. [T]here is something more dangerous than this: Biden has completely abandoned the Arabs, allies and non-allies alike.” — Sayed Zahra, August 20, 2022.

• The Iranian-backed Houthi militia in Yemen, [Kheirallah] added, is continuing to recruit hundreds of fighters.

• “What will the Houthis do with these fighters? Are they preparing for new rounds of fighting, or is their goal limited to threatening neighboring countries, primarily the Kingdom of Saudi Arabia?” — Kheirallah Kheirallah, veteran Lebanese journalist, Alraimedia, August 17, 2022.

• The Iranian regime, [Kheirallah] wrote, cannot survive without its expansionist project. “The collapse of this project means the collapse of the regime, similar to the collapse of the Soviet Union. In Lebanon, Iran is flexing its muscles through Hezbollah, which asserts daily that it is the ruling party. In Iraq, Iran refuses to admit that it is rejected by the majority of the Iraqi people…. Unfortunately, there is no American administration capable of understanding the meaning and repercussions of the presence of an Iranian entity in the Arabian Peninsula. Iran escalates everywhere it considers itself present through its militias. There is a question that will arise soon: Will the US administration facilitate this escalation through a deal it concludes with the Islamic Republic that provides it with large financial resources? To put it more clearly, does America consider itself concerned with the security of its allies in the region, or should these people manage their own affairs in the way they see fit?” — Kheirallah Kheirallah, Annahar, August 17, 2022.

• “Iran still considers interference in the affairs of other countries in the region as one of its top priorities…. for the sake of regional hegemony.” — Hamid Al-Kaifaey, Iraqi author, Sky News Arabia, August 14, 2022.

• “The most striking thing about the ongoing international negotiations with the Iranian regime regarding its suspicious nuclear program is that the international community has become confident and certain that this regime is lying and engaged in all forms of deception to achieve its goals without meeting international demands…. Anyone who relies on the Iranian regime is engaged in self-deception. Western countries have completed more than three decades of practicing the policy of appeasement and alignment with the Iranian regime and provided it with many privileges without getting anything in return.” — Alladdin Touran, member of the Foreign Affairs Committee of the National Council of Resistance of Iran, Elaph, August 15, 2022.

US President Joe Biden, it seems, has effectively decided to sacrifice the Arabs, their interests, demands and fears in order to appease Iran.

This view, expressed by Sayed Zahra, deputy editor of the Gulf’s Akhbar Al-Khaleej newspaper, is shared by many prominent Arab political analysts who say they are extremely worried about the possibility that the US and other Western powers may sign a new nuclear agreement with Iran’s mullahs.

Referring to reports that progress has been achieved towards striking a new deal with the mullahs, Zahra said that the alleged breakthrough appears to have occurred after Biden decided to waive two pre-conditions. Zahra accused Biden of being in collusion with Iran.

“First, Biden decided to waive the demand to include Iran’s terrorist role in the region in the talks [in Vienna],” Zahra wrote. “Biden decided not to address this issue at all, nor the role of terrorist militias affiliated with Iran in the Arab countries.”

The second demand Biden gave up, according to Zahra, includes the issue of Iran’s ballistic missile program and the threat it poses to the security and stability of the region and the US itself and its interests.

By dropping the two demands, “Biden has practically decided to acquiesce to Iran and its entire terrorist expansion project in the Arab region,” the influential newspaper editor argued.

“This is a dangerous development. The issue is not whether the agreement is signed or not. This is no longer important. The issue is that the Biden administration made its choice between Iran and the Arab countries in this way. The matter is not limited to these concessions made by Biden; there is something more dangerous than this: Biden has completely abandoned the Arabs, allies and non-allies alike.”

Veteran Lebanese journalist Kheirallah Kheirallah expressed frustration with the Biden administration for ignoring the mullahs’ expansionist project and its tools and proxies, especially the Iranian missile and drone program.

“The program poses a threat to every country in the region,” Kheirallah wrote.

“This was evident when Iran recently started firing long-range missiles and drones from Yemen towards Saudi Arabia and the United Arab Emirates. There is an American and Iranian tendency to conclude a deal that would provide Iran with much-needed funds.

Kheirallah wrote that Iran has been working to escalate tensions in the Arab countries it occupies: Iraq, Syria, Yemen and Lebanon.

The Iranian-backed Houthi militia in Yemen, he added, is continuing to recruit hundreds of fighters.

“What will the Houthis do with these fighters?” Kheirallah asked.

“Are they preparing for new rounds of fighting, or is their goal limited to threatening neighboring countries, primarily the Kingdom of Saudi Arabia? The US has failed to reassure its [Arab] allies in the region. When viewing the chronology events in the region since Biden entered the White House, it becomes clear that we are facing a confused administration that could not take any initiative. In light of the lack of confidence [in the Biden administration], a US-Iranian deal will raise all kinds of fears in the absence of any answer to an obvious question: What is the US position on Iran’s behavior outside its borders and its missile program and drones?”

