European Equities: A Week in Review – 24/09/21

The Majors

It was a relatively bullish week for the majors in the week ending 24th September. The CAC40 led the way, rising by 1.04%, with the DAX30 and the EuroStoxx600 seeing gains of 0.27% and 0.31% respectively.

Economic data from the Eurozone failed to impress in the week.

Prelim private sector PMIs for September came in weaker raising further red flags over the economic outlook. German business sentiment also softened, albeit moderately.

While the stats were skewed to the negative, an uncommitted FED delivered the majors with support in the week. The FOMC projections were market friendly, with the FED also holding back on a tapering start date.

From the U.S, economic data was also skewed to the negative, though the numbers were not weak enough to cause concern.

Away from the economic calendar, Evergrande was a key driver, ultimately delivering support.

The Stats

Private sector PMIs and German business sentiment were in focus, with the stats skewed to the negative.

In September, the French Manufacturing PMI fell from 57.5 to 55.2, with the Services PMI down from 56.3 to 56.0.

Germany’s Manufacturing PMI declined from 62.6 to 58.5, with the Services PMI falling from 60.8 to 56.0.

As a result, the Eurozone’s Manufacturing PMI fell from 61.4 to 58.7, and the Services PMI down from 59.0 to 56.3.

According to the Eurozone’s September survey,

  • Business activity grew at a markedly reduced rate, reflecting the peaking of demand in Q3, supply chain bottlenecks, and lingering concerns over the pandemic.
  • Increased concerns over the Delta variant hit business expectations.
  • As a result, the rate of job creation moderated further from July’s 21-year peak.
  • Costs rose at the fastest pace in 21-years, however, as demand continued to outstrip supply.
  • New export order growth slowed to its lowest level since February, cooling sharply in the manufacturing sector.

Germany’s IFO Business Climate Index fell from 99.6 to 98.8, with the Current Assessment sub-index down from 101.4 to 100.4. The Business Expectations sub-index declined from 97.5 to 97.3.

From the U.S

A quiet start to the week left the markets on hold ahead of Wednesday’s FOMC policy decision and projections.

Stats were limited to housing sector numbers that had a muted impact on the Dollar and beyond.

On Wednesday, the FED left policy unchanged as anticipated. The markets had expected a firm timeline on tapering, which didn’t materialize, however. While there were no fixed timelines, the projections revealed a divided camp on the interest rate front, with some pointing to rate hikes from 2022.

It was good enough to deliver Dollar support as central banks elsewhere shifted back due to the Delta variant.

On Thursday, economic data failed to test support for riskier assets, with the stats skewed to the negative.

In the week ending 17th September, initial jobless claims climbed from 335k to 351k.

Prelim private sector PMIs pointed to softer growth, albeit marginally.

In September, the Manufacturing PMI fell from 61.1 to 60.5, with the Services PMI declining from 55.1 to 54.4.

FED Chair Powell wrapped things up at the end of the week, with the FED Chair looking to soften market expectation of rate hikes near-term.

The Market Movers

From the DAX, it was a mixed week for the auto sector. Continental fell by 1.48% to buck the trend. Daimler led the way, however, rallying by 4.56%, with BMW ending the week up by 1.62%. Volkswagen saw a more modest 0.59% gain in the week.

It was also a mixed week for the banking sector. Deutsche Bank slid by 2.21%, while Commerzbank ended the week flat.

From the CAC, it was a bullish week for the banks. Soc Gen rose by 1.07%. Credit Agricole and BNP Paribas led the way, however, rallying by 2.06% and by 2.35% respectively.

It was also a bullish week for the French auto sector. Stellantis NV rose by 0.51%, with Renault rallying by 6.89%.

Air France-KLM led the way, however, surging by 15.17%, with Airbus ending the week up by 2.09%.

On the VIX Index

It was a 2nd consecutive week in red for the VIX in the week ending 24th September.

Following a 0.67% decline from the previous week, the VIX slid 14.70% to end the week at 17.75.

4-days in the red from 5 sessions, which included 14.33% fall on Wednesday and a 10.73% decline on Thursday delivered the downside. A 23.55% jump on Monday limited the downside from the week, however.

For the week, the NASDAQ rose by 0.02%, with the Dow and the S&P500 ending the week up by 0.62% and by 0.51% respectively.

VIX 250921 Weekly Chart

The Week Ahead

It’s a busy week ahead on the economic calendar.

German consumer sentiment and unemployment figures, along with French consumer spending will be in focus mid-week.

At the end of the week, German retail sales and manufacturing PMIs will also influence.

September PMIs are due out for Italy and Spain, with finalized PMIs for France, Germany, and the Eurozone also in focus.

On the inflation front, prelim September figures for member stats and the Eurozone will also influence. A pickup in inflationary pressure would further question the current the ECB’s current transitory outlook.

From the U.S, it’s also a busy week ahead.

Core durable goods and consumer confidence figures will be in focus early in the week.

In the 2nd half of the week, jobless claims, inflation, personal spending and manufacturing sector data will also influence. Barring any marked revisions, GDP numbers for the 2nd quarter should have a muted impact on the majors.

From China, private sector PMIs will also provide the majors with direction on Thursday. Economic data from China has been on the weaker side in recent months. Softer manufacturing sector growth would test support for the majors.

Away from the economic calendar, expect news updates on Evergrande’s debt woes to also influence.