In another article, Kheirallah wrote that the Biden administration does not appear to be worried about the security of its Arab allies. This, he said, is the reason why Iran is continuing to flex its muscles to show that its expansionist project has not stopped faltered and that it is determined to take it to the end, regardless of whether or not the mullahs reach a new deal with “the American Big Satan.”

The Iranian regime, he wrote, cannot survive without its expansionist project. “The collapse of this project means the collapse of the regime, similar to the collapse of the Soviet Union,” Kheirallah said.

“In Lebanon, Iran is flexing its muscles through Hezbollah, which asserts daily that it is the ruling party. In Iraq, Iran refuses to admit that it is rejected by the majority of the Iraqi people, who expressed this in the last legislative elections. Iran refuses to acknowledge the defeat of its supporters in these elections. We see it currently seeking to overturn the results of those elections, starting with disrupting the formation of a new government and political life in the entire country. In Syria, Iran, in light of Russia’s preoccupation with the Ukrainian war, has become the number one player in that country. This includes southern Syria, where it is expanding daily and increasing its smuggling activity to Jordan and across it to the Arab Gulf states. But the place where Iran is most active than anywhere else is Yemen. It took advantage of the truce announced last April in order to recruit more fighters. The Houthis, and behind them Iran, are encouraged by the American fluidity in dealing with them. Unfortunately, there is no American administration capable of understanding the meaning and repercussions of the presence of an Iranian entity in the Arabian Peninsula. Iran escalates everywhere it considers itself present through its militias. There is a question that will arise soon: Will the US administration facilitate this escalation through a deal it concludes with the Islamic Republic that provides it with large financial resources? To put it more clearly, does America consider itself concerned with the security of its allies in the region, or should these people manage their own affairs in the way they see fit?”

Iraqi author Hamid Al-Kaifaey pointed out that since Joe Biden came to power, his administration has embarked on “vigorous measures” to return to the nuclear agreement with Iran.

“The Democratic administration, whether under former president Barack Obama, or the current president, Joe Biden, adopts the method of diplomatic dealing with Iran and engaging in negotiations with it in order to stop its attempts to build a nuclear bomb, instead of the policy of maximum pressure adopted by the previous Republican administration… Just as the policy of maximum pressure has failed to dissuade Iran from its relentless pursuit of developing its nuclear program, so as to enable it to manufacture a nuclear bomb, the policy of negotiation and diplomacy pursued by the Biden administration has also failed so far to bring Iran back to the nuclear agreement.”

The Iraqi writer said that he has no doubt that Iran is determined to build an atomic bomb, just as it is determined to develop its other offensive war industries, such as drones and long-range ballistic missiles.

“A return to the nuclear deal will enhance Iran’s capabilities because it allows it to interact with the outside world, export oil and gas, and develop sectors of the Iranian economy instead of being under severe and comprehensive punishments,” Al-Kifaey warned.

“The Iranian economic situation is constantly getting worse, due to the US sanctions imposed by the administration of former President Trump, which President Biden has maintained, and despite that, Iran still considers interference in the affairs of other countries in the region as one of its top priorities. Iranian interference in the affairs of neighboring countries greatly increased after 2015, the year of the nuclear agreement. While the countries of the world are trying to solve their economic problems, reduce the rate of inflation and unemployment and find alternative sources of energy, Iran is ignoring the suffering of its people and their difficult economic conditions, and is trying to exploit the current international conditions to develop its military capabilities, nuclear and conventional, and its ballistic missiles, for the sake of regional hegemony.”

Alladdin Touran, member of the Foreign Affairs Committee of the National Council of Resistance of Iran, an international opposition organization based in France, warned the Biden administration and the Western powers that it would be a “big mistake” to trust the Iranian regime.

“The most striking thing about the ongoing international negotiations with the Iranian regime regarding its suspicious nuclear program is that the international community has become confident and certain that this regime is lying and engaged in all forms of deception to achieve its goals without meeting international demands… The Iranian regime has engaged in a lot of rhetoric and various childish actions in the ways and methods that it used in the nuclear talks, especially by putting forward demands unrelated to the talks in return for its efforts to remove its terrorist Revolutionary Guard Corps from the list of terrorist organizations. Anyone who relies on the Iranian regime is engaged in self-deception. Western countries have completed more than three decades of practicing the policy of appeasement and alignment with the Iranian regime and provided it with many privileges without getting anything in return. The international community should know that this regime can never abide by any agreement, especially if it is not in its interest and affects its own plans. With or without a nuclear agreement, Iran will not give up its efforts to produce and manufacture the atomic bomb. Confidence in the Iranian regime is a big mistake that must be avoided.”

Judging from the reactions of many Arabs to a possible revival of the Iran nuclear deal, it is obvious that America’s Arab allies have lost confidence in the Biden administration and its policy of appeasing the mullahs. The Arabs’ biggest fear is that this policy will embolden Iran’s mullahs and encourage them to proceed with their scheme to expand their control of the Arab countries — an existential threat to their national security.

The staggering “most hated rally” melt-up, which we warned back in June would steamroll shorts, and which ended up being one of the biggest summery rallies on record, is officially over…

… with BofA superstar strategist Michael Hartnett proven correct again this morning, as stocks retreated further from the bear market peak he called at 4,328 last week, with US equity futures sliding more than 1% on Monday along with stocks in Europe as a risk-off mood took hold at the start of a critical week for global markets when central bankers gather at their annual Jackson Hole symposium starting on Thursday.  Both S&P and Nasdaq futures slumped more than 1.1%, with spoos down 50 points to 4,180, as 10-year Treasury yields are little changed after briefly kissing 3.0%, while two-year yields rose about six basis points, deepening the yield-curve inversion that’s seen as a harbinger of a recession. The dollar spot index climbed to a five-week high, while gold and bitcoin slumped.

In China, banks lowered the one-year and five-year loan prime rates on Monday in the aftermath of a decision by the nation’s central bank last week to cut a key policy rate. The Chinese demand outlook has weighed on oil, which briefly sank below $90 a barrel in New York before rebounding and turning green. Traders are monitoring Iran nuclear talks that could lead to more supplies.

In premarket trading, GameStop and Bed Bath & Beyond led the declines in meme stocks as the latest frenzy in the cohort loses steam. GameStop -5.6%, Bed Bath & Beyond -8.6%; Fellow retail trading favorite AMC Entertainment Holdings was also down as the cinema theater operator’s preferred stock will start trading on the New York Stock Exchange under the ticker “APE” on Monday. Here are some of the biggest U.S. movers today:

• Signify Health (SGFY US) jumps 35% in premarket trading after reports of UnitedHealth (UNH US), Amazon.com (AMZN US), CVS (CVS US) and Option Care Health (OPCH US) vying to buy the health- care technology provider.
• Tesla (TSLA US) and fellow electric-vehicle makers fall amid worries over a hawkish Fed ahead of Jackson Hole symposium this week, and following data showing China EV registrations declined in July.
• Tesla drops as much as 2.7%; Rivian (RIVN US) -2.3%, Nikola (NKLA US) -2.8%.
• CFRA cut its recommendation on Netflix (NFLX US) to sell from hold, saying the stock may underperform the S&P 500 Index for the rest of the year after rallying 40% from mid-July lows.
• Netflix falls 2.2% amid a decline for Nasdaq futures.
• GigaCloud (GCT US) shares rally as much as 40%, before paring gains to trade around 12% higher. The Chinese e-commerce firm is on course for its third session of straight gains following its Nasdaq debut last week.

A huge squeeze in global shares from June’s bear-market lows, stoked by the market’s expectations for a pivot to slower rate hikes, is rapidly fizzling after repeated Fed policy makers warned that interest rates are going higher. This weekend’s Jackson Hole symposium gives Jerome Powell a platform to reset those bets, which are vulnerable to the possibility of persistently elevated price pressures even as economic growth stumbles. Investors are also waking up to the looming acceleration of the Fed’s balance-sheet reduction: quantitative tightening kicks into top gear next month, and will add to pressure on riskier assets which have benefited from ample liquidity.

“It is likely central bankers, including Fed Chair Powell, will remain hawkish in dealing with inflation albeit with a bit of caution creeping in given the emerging economic downturn,” Shane Oliver, head of investment strategy at AMP Services Ltd., wrote in a note.

Of course, the irony would be if markets melt up again next week just as hedge funds aggressively reset shorts: “The expectation is still that Powell will reaffirm what he and his colleagues have been saying in public recently,” said Craig Erlam, a senior market analyst at Oanda. “The risk is that he says something dovish — intentionally or otherwise — after investors position for the opposite and triggers another risk-on rally in the markets.”