S&P 500 Weekly Price Forecast – Stock Markets Recover After Initial Plunge for the Week

The S&P 500 has initially plowed lower during the course of the week, only to turn around and show signs of life again. The hammer that formed during the course of the week suggests that we have further to go to the upside and could very well take off again. After all, the market has shown itself to be resilient over the longer term, and therefore it is likely that we will continue to be bullish in general. After all, the Federal Reserve will do everything it can to lift the market, despite the fact that it has suggested that there is the likelihood of tapering by the end of the year.

S&P 500 Video 27.09.21

Now that the market has completely recovered from the FOMC meeting and statement, it is very likely that we will continue to see buyers come in based upon the fact that longer-term we always go higher. The market breaking down below the bottom the hammer would of course be very negative, and at that point in time I might be a buyer of puts. Nonetheless, it is very unlikely that will be the case and I do think that eventually we go looking towards the 4600 level. The market breaking above that level then opens up the possibility of a move towards the 5000 handle.

I would anticipate a little bit of noise, but now that we are done with this week, it certainly looks as if we are going to continue to find reasons to go higher. Quite frankly, even though the interest rates in America are rising just a bit, the reality is that interest rates are still very low, so that continues to favor stock markets.

For a look at all of today’s economic events, check out our economic calendar.

Crude Oil Weekly Price Forecast – Crude Oil Continue to Show Upward Momentum

WTI Crude Oil

The West Texas Intermediate Crude Oil market has initially fallen during the course of the week to retest the downtrend line that we had recently broken out of, and then turned around to show signs of life again. By forming the hammer that we have, it does suggest that we are going to go higher, perhaps reaching towards the $80 level above. If we break down below the bottom of the candlestick, then it is likely that we continue to go lower for the short term. Nonetheless, the crude oil markets see a lot of demand, and most analysts out there believe that we are going to continue going higher.

The fact that we closed at the top of the range suggests that there should be more momentum, but I would look for some type of short-term pullback in order to get long again, as the market would be able to go higher based upon value.

WTI Oil Video 27.09.21

Brent

Brent markets have pulled back during the course of the week, only to turn around and show signs of life again. By breaking above the candlestick from the previous week after falling, that shows that we have plenty of bullish momentum. In fact, based upon the December contract, we are at the highs again and it is likely that we go looking towards the $80 level. If we were to turn around a break down below the candlestick from the previous week, then it is likely that the market will have to test the $70 level for support. Breaking down below that could open up a flood of selling.

For a look at all of today’s economic events, check out our economic calendar.

Silver Weekly Price Forecast – Silver Markets Give Up Early Gains for the Week

Silver markets have initially rallied during the course of the week to show signs of strength again, but then turned around quite drastically on Friday to test the $22 level. The $22 level is important from what I can see, and if we were to break down below there it is likely that the silver market will fall apart. This of course is a very important level, and therefore I think that it is only a matter of time before we break down there based upon what I am seeing right now.

SILVER Video 27.09.21

At this point, the market certainly looks as if it is threatening this move, but if we were to turn around and take out the top of the inverted hammer, that could send silver much higher. That point in time would send the market looking towards the 50 week EMA near the $24.62 level. Breaking above there, then it is likely that the market goes looking towards the $26 level.

All things been equal, this is a market that continues to see a lot of back and forth, and of course the US Dollar Index has a negative correlation to it, so you need to see how that behaves in order to get an idea how this will. If the US dollar falls apart, that will help silver, and of course vice versa, as silver is so highly sensitive. Silver of course has been underperforming gold, and that continues to be a major factor to trading this market. All things been equal, this is a market continues to see noisy trading more than anything else.

For a look at all of today’s economic events, check out our economic calendar.

Natural Gas Weekly Price Forecast – Natural Gas Markets Form a Hammer

Natural gas markets have fallen during the course of the week to test the 50% Fibonacci retracement level from the most recent move to the upside. On the other hand, we have turned around to show signs of life and therefore I think it is likely that we are going to continue to grind to the upside. The previous week has formed a massive shooting star, which of course contradicts what we have just done over the last week. That being said, the market continues to hover around the $5.00 level, an area that of course will attract a lot of attention.

NATGAS Video 27.09.21

At this point, longer-term traders will be paying close attention to both the shooting star and the hammer, because if we break either one of these candlesticks, it is likely that it will kick off a bigger move. If we break down below the bottom of the hammer, that opens up a move towards the $4.50 level, where we might see a little bit more in the realm of value hunting. On the other hand, if we were to turn around a break above the top of the hammer, then we will probably test the top of that shooting star. Breaking above there could then open up another massive move to the upside.

At this point, the market continues to see a lot of indecision, but I think longer term we continue the overall trend. If we were to drop down below the $4.50 level, then I think you have to look at the possibility of a collapse, which quite frankly after this type of parabolic move is something that is still possible.

For a look at all of today’s economic events, check out our economic calendar.

Gold Weekly Price Forecast – Gold Markets Give Up Early Gains for the Week

Gold markets have initially rally during the course of the week but gave back gains in order to form a bit of an inverted hammer. The $1750 level continues to offer support, and therefore if we were to break down below there then I think it is likely that we drop towards the $1680 level. Breaking down below that level would open up a huge move down to the $1500 level. On the other hand, if we were to turn around a break above the candlestick for the week, then it is likely that we go looking towards the $1835 level.

Gold Price Predictions Video 27.09.21

The US Dollar Index of course has a negative correlation to gold, and as a result it is likely that the dollar rising will work against the value of gold. On the other hand, if the market sees the US dollar falling, that will give a lift to gold markets going towards the 50 week EMA. Breaking above that then would add more momentum into this marketplace, opening up the possibility of a breakout.