The selling also accelerate in Europe, where the Stoxx 600 index dropped to its lowest level in more than three weeks, with autos, chemicals and tech the worst-performing industries as all sectors fall.  The DAX lags, dropping 2%. S&P futures slide 1.3%, Nasdaq contracts tumble 1.6%. Here are some of the biggest European movers today:

• Fresenius SE shares rose as much as 7.1% after the company said Fresenius Kabi CEO Michael Sen will replace CEO Stephan Sturm. Berenberg says the choice is sensible and expected
• EVS Broadcast Equipment shares jumped as much as 4% after the company announced a 10-year, $50m contract with a US-based broadcast and media production company on Friday
• Scandinavian Tobacco Group shares fell as much as 19% after the Danish cigar and pipe tobacco manufacturer published its preliminary 2Q numbers and lowered its FY22 guidance
• Deliveroo shares dropped as much as 6.8% amid a broader decline among European food delivery stocks. FY23 growth expectations for Deliveroo seem “stretched,” according to Morgan Stanley
• B&S Group shares slid as much as 13%, dropping to the lowest since April 2020, after the company reported interim results ING described as a “weak set” of numbers
• Intrum shares fell as much as 7.5%, their biggest decline since early May, after the board of the credit management firm replaced CEO Anders Engdahl with immediate effect
• Covestro fell as much as 5.9%, hitting lowest since May 2020, after Stifel slashed its price target to EU34 from EU53,  citing “shaky prospects” for the company
• Dassault Aviation shares were down as much as 4.7% after French Transport Minister Clement Beaune said he wanted to regulate private jet use, according to an interview with Le Parisien newspaper

Earlier in the session, Asian stocks fell to more than a two week low as investors braced for a hawkish stance by US officials at the upcoming Jackson Hole symposium. The MSCI Asia Pacific Index declined as much as 0.7%, with the region’s tech giants TSMC and Tencent Holdings dragging down the measure the most.

MSCI Inc.’s Asia-Pacific share index fell for a third day with losses evident in most major markets except for some gains in China, where a move by banks to trimlending rates aided property developers.

Philippine stocks were the region’s biggest losers, sinking more than 2% as the central bank there signaled more hikes. Chinese equities advanced.  Jerome Powell’s Friday speech at the central bankers’ gathering will be the highlight of the week, with markets expecting the Fed chair to reaffirm his determination to get inflation under control. Traders have already been paring back risky bets after Richmond Fed President Thomas Barkin said Friday that the central bank was resolved to curb red-hot inflation even at the risk of a recession.

“The bear market rally seems to be fading ahead of the Jackson Hole symposium this week, which may see the Fed pushing back further on easing expectations for next year,” said Charu Chanana, a senior strategist at Saxo Capital Markets.   Equities in mainland China posted rare gains in the region after the nation’s banks lowered their borrowing costs in a bid to stabilize the property market. That gave a positive boost, said Banny Lam, head of research at Ceb International Inv Corp. But markets are still on a bumpy ride as the dollar’s rise extends the outflow of liquidity from Asian assets, he added.  Other key issues on the radar include corporate earnings results. More than 340 members of the MSCI Asia Pacific Index, including battery heavyweight Contemporary Amperex Technology and e-commerce giant JD.com, are expected to release their financial results this week.

Japanese stocks fell as hawkish comments from a Federal Reserve official put investors on edge ahead of the Jackson Hole symposium later this week.  The Topix Index fell 0.1% to 1,992.59 in Tokyo on Monday, while the Nikkei declined 0.5% to 28,794.50. Keyence Corp. contributed the most to the Topix’s decline, as the producer of sensors and scanners decreased 1.3%. Out of 2,170 stocks in the index, 1,123 fell, 924 rose and 123 were unchanged. “There is a bit of hawkishness coming out from the Fed as its seen trying to correct the direction of the market,” said Naoki Fujiwara, a chief fund manager at Shinkin Asset Management. “In the end, it’s profit taking as the market has gone up so far.” 

Indian stocks fell for a second session on concerns the US Federal Reserve may remain committed to tightening monetary policy, which could impact foreign inflows to local equities. The S&P BSE Sensex declined 1.5%, its biggest drop since June 16, to 58,773.87 in Mumbai. The NSE Nifty 50 Index fell by a similar magnitude. Of the 30 member stocks of the Sensex, all but two declined. ICICI Bank Ltd. slipped 2.1% and was the biggest drag on the index. All 19 sectoral sub-indexes compiled by BSE Ltd. dropped, with a gauge of metal companies the worst performer. “While a correction was overdue for sometime after the recent upsurge, fresh concerns of a likely hawkish stance by the US Fed in its September meet and strengthening dollar index turned investors jittery and triggered a massive fall in banking, IT, metal & realty stocks,” Shrikant Chouhan, head of equity research at Kotak Securities Ltd., wrote in a note.   Overseas investment into local stocks totaled $6.3 billion from end-June through Aug. 18, after record outflows since October. The Fed’s symposium at Jackson Hole, Wyoming this week will be key for markets for clues on how the central bank plans to tackle price pressures. 

In Australia, the S&P/ASX 200 index fell 1% to close at 7,046.90, tracking Friday’s losses on Wall Street as investors weighed the Fed’s next steps. The benchmark posted its worst session since July 11 as all sectors declined in Australia. Adbri was the biggest laggard after reporting a drop in 1H underlying Npat and trimming its interim dividend. EML Payments gained after announcing a buyback. In New Zealand, the S&P/NZX 50 index rose 0.7% to 11,763.95.

In FX, the Bloomberg Dollar Spot Index advanced for a fourth consecutive day, to the highest level since July 18, while the greenback advanced versus most of its Group-of-10 peers. The euro fell to a seven-year low against the Swiss franc, extending losses as concerns about a global economic slowdown prompted demand for the safe-haven Swiss currency.  Australia’s dollar gained for the first time in six days after Chinese banks cut their loan prime rates in an effort to bolster the struggling property sector. Aussie bonds extended opening declines. The yen slipped to its lowest level in nearly a month as higher US yields amid growing bets for a hawkish Federal Reserve stance weighed on sentiment. Bonds fell, tracking US Treasuries.

In rates, Treasuries were cheaper, the 10- year US yield rising as much as three basis points to 2.9997%, adding to Friday’s climb, before falling back. 2-year yields rose by around 5bps, inverting the curve further with losses led by front-end of the curve where two-year yields trade 6bp higher versus Friday’s close. Further out the curve, bunds and gilts both lag with notable bear steepening move seen across UK curve. US yields cheaper by 6bp to 1bp across the curve in bear flattening move which sees 2s10s, 5s30s spreads trade tighter by 6bp and 1.5bp on the day; 10-year yields around 2.98% after peaking at 2.9997% in early Asia session. Focus this week is on US auctions which kick-off Tuesday with $44b two-year note sale, followed by $45b five-year Wednesday and $37b seven-year Thursday. IG dollar issuance slate empty so far; issuance expectations are low for the week and dependent on market conditions with the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, due to commence Thursday. Bunds and Italian bonds snapped four- day sliding streaks, with German debt gains led by the belly and Italy’s yield curve bull flattening as stock futures drop. Belgium sells five- and 10-year notes.

In commodities, WTI trades within Friday’s range, first falling as much as 1% before spiking and recovering all losses, with Brent jumping from a session low of $94.50 to a high of $96.90. Most base metals are in the red; LME copper falls 1%, underperforming peers. Spot gold falls roughly $15 to trade near $1,732/oz.

It’s a busy week for the calendar, but we kick off on a day quiet note, with the day at hand featuring the Chicago Fed’s national activity index and earnings from Zoom and Palo Alto Networks.

Market Snapshot

• S&P 500 futures down 1.1% to 4,183.75
• STOXX Europe 600 down 1.1% to 432.35
• MXAP down 0.6% to 159.83
• MXAPJ down 0.9% to 518.65
• Nikkei down 0.5% to 28,794.50
• Topix little changed at 1,992.59
• Hang Seng Index down 0.6% to 19,656.98
• Shanghai Composite up 0.6% to 3,277.79
• Sensex down 1.2% to 58,934.14
• Australia S&P/ASX 200 down 0.9% to 7,046.88
• Kospi down 1.2% to 2,462.50
• Gold spot down 0.7% to $1,735.45
• U.S. Dollar Index up 0.18% to 108.36
• German 10Y yield little changed at 1.20%
• Euro down 0.3% to $1.0006

Top Overnight News from Bloomberg

• European gas prices surged after Moscow’s move to shut a major pipeline ramped up fears of a prolonged supply halt, leaving Germany once again guessing as to how much Russian fuel it can count on this winter
• About 2,000 dockers at the Port of Felixstowe began an eight-day walkout on Sunday, halting the flow of goods through the UK’s largest gateway for containerized imports and exports
• Federal Reserve Chair Jerome Powell will have a chance — if he wants to take it — to reset expectations in financial markets when central bankers gather this week at their annual Jackson Hole retreat
• A sober warning for Wall Street and beyond: The Federal Reserve is still on a collision course with financial markets. Stocks and bonds are set to tumble once more even though inflation has likely peaked, according to the latest MLIV Pulse survey, as rate hikes reawaken the great 2022 selloff
• New Zealand’s central bank is open to the possibility of raising its benchmark rate as high as 4.25% amid uncertainty over the amount of tightening needed to regain control of inflation, Deputy Governor Christian Hawkesby said
• Swedish kronor bonds tied to environmental, social and governance goals are helping keep the country’s waning issuance market afloat this year

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks were mostly lower after last Friday’s declines in stocks and bonds across global markets in the aftermath of red-hot PPI data from Germany which rose by a new record high and stoked inflationary concerns, while the region also digests the PBoC’s latest actions on its benchmark lending rates. ASX 200 was pressured with all sectors subdued and as the influx of earnings continued. Nikkei 225 declined at the open as it took its cue from global peers and following reports that PM Kishida tested positive for COVID-19, although the index clawed back around half of the losses with help from a weak currency. Hang Seng and Shanghai Comp were mixed with early indecision as participants reflected on the PBoC’s rate actions in which it cut the 1-Year LPR by 5bps to 3.65% and reduced the 5-Year LPR by 15bps to 4.30% vs expectations for a 10bps cut to both, while the reduction in the 5-Year LPR which is the reference for mortgages, also followed recent measures to support the construction and delivery of unfinished residential projects through special loan schemes from policy banks. This provided some early support for developers although the broader sentiment was restricted amid the extension of factory power cuts in Sichuan.