Interest rates in the United States of course have a major influence on gold, as rising rates are a killer for the value of gold. That being said, the market is likely to continue to see that 10 year yield correlation come into effect as well. Nonetheless, this is a market that certainly looks as if it is ready to drop, so a break down below the candlestick has me not only shorting this market, but perhaps a bit aggressively.

For a look at all of today’s economic events, check out our economic calendar.

USD/JPY Weekly Price Forecast – US Dollar Testing Resistance

The US dollar initially fell against the Japanese yen during the course of the week but found support just above the ¥109 level. This is an area that has been resistance previously, and therefore I think it will be interesting to see if we get through. If we do, then the ¥111.50 level could offer quite a bit of resistance. If we break above there, then the market goes looking towards the ¥112.50 level. Furthermore, when you look at this chart, you can see that we have been in a range for a while, with the ¥110 level being a bit of a magnet for price. All things been equal, this is a market that I think continues to see a lot of choppiness, but you should keep in mind that this market is highly risk sensitive.

USD/JPY Video 27.09.21

If we break down from here, then the market is likely to test the ¥109 level yet again, and if we break down below there, the market is likely to fall even further. With that being said, the market tends to favor the Japanese yen when there is a lot of concern out there. That being the case, pay close attention to this market. That being said, the market is also forming an ascending triangle, so we need to make some type of decision sooner or later.

The move has been rather strong, but at this point now we are really starting to press the issue when it comes to the technicals when it comes to the market, and therefore we need to see some type of clarity but it certainly looks as if it is starting to favor the upside.

For a look at all of today’s economic events, check out our economic calendar.

GBP/USD Weekly Price Forecast – British Pound Tests Major Support Level

The British pound has fallen significantly during the course of the week only to turn around and form a bit of a hammer. That being the case, the market looks as if it is going to continue to look at the 1.36 handle, which is an area of significant support. On the other hand, if we were to turn around a break above the candlestick, then it is likely that we go looking towards the 1.39 handle. Quite frankly, the British pound looks rather well supported.

GBP/USD Video 27.09.21

On the other hand, if we were to break down below the 1.36 handle, then the market could fall quite drastically. At that point, I think we could unwind for a bigger move, but clearly it looks as if it is going to be difficult to break down through there. If we do, the market is likely to go much lower. At that point, the market is likely to go opening up for a move to the 1.30 handle. All things been equal, this is a market that sees a lot of noisy behavior, but when you look at this chart, it is obvious that we are trying to figure out what to do for a bigger move.

You could even make an argument for a little bit of a symmetrical triangle being formed but is still early for that. The one thing I think you can count on is a lot of choppy behavior and hesitation. At this point, market is going to continue to be a lot of noise more than anything else.

For a look at all of today’s economic events, check out our economic calendar.

GBP/JPY Weekly Price Forecast – British Pound Turned Around to Show Support Again

The British pound has fallen significantly during the course of the trading week to reach down towards the significant support level underneath before bouncing again. Because of this, it looks as if the market is trying to recover for a bigger move, but there are quite a few hurdles above that offer a certain amount of resistance. The ¥152.50 level course is an area where we have seen a lot of resistance previously, so it would obviously be an area of interest for sellers to get involved. That being said, if we break above there the market then goes much higher.

GBP/JPY Video 27.09.21

If we were to turn around a break down below the bottom of the candlestick, it would be a very negative turn of events, perhaps opening up a move down to the ¥145 level, and then followed by the ¥140 level. That being said, it would take quite a bit of effort to make that happen, so I am not necessarily looking for that scenario right away. The market breaking down below the bottom of the candlestick would of course send a flood of new sellers into the market, so I think at that point in time you could get aggressive. Until then, the market is going to be very choppy and listless, as we have seen over the last couple of months. All things been equal, things look as if they are sticking to a range in general, but pay close attention to the bottom of this candlestick as it could kick off a huge move.

For a look at all of today’s economic events, check out our economic calendar.

EUR/USD Weekly Price Forecast – Euro Forms Choppy Candlestick

The Euro has gone back and forth during the course of the trading week to form a bit of a neutral candlestick, as we are sitting just above the crucial 1.17 handle. This area has been significant support, which is likely to be a major factor in the markets going forward. At this point, the 1.16 level would be a target if we break down, but at the same time if we break to the upside of the candlestick, we could go looking towards 1.1850 level.

EUR/USD Video 27.09.21

The market is going back and forth, showing signs of hesitation. At this point in time, the market is likely to see a lot of attempts to find clarity, but at the end of the week we have seen very little in the way of decision. Ultimately, this is a market that continues to see a lot of choppy and hesitation when it comes to making a bigger move, but that is not a huge surprise when it comes to the market, as it tends to be very choppy in general. If we break down below the 200 week EMA, then it is likely that we go much lower.

To the upside, the 1.1850 level has been resistance, and if we can break above that level, then the market could go looking towards 1.20 handle. This is all about the US dollar, so you need to pay close attention to how is behaving against other currencies get an idea as to where we are going next in this pair. Quite frankly, this is a difficult paired to trade from the longer-term standpoint, but when you look at the chart, you can make an argument for a bit of a topping pattern.

For a look at all of today’s economic events, check out our economic calendar.