Top Asian News

• China’s Sichuan extended its factory power cuts to August 25th, according to Caixin.
• Japanese PM Kishida tested positive for COVID-19 and is recuperating at his official residence, according to NHK.
• Singapore PM Lee announced to reduce mask requirements as the COVID-19 situation stabilises with masks to only be required for public transport and healthcare settings with everywhere else optional. PM Lee also confirmed that Deputy PM Wong has been chosen to be the next leader and said authorities will soon announce new initiatives to attract talent, according to Reuters
• Aluminum Up as China’s Worsening Power Shortages Tighten Supply
• Debt Audit, Constitution Change on Angolan Opposition’s Agenda
• Shanghai United Imaging Jumps 65% in Debut Post $1.6 Billion IPO
• China Province Extends Power Cuts on Worst Drought Since ‘61

European bourses are under pressure, Euro Stoxx 50 -1.8%, amid Nord Stream 1 maintenance. Updates that sparked a continuation of Friday’s downbeat price action and has caused particular downside for the likes of Uniper (-10%) while defenisve sectors outperform slightly. S futures are in-fitting both in terms of direction and magnitude, ES -1.3%, amid global recession and inflation fears. Panasonic (6752 JT) is to increase prices on 17 products from September 1st due to increasing material and manufacturing costs, hike will range between 2-33%.

Top European News

• Cineworld Says It Considers Filing for Bankruptcy in the US
• Vodafone Agrees to Sell Hungary Unit for 1.8 Billion Euros (1)
• Borealis Curbs Fertilizer Output for Economic Reasons
• UK Trial Lawyers Vote to Strike Indefinitely Over Fees
• Biggest Rate Hike in Decades Is in Play in Israel: Day Guide

FX

• DXY sees a firm start to the week as the index extends gains above 108.00, topping Friday’s peak.
• EUR/USD has again dipped under parity amid jitters over a potential supply disruption as Russia is to shut the Nord Stream 1 pipeline.
• The Antipodeans are the relative outperformers but have waned off best levels amid the broader deterioration in sentiment.
• The JPY has climbed its way up the ranks having experienced mild losses in APAC trade owing to widening yield differentials alongside losses in broad APAC FX.
• Turkey’s Central Bank revised rules for Lira government bond collateral for FX deposits in which it raised the RRR for credit from 20% to 30% for bond collateral, according to Reuters.

Fixed Income

• A session of pronounced two-way action for fixed benchmarks as energy and inflation vie for the limelight.
• Initial upside (Bunds tested 152.85 Fib of Friday) occurred as sentiment deteriorate on Nord Stream 1’s unscheduled maintenance announcement.
• However, this then swiftly retraced with core benchmarks modestly negative at worst, perhaps as attention pivoted to the associated inflation implications.
• Stateside, USTs have been moving in tandem though the move lower was somewhat more contained as participants look to Jackson Hole at the tail-end of the week.

Commodities

• WTI and Brent October contracts have continued trending downwards in a resumption of Friday’s action.
• The main focus of this morning has been on European gas prices surging on news that Russia’s Gazprom will shut down the Nord Stream 1 pipeline for three days.
• Dutch TTF October surged over 18% whilst European coal for the next year rose over 5% to a new record.
• Metals markets are hit by the firmer Dollar with spot gold losing further ground under USD 1,750/oz while LME copper eyes USD 8,000/t to the downside
• Libya’s NOC said oil production was running at 1.211mln bpd, while the Waha Oil Co said gas output from the Faragh field increased to 149mcfd on Sunday from 95mcfd on Saturday, according to Reuters.
• Caspian Pipeline Consortium suspended oil loadings from two of three single mooring points at its Black Sea terminal for inspection, while CPC exports continue from the third mooring point and August loadings are currently unaffected, according to Reuters sources. Subsequently confirmed
• Turkey has increased its imports of Russian oil to over 200k BPD so far this year (vs 98k BPD in the same period last year), according to Refinitiv data.
• Norway Prelim. July production: Oil 1.646mln BPD (vs 1.298mln BPD in June); gas 10.9bcm (vs 10.0bcm in June), according to the Norway Oil Directorate.

US Event Calendar

• 08:30: July Chicago Fed Nat Activity Index, est. -0.25, prior -0.19

DB’s Tim Wessel concludes the overnight wrap

The annual plenary of the global central bank cognoscenti kicks off in Jackson Hole this week. The main macro dish of the deep dog days of summer – where this year’s theme is “Reassessing Constraints on the Economy and Policy” – will be highlighted by Chair Powell’s remarks due on Friday morning. Global production data will serve as suitable hors d’oeuvres throughout the week, while US PCE data on Friday will be a side dish commanding ample attention. Elsewhere, we receive the second estimate of 2Q US GDP; will the poor aftertaste of two consecutive quarterly retractions continue to overwhelm the otherwise supportive ingredients that comprise near-term growth?

Back to Jackson Hole, as the market looks for direction on the uncertain economic outlook and Fed reaction function, Chair Powell’s remarks are one of the key events that can jolt US policy expectations from their recent range, along with inflation and employment data preceding the September FOMC. Indeed, since the day of the July CPI print, 2yr Treasury yields are on net less than a basis point lower, while pricing of the September rate hike has oscillated in a narrow range that effectively has placed equal probabilities on a 50 or 75bp hike, as conviction around the terminal rate and intervening path of policy is low until the market can assess which way inflation (and the Fed) is breaking. The Chair will likely strike an imposing tone against the inflationary scourge, all the more given his remarks last year noted the bout of inflationary pressure was likely to be a transitory phenomenon (important to keep in mind how much the policy outlook can evolve over a 12-month time frame, let alone when uncertainty is this high here). While the Fed has taken to emphasizing two-way risks around the tightening cycle, most visibly in the minutes at the July meeting, the easing of financial conditions since the July meeting may force the Chair to re-orient expectations away from the balance of risks back toward the primary objective of bringing inflation lower.

Executive Board member Schnabel will be the highest profile ECB speaker at the gathering, where focus is on calibrating the ECB’s next policy action, which our team takes careful measure of, here, preserving another 50bp hike as their base case. Before Schnabel, due on a panel Saturday, the ECB’s account of the July meeting’s 50bp hike will provide yet more detail into the super-sized kickoff to the ECB’s tightening cycle. Elsewhere in Europe, the looming energy crisis will remain top of mind. German Chancellor Scholz and Vice Chancellor Habeck are in Canada to try and plug the energy gap left by dwindling Russian gas supplies. Along with alternative imports, the government is still weighing whether to extend the life of heretofore condemned nuclear facilities if sufficient supplies cannot be secured.

Asian equity markets are trading in negative territory at the start of the week amid a broad strength in the US dollar coupled with a potentially tighter Fed policy path. The Kospi (-0.78%) is the biggest underperformer across the region followed by the Nikkei (-0.46%) and the Hang Seng (-0.45%). Over in mainland China, markets are reclaiming earlier losses, with the Shanghai Composite (+0.43%) and CSI (+0.60%) both in the green after the People’s Bank of China (PBOC) surprisingly slashed its benchmark lending rates yet again to shore up an economy battered by a worsening property slump and a resurgence of Covid-19 cases.

The PBOC slashed the one-year loan prime rate (LPR) by -5bps to 3.65%, the first reduction since January while the five-year LPR (a reference for mortgages) was cut by -15 bps to 4.3% at the central bank’s monthly fixing. This move comes after a raft of data released last week indicated that the world’s second largest economy slowed in July.

US stock futures point to continued losses after ending last week on the downbeat, with the S&P 500 (-0.38%) and NASDAQ 100 (-0.51%) edging lower. Elsewhere, crude oil prices are trading lower in Asia trading hours with Brent futures -0.98% down at $95.77/bbl.

Turning to a brief wrap of last week, the S&P 500 retreated -1.29% on Friday to bring the index -1.21% lower on the week, its first weekly decline in a month. The sharp decline Friday came absent any material data or policy developments; instead, it appeared programmatic selling and large options expiries concocted headwinds that were too hard for the index to overcome, where health care (+0.27%) and energy (+0.02%) were the only sectors to escape the day in the green, and only just. The STOXX 600 also fell over the week, retreating -0.80% (-0.77% Friday).

In rates, 10yr Treasuries gained +14.1bps over the week, +9.0bps of which came on Friday, though, as mentioned, the net move in 2yr Treasury yields was smaller, having fallen -0.08bps over the week (+3.6bps Friday) as we await further direction from the Fed or from the data. 10yr bund yields increased each of the last four days of the week to end +24.3bps higher (+12.8bps Friday), as the inflationary impact of the energy crisis gripped markets. For their part, OATs climbed +26.1bps (+12.8bps Friday) and BTPs were +43.0bps higher (+17.1bps Friday). Of course, European energy prices from natural gas (+18.65%, +1.47% Friday) to German power (+21.42%, +4.02% Friday) rose to record highs as crisis binds the continent.

The week kicks off on a day quiet note, with the day at hand featuring the Chicago Fed’s national activity index and earnings from Zoom and Palo Alto Networks.