AUD/USD Weekly Price Forecast – Australian Dollar Has Choppy Week

The Australian dollar has gone back and forth during the course of the trading week, showing signs of hesitation and confusion. That being said, the market is very likely to continue seeing a lot of indecision, as there are so many issues in China and that of course has a major influence on risk appetite. Australia is particularly sensitive to the Chinese mainland, and the export situation to that economy. With that being the case, I think you can continue to see a lot of noisy behavior.

AUD/USD Video 27.09.21

I would also anticipate that over the weekend we will probably get some type of headlines over the weekend that could move this market, so I would not be surprised at all to see the Aussie jump or fall apart right at the open. The 200 week EMA is sitting just above, and therefore if we break above there it is likely that we could go looking towards the 0.7450 level. On the other hand, if we break down below the 0.70 level, this is a market that could fall apart and then go looking towards the 0.6750 level.

The market continues to see a lot of noisy behavior, but ultimately this is a market that needs to make a significant decision one way or another. With this being the case, I think that this is a market that continues to see a lot of noisy behavior, but once we get some type of break out from this candlestick, we could get something to follow. Until then, I think the market is likely to be very noisy.

For a look at all of today’s economic events, check out our economic calendar.

Will Biden’s Neo-Populist Economic Doctrine Support Gold?

Inflation, bond yields, monetary policy… that’s all interesting and crucial to understand trends in the gold markets – but, hey, what’s up in politics? A lot has happened recently on this front. In particular, last month, the world was shocked by the chaotic withdrawal of US troops from Afghanistan. The messy pullover and the quick takeover of the country by the Taliban is not only the end of Biden’s honeymoon but also America’s great failure. Some analysts even say that the fall of Kabul is another Saigon time for the US. Indeed, it goes without saying that the collapse in Afghanistan is a huge blow to America’s reputation. So, it could weaken the faith in Uncle Sam and its currency, which could be positive for gold in the long run.

However, the end of the US mission in Afghanistan doesn’t pose any direct threats to America (although terrorism could thrive under the Taliban regime) or to the greenback. So, I don’t expect any substantial, long-lasting moves in gold prices (always remember that geopolitical events cause only short-lived fluctuations, if any).

Another recent important development in the US policy was that the Senate passed a $1 trillion bipartisan infrastructure bill, which is a big step in pushing Biden’s economic agenda through Congress. The economic effect will probably be smaller than expected, as public stimulus rarely works as intended. So, I don’t expect any material impact on gold prices, especially given that this additional government spending has already been priced in.

However, I would like to point out that Biden has scaled back his infrastructure plans from $2.2 trillion and agreed to spend these funds over a longer period. It means that the US fiscal policy, although still unprecedentedly easy, is normalizing somewhat (see the chart below), at least compared to Democrats’ initial huge plans (however, they are still working on a budget resolution that would allow them to approve a complementary $3.5 trillion spending plan). A normalization of the fiscal policy is bad for gold prices, especially when coupled with the Fed’s tightening cycle.

Let’s step back — it turns out that it’s quite fruitful to look at Biden’s economic agenda from a bit broader perspective. It becomes clear that Biden – despite his hatred for Trump – actually continues Trumponomics. Nouriel Roubini calls Biden’s doctrine “neo-populist” and sees the paradox in the fact that it “has more in common with Trump’s policies than with those of Barack Obama’s administration, in which the current president previously served”.

Indeed, every president from Bill Clinton to Obama favored trade liberalization and a strong dollar while respecting the Fed’s independence. They were also understanding the importance of the moderate fiscal policy (although the practice differed, especially after the financial crisis of 2007-9). They were far from being laissez-faire advocates, but at least they didn’t question the economic orthodoxy.

Then Trump stepped in, inaugurating a trade war with China, and imposing tariffs on goods from other countries as well. He also questioned the Fed’s actions, which supported a weak greenback and ballooned fiscal deficits even before the epidemic started.

Biden’s rhetoric is softer and his actions less erratic, but he has maintained Trump’s tariffs, pursuing similar nationalist and protectionist trade policy. He even widened the already large budget deficit, continuing the spending spree financed by public debt. Although Biden doesn’t openly favor a weak dollar, the current administration is far from pursuing a strong-dollar policy. He also supported large direct cash transfers to citizens that Trump started in response to the pandemic. Last but not least, Biden fights with Big Business, introducing some anti-monopoly policies.

What does it all mean for the gold market? Well, the continuation of neo-populist economic doctrine and shifting away from sound economics (I wrote about this earlier this year) implies generally looser monetary and fiscal policies. Larger debts create a risk of a debt crisis, while downplaying the inflationary pressures (as for populists, price stability is less important than employment gains, rising wages, or reducing inequalities) increases the odds of inflation crisis or even stagflation (big government and huge indebtedness could hamper the pace of GDP growth).

As we know from Latin America, the rules of populists and MMT-like policies never end well. And, as we know from the 1970s, constant stimulation of the economy (because there is still some slack) and neglecting the dangers of inflation could be disastrous. So, Bidenomics should be generally supportive of gold.

Having said that, investors should remember that many more factors influence gold prices than just the President’s actions. A part of Biden’s presidency will coincide with the economic expansion from the pandemic recession and normalization of the interest rates that will likely create downward pressure on the yellow metal.

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For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care.

 

FOMC Pushes Gold Prices Down

Yesterday (September 22, 2021), the FOMC published its newest statement on monetary policy. There are just a few alterations in the publication, which mainly reflect changes in the economic environment. The Fed noted that the sectors most adversely affected by the pandemic “have improved in recent months, but the rise in COVID-19 cases has slowed their recovery”, while inflation “is elevated” (last time, the Fed wrote that “inflation has risen”).