By Nick Colas of DataTrek Research

Every investor is short something, even if they don’t think about their investment decisions or risk exposure in the same way a hedge fund might. For example, if you are underweight equities right now versus a benchmark or your typical allocation, you are essentially short stocks. Today we discuss the very specific rules traders use when shorting a security and how they apply to all investors. The bottom line: every short is just a trade, and eventually you must cover.

“Every investor is short something.” I (Nick) first heard that bit of wisdom in the early 1990s from an analyst at Harvard Management, the organization which manages that university’s endowment.

His point was that the range of possible investments is so wide that no institution or individual investor can possibly run a truly “neutral” portfolio. This is even truer today. For example, most investors are short virtual currencies because they don’t own even a small allocation of this now trillion-dollar but still deeply fragmented and complex asset class. At a more mainstream level, many investors are short equities in that they are underweight stocks versus their benchmarks or historical allocations due to this year’s volatility.

Traders know that shorting stocks requires strict adherence to a set of rules, and for this week’s Story Time Thursday I will describe 4 of them and how I think they apply to today’s investment environment:

#1: Valuation alone is not enough. At the old SAC, rookie analysts often made the mistake of pitching Steve short ideas based on valuation metrics like PE ratios or EBITDA multiples. His reply was always the same: “Everyone owns a calculator. Math is not an edge.”

I think about this every time we discuss our longstanding overweight to US equities versus rest of world stocks. Yes, US stocks are much more expensive, at 18x forward earnings expectations versus 11 – 13x for European, Japanese and Emerging Markets equities. There are good reasons for that, from the dollar’s reserve currency status to American public companies’ keen focus on profits, to the world’s most vibrant venture capital industry. While it may be tempting to add non-US equity exposure here as a “cheaper” alternative to US stocks, we would advise against it.

#2: A well-constructed short investment thesis requires identifying specific catalysts that will affect the price of a stock, and that means knowing exactly why the name appeals to its current base of shareholders. Hedge funds look at which institutions own a stock and why they like it in order to judge if a short argument has merit. After all, those are the asset managers that (ideally) will be spooked out of a stock on bad fundamental news.

This point is what makes being short/underweight US stocks such a difficult call just now:

• Everyone knows only recessions kill inflation. The historical record is crystal clear on that point. It is just as obvious as a PE ratio, which means there is no investment edge in this observation.

• Equity investors don’t even care about recessions per se; they care about the effect recessions have on earnings.

• Q2 2022 was a record for S&P 500 earnings, which were 39 percent higher than 2019’s quarterly run rate. By way of comparison, nominal US GDP is only up 17 percent from Q2 2019 to Q2 2022. Despite a slew of headwinds, from supply chain shortages to labor turnover to questionable WFH productivity, American companies have delivered simply stellar margins and earnings.

• Unless the US economy goes into a tailspin very soon, Q3 and Q4 earnings should be broadly in line with Q3 or even slightly higher given normal seasonal trends.

The short case for US stocks therefore requires answers to 4 questions:

1) when does a US recession start,

2) what will corporate earnings power be when it starts,

3) how much will earnings decline, and

4) how quickly will they recover?

The fact that monetary policy works with a lag only makes answering these questions even harder. Half of the art in shorting stocks is timing the entry point for a position. And as the old trader’s saying goes, “early is the same thing as wrong”.

#3: Avoid crowded shorts. There is nothing more frustrating to short sellers than being right on a fundamental call but wrong on a stock because too many other hedge funds are short the same name. On top of that, short interest is public knowledge so there is also the risk of simply being squeezed out of a position.

One way to think about the June 16th lows for US stocks is that it represented the apex of a crowded short. Too many investors saw the S&P 500 down +20 percent on the year, the VIX at 33-34, and Treasury yields ripping to new highs and simply said, “I’m out”. The subsequent rally has been, therefore, a classic short squeeze. With the VIX now at 20, that squeeze is over, and stocks have to justify further gains based on fundamentals and macro developments.

#4: Shorts are trades, not investments. By the time a company is public, it usually has some intrinsic value. This can wax and wane with management competence, economic cycles, competitive forces, and other issues. If things truly go off the rails, the company’s board either replaces management or splits up/sells the business. Very few public companies go to zero. This is why every short seller has a target price where they cover in mind before they initiate a position.

If one is negative on stocks at current levels, the only relevant question to ask (and answer) is “where do you cover/add equity exposure and, more importantly, why is that the right level?” One of the hardest things about shorting a stock is covering when it hits your price target. Maybe it will go lower… Maybe it’s even one of those rare stocks that goes to zero. And why even cover when the position is working for you?

The answer is, as a wise old SAC trader once told me, because “this game is rigged to the upside”. The upshot here is that if one is underweight stocks right now, set a target price or range where you will add equity exposure and do your best to stick to it.