However, the most important change is, of course, the signal about a slowdown in the pace of asset purchases. The Fed acknowledged the economy’s progress towards the goals of price stability and maximum employment, and said that tapering of quantitative easing could soon be warranted:

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.

Although this is not a revolution in the Fed’s thinking and it’s not a surprise for the markets, the move is hawkish. The statement shows that the US central bank is determined to begin tapering soon despite the weak non-farm payrolls in August. The Fed didn’t provide any date, but investors could expect an announcement in October or November and effective implementation by the end of this year.

Thus, the statement is negative for the gold prices. However, the silver lining is that the FOMC decided to write “moderation” instead of simply “tapering”. For me, this particular phrasing sounds softer, which gives some hope that tapering will be very gradual. So, the Fed’s monetary policy would remain accommodative for quite a long time.

September Dot-Plot and Gold

Now, let’s move on to the Fed’s newest economic projections that accompanied the statement. As the table below shows, the FOMC expects slower GDP growth, higher unemployment rate and higher inflation this year compared to its June’s forecasts.

To be more precise, the FOMC expects that the GDP will jump 5.9% in 2021, compared to the 7% rise expected in June. It’s still an impressive surge but significantly slower than it was expected just three months ago. So, it seems that the Fed has taken the negative impact of the spread of the Delta variant of the coronavirus into account. Similarly, the unemployment rate is forecasted to decrease to 4.8% instead of to 4.5% expected in the previous projections.

Meanwhile, the US central bank has also increased its inflation outlook. The FOMC members believe now that the PCE inflation will jump 4.2% this year, compared to 3.4% seen in December. The core PCE inflation is also expected to rise faster, i.e., 3.7%, versus 3% projected previously. So, the Fed expects a slowdown in the GDP growth combined with acceleration in inflation, which sounds stagflationary at the margin. These forecasts, when analyzed alone, should be positive for gold prices.

However, the US central bank also updated its forecast for the interest rates. And I don’t have good news. In the latest edition of the Fundamental Gold Report (September 16, 2021), I warned readers of hawkish changes in the expected path of the federal funds rate.

Given the increase in inflation since June and all the employment progress the economy made, the upcoming dot-plots could be hawkish and send gold prices lower. You have been warned.

And, indeed, according to the fresh dot plot, the FOMC considers one interest rate hike next year as appropriate at the moment. On top of that, the Fed sees three additional 25-basis points increases in 2023, and three more in 2024 (and more hikes later in the future). So, instead of two hikes in 2023, we have one upward move as soon as in 2022 and three more in the following year. It means that the curve of the expected federal funds rate has become much steeper, which could make gold struggle.

Implications for Gold

What do the latest FOMC statement and dot-plot imply for the gold market? Well, the Fed cleared the way to taper its asset purchase program and signaled that the first interest rate hike could occur sooner than expected. Not surprisingly, the price of gold declined in response to the shift in the timeline of the interest rates liftoff, in line with my expectations.

When it comes to the future, I believe that when the dust settles, gold may find some short-term relief. However, my guess is that gold will struggle until the Fed’s tightening cycle is well underway.

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For a look at all of today’s economic events, check out our economic calendar.

Arkadiusz Sieron, PhD
Sunshine Profits: Effective Investment through Diligence & Care

 

How Do You Get Inflation Under Control?

With the USD Index and U.S. Treasury yields the main fundamental drivers of the PMs’ performance, some confusion has arisen due to their parallel and divergent moves. For example, sometimes the USD Index rises while U.S. Treasury yields fall, or vice-versa, and sometimes the pair move higher/lower in unison. However, it’s important to remember that different economic environments have different impacts on the USD Index and U.S. Treasury yields.

To explain, the USD Index benefits from both the safe-haven bid (stock market volatility) and economic outperformance relative to its FX peers. Conversely, U.S. Treasury yields only benefit from the latter. Thus, when economic risks intensify (like what we witnessed with Evergrande on Sep. 20), the USD Index often rallies while U.S. Treasury yields often fall. Thus, the economic climate is often the fundamental determinant of the pairs’ future paths.

For context, I wrote on Apr.16:

The PMs suffer during three of four possible scenarios:

  1. When the bond market and the stock market price in risk, it’s bearish for the PMs
  2. When the bond market and the stock market don’t price in risk, it’s bearish for the PMs
  3. When the bond market doesn’t price in risk, but the stock market does, it’s bearish for the PMs
  4. When the bond market prices in risk and the stock market doesn’t, it’s bullish for the PMs

Regarding scenario #1, when the bond market and the stock market price in risk (economic stress), the USD Index often rallies and its strong negative correlation with the PMs upends their performance. Regarding scenario #2, when the bond market and the stock market don’t price in risk, U.S. economic strength supports a stronger U.S. dollar and rising U.S, Treasury yields reduce the fundamental attractiveness of gold. For context, the PMs are non-yielding assets, and when interest rates rise, bonds become more attractive relative to gold (for some investors).

Regarding scenario #3, when the stock market suffers and U.S. Treasury yields are indifferent, the usual uptick in the USD Index is a bearish development for the PMs (for the same reasons outlined in scenario #1). Regarding scenario #4, when the bond market prices in risk (lower yields) and the stock market doesn’t, inflation-adjusted (real) interest rates often decline, and risk-on sentiment can hurt the USD Index. As a result, the cocktail often uplifts the PMs due to lower real interest rates and a weaker U.S. dollar.

The bottom line? The USD Index and U.S. Treasury yields can move in the same direction or forge different paths. However, while a stock market crash is likely the most bearish fundamental outcome that could confront the PMs, scenario #2 is next in line. While it may (or may not) seem counterintuitive, a strong U.S. economy is bearish for the PMs. When U.S. economic strength provides a fundamental thesis for both the USD Index and U.S. Treasury yields to rise (along with real interest rates), the double-edged sword often leaves gold and silver with deep lacerations.

In the meantime, though, with investors eagerly awaiting the Fed’s monetary policy decision today, QE is already dying a slow death. Case in point: not only has the USD Index recaptured 93 and surged above the neckline of its inverse (bullish) head & shoulders pattern, but the greenback’s fundamentals remain robust. With 78 counterparties draining more than $1.240 trillion out of the U.S. financial system on Sep. 21, the Fed’s daily reverse repurchase agreements hit another all-time high.

Please see below:

Graphical user interfaceDescription automatically generatedSource: New York Fed

To explain, a reverse repurchase agreement (repo) occurs when an institution offloads cash to the Fed in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the Fed at an alarming rate. And while I’ve been warning for months that the activity is the fundamental equivalent of a taper – due to the lower supply of U.S. dollars (which is bullish for the USD Index) – the psychological effect is not the same. However, as we await a formal taper announcement from the Fed, the U.S. dollar’s fundamental foundation remains quite strong.

Furthermore, with the Wall Street Journal (WSJ) publishing a rather cryptic article on Sep. 10 titled “Fed Officials Prepare for November Reduction in Bond Buying,” messaging from the central bank’s unofficial mouthpiece implies that something is brewing. And while the Delta variant and Evergrande provide the Fed with an excuse to elongate its taper timeline, surging inflation has the Fed increasingly handcuffed.

As a result, Goldman Sachs Chief U.S. Economist David Mericle expects the Fed to provide “advance notice” today and set the stage for an official taper announcement in November. He wrote:

While the start date now appears set, the pace of tapering is an open question. Our standing forecast is that the FOMC will taper at a pace of $15bn per meeting, split between $10bn in UST and $5bn in MBS, ending in September 2022. But a number of FOMC participants have called instead for a faster pace that would end by mid-2022, and we now see $15bn per meeting vs. $15bn per month as a close call.”

On top of that, with stagflation bubbling beneath the surface, another hawkish shift could materialize.

To explain, I wrote on Jun. 17:

On Apr. 30, I warned that Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), was materially behind the inflation curve.

I wrote:

With Powell changing his tune from not seeing any “unwelcome” inflation on Jan. 14 to “we are likely to see upward pressure on prices, but [it] will be temporary” on Apr. 28, can you guess where this story is headed next?

And with the Fed Chair revealing on Jun. 16 what many of us already knew, he conceded:

TextDescription automatically generatedSource: CNBC

Moreover, while Powell added that “our expectation is these high inflation readings now will abate,” he also conceded that “you can think of this meeting that we had as the ‘talking about talking about’ [tapering] meeting, if you’d like.”

However, because actions speak louder than words, notice the monumental shift below?

TableDescription automatically generatedSource: U.S. Fed

To explain, if you analyze the red box, you can see that the Fed increased its 2021 Personal Consumption Expenditures (PCE) Index projection from a 2.4% year-over-year (YoY) rise to a 3.4% YoY rise. But even more revealing, the original projection was made only three months ago. Thus, the about face screams of inflationary anxiety.

What’s more, I highlighted on Aug. 5 that the hawkish upward revision increased investors’ fears of a faster rate-hike cycle and contributed to the rise in the USD Index and the fall in the GDXJ ETF (our short position).

Please see below:

Chart, line chart, histogramDescription automatically generated

And why is all of this so important? Well, with Mericle expecting the Fed to increase its 2021 PCE Index projection from 3.4% to 4.3% today (the red box below), if the Fed’s message shifts from we’re adamant that inflation is “transitory” to “suddenly, we’re not so sure,” a re-enactment of the June FOMC meeting could uplift the USD Index and upend the PMs once again. For context, the FOMC’s July meeting did not include a summary of its economic projections and today’s ‘dot plot’ will provide the most important clues.

Please see below:

TableDescription automatically generated

Finally, with CNBC proclaiming on Sep. 21 that the Fed is “widely expected to indicate it is getting ready to announce it will start paring back its $120 billion in monthly purchases of Treasuries and mortgage-backed securities,” even the financial media expects some form of “advance notice.”

A picture containing text, bottle, darkDescription automatically generatedSource: CNBC

The bottom line? While the Delta variant and Evergrande have provided the Fed with dovish cover, neither addresses the underlying problem. With inflation surging and the Fed’s 2% annual target looking more and more like wishful thinking, reducing its bond-buying program, increasing the value of the U.S. dollar, and decreasing commodity prices is the only way to get inflation under control. In absence, the Producer Price Index (PPI) will likely continue its upward momentum and the cost-push inflationary spiral will likely continue as well.

In conclusion, the gold miners underperformed gold once again on Sep. 21 and the relative weakness is profoundly bearish. Moreover, while the USD Index was roughly flat, Treasury yields rallied across the curve. And while Powell will do his best to thread the dovish needle today, he’s stuck between a rock and a hard place: if he talks down the U.S. dollar (like he normally does), commodity prices will likely rise, and inflation will likely remain elevated. If he acknowledges reality and prioritizes controlling inflation, the U.S. dollar will likely surge, and the general stock market should suffer. As a result, with the conundrum poised to come to a head over the next few months (maybe even today), the PMs are caught in the crossfire and lower lows will likely materialize over the medium term.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

S&P 500 Update: Anticipated Correction Unfolding. Low-4000s on Tap as Expected

In my last update, see here, I showed by using the Elliott Wave Principle (EWP) that the S&P500 (SPX) had most likely completed a significant-top (wave-iii of 3) and would be heading down to the low-4000s on a break below the August low at SPX4368. Nine days later and the index is already trading at SPX4345. Thus the anticipated correction is unfolding, and the low-4000s remain IMHO in tap with an ideal target of SPX4250+/-20. Allow me to explain below.

Figure 1. S&P500 daily chart with detailed EWP count and technical indicators

Today’s break below the August low makes for a lower low

In my last update, I showed that “since the early May low, the SPX has been in an overlapping set of regular interval rallies, lasting about 20 TDs with 3-day corrections, all bottoming around the 18th of each month. Each low and high was a higher low and a higher high: a Bullish pattern. Hence, because the most recent string of down days is already five, a drop below the August low at SPX4368 (orange wave-4 at the green arrow) will confirm a (red) intermediate wave-iv to ideally SPX4030-4235 is underway. I prefer the upper end of the target zone because, in Bull markets, the downside often disappoints, and the upside surprises.

Well, we got the break lower. Thus we have a lower low, and now SPX4030-4235 must be respected as the logical target zone with SPX4250+/-20 as the preferred narrowed-down level to watch. My premium major market members were already ahead of the curve as I identified five waves down last week and anticipated SPX4400-4300 after a bounce (see my tweet here, for example).

The beauty of the EWP is that we know with certainty in an impulse, the 3rd wave up is followed by a 4th wave correction down and then another 5th wave higher. Intermediate wave-iii of major-3 has topped, and wave-iv is now underway, which means wave-v of major-3 is still pending.

For now, I anticipate the SPX to bottom out soon (green minor wave-a in Figure 1 above) at ideally SPX4310-4335, and at a minimum, provide us with a strong bounce (green minor wave-b) before heading lower again. However, there are by then already enough waves in place to call the correction complete: three waves (a,b,c). Besides, I expect wave-v of wave-3 to complete around SPX4800-5000. Thus it is soon time to look for higher price, be it for a bounce (to possibly as high as SPX4600) or a new rally.

Bottom line: the correction I anticipated nine days ago is unfolding. I am now looking for a bottom soon in the SPX4310-4335 region before expecting a significant bounce at a minimum, possibly already a new rally. Namely, ideally, this correction should last longer and reach SPX4250+/-20, but there are soon enough waves in place to consider it complete. And in a Bull market, it is prudent to respect the upside.

For a look at all of today’s economic events, check out our economic calendar.

Oil Price Fundamental Daily Forecast – Outside Factors Encouraging Long Liquidation, Profit-Taking

U.S. West Texas Intermediate and International-benchmark Brent crude oil futures are trading lower early Monday, extending Friday’s losses amid a jump in the U.S. Dollar to a three-week high against a basket of major currencies and a potential increase in U.S. supply after a reported rise in the U.S. rig count.

At 11:11 GMT, December WTI crude oil is trading $69.96, down $1.42 or -1.99% and December Brent crude oil is at $73.33, down $1.23 or -1/65%.

Crude Pressured as US Dollar Catches Safety Bid

Dollar-denominated crude oil is getting hit by a sharply higher U.S. Dollar on Monday. The movement is being fueled by overseas activity in Asia. The offshore Chinese Yuan fell to a three-week low dragging commodities lower, while the safe-haven U.S. Dollar rose as worries about Chinese property developer Evergrande’s solvency spooked financial markets.

The drop in the Yuan came on the back of warnings from Chinese regulators that the Evergrande’s insolvency could spark broader risks in the country’s financial system if not stabilized.

Evergrande has been scrambling to raise funds to pay its many lenders, suppliers and investors. A deadline for the company to make an interest payment to creditors looms this week.

US Margin Call Selling Weighing on Crude Prices

U.S. stock futures began the week deeply in the red as investors continued to move to the sidelines in September amid several emerging risks for the market including the fear of contagion in the financial markets following the troubled China property market, an upcoming Federal Reserve meeting, Rising US. COVID cases, debt ceiling negotiations and a new tax bill.

The steep sell-off in stocks is likely triggering a series of margin calls which are forcing hedge funds to sell other assets like crude oil to raise the cash to meet their margin obligations. So far the selling in crude has been relatively light but could increase after the New York futures market opening.

Fear of Increased Supply

U.S. energy firms last week added oil and natural gas rigs for a second week in a row although the number of offshore units in the Gulf of Mexico remained unchanged after Hurricane Ida slammed into the coast over two weeks ago.

Fourteen offshore Gulf of Mexico rigs shut two weeks ago due to Ida remained inactive, energy services firm Baker Hughes Co said in its closely followed report on Friday. Last week, four of those offshore rigs returned to service. The oil and gas rig count, an early indicator of future output, rose nine to 512 in the week to September 17, its highest since April 2020, Baker Hughes said.

Daily Forecast

WTI and Brent crude oil futures are going through normal corrections with traders looking for a pullback into a value area after the market got a little overvalued last week. Long liquidation to meet margin calls in the stock market, fear of increased supply from the recovery in the Gulf and good old-fashioned profit-taking are behind the weakness. The longer-term supply/demand fundamentals remain intact. Prices are just cheaper than they were last week.

For a look at all of today’s economic events, check out our economic calendar.

Bitcoin and Ethereum – Weekly Technical Analysis – September 20th, 2021

Bitcoin

Bitcoin, BTC to USD, rose by 2.61% in the week ending 19th September. Partially reversing an 11.09% slide from the week prior, Bitcoin ended the week at $47,239.0.

A bearish start to the week saw Bitcoin fall to a Monday intraweek low $43,444.0 before making a move.

Steering clear of the first major support level at $41,877, Bitcoin rallied to a Saturday intraweek high $48,819.0.

Falling short of the 23.6% FIB of $50,473 and the first major resistance level at $51,545, Bitcoin slid back to sub-$47,000 levels before ending the week at $47,200 levels.

4 days in the red that included a 2.34% fall on Monday delivered the downside for the week.

For the week ahead

Bitcoin would need to avoid the $46,501 pivot to support a run the first major resistance level at $49,557 and the 23.6% FIB of $50,473.

Support from the broader market would be needed for Bitcoin to break out from last week’s high $48,819.0.

Barring an extended crypto rally, the 23.6% FIB would likely cap any upside.

In the event of an extended breakout, Bitcoin could test resistance at $52,000 before any pullback. The second major resistance level sits at $51,876.

A fall through the $46,501 pivot would bring the first major support level at $44,182 into play.

Barring an extended sell-off, Bitcoin should steer clear of the 38.2% FIB of $41,592. The second major support level sits at $41,126.

At the time of writing, Bitcoin was down by 0.29% to $47,103.0. A mixed start to the week saw Bitcoin rise to an early Monday high $47,327.0 before falling to a low $46,792.0.

Bitcoin left the major support and resistance levels untested early on.

BTCUSD 200921 Daily Chart

Ethereum

Ethereum fell by 2.21% in the week ending 20th September. Following a 13.87% slide from the previous week, Ethereum ended the week at $3,328.59.

A mixed start to the week saw Ethereum fall to a Monday intraweek low $3,111.14 before making a move.

While steering clear of the first major support level at $3,077, Ethereum fell through the 23.6% FIB of $3,369.

Finding Tuesday support, however, Ethereum rallied to a Thursday intraweek high $3,675.92 before sliding back into the red.

Ethereum broke back through the 23.6% FIB and also broke through the first major resistance level at $3,642.00 before falling back to sub-$3,320 levels.

4-days in the red that included a 4.73% slide on Friday delivered the downside in the week.

For the week ahead

Ethereum would need to move through the 23.6% FIB of $3,369 and the $3,372 pivot level to support a run at the first major resistance level at $3,633.

Support from the broader market would be needed, however, for Ethereum to break out from $3,550 levels.

Barring an extended crypto rally, the first major resistance level and last week’s high $3,675.92 would likely cap any upside.

In the event of another extended breakout, Ethereum could test resistance at $4,000 before any pullback. The second major resistance level sits at $3,937.

Failure to move through the 23.6% FIB and the $3,372 pivot would bring the first major support level at $3,068.

Barring an extended sell-off in the week, Ethereum should steer clear of sub-$3,000 support levels. The second major support level sits at $2,807.

At the time of writing, Ethereum was down by 0.54% to $3,310.78. A choppy start to the week saw Ethereum rise to an early Monday high $3,346.58 before falling to a low $3,259.03.

Ethereum left the major support and resistance levels untested at the start of the week.

ETHUSD 200921 Daily Chart

Earnings Week Ahead: Lennar, Autozone, FedEx, Nike and Costco Wholesale in Focus

Earnings Calendar For The Week Of September 20

Monday (September 20)

IN THE SPOTLIGHT: LENNAR

Lennar Corp, a home construction and real estate company, is expected to report earnings per share of $3.27 in the fiscal third quarter, which represents year-over-year growth of over 54% from $2.12 per share seen in the same period a year ago.

The Miami, Florida-based company would post year-over-year revenue growth of nearly 24% to around $7.3 billion. For four quarters in a row, the company has exceeded expectations on earnings per share.

“Shares of Lennar have outperformed the industry so far this year. The company is benefiting from effective cost control and focus on making its homebuilding platform more efficient, which in turn resulted in higher operating leverage. Higher demand for new homes backed by declining mortgage rates and low inventory levels bodes well. Focus on the lighter land strategy to boost free cash flow will bolster the balance sheet and thereby drive returns,” noted Analysts at ZACKS Research.

“Moreover, it has provided strong fiscal Q3 homebuilding gross margin guidance, suggesting 420 basis points (bps) increase at mid-point. Also, it has lifted average selling price and margin expectation for fiscal 2021, indicating 6% and 400bps year-over-year growth. However, higher land, labor and material costs are concerning. This may exert pressure on the company’s upcoming quarters as well.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE SEPTEMBER 20

Ticker Company EPS Forecast
LEN Lennar $3.27
HRB H&R Block -$0.34

 

Tuesday (September 21)

IN THE SPOTLIGHT: AUTOZONE, FEDEX

AUTOZONE: The Memphis, Tennessee-based auto parts retailer is expected to report its fiscal fourth-quarter earnings of $29.71 per share, which represents a year-over-year decline of about 4% from $30.93 per share seen in the same period a year ago.

Autozone (AZO) is our top pick in DIY Auto. We see it as a high-quality retailer with the ability to compound earnings/FCF growth over time. While not immune to a tougher macro backdrop (fewer miles driven), we believe AZO is best positioned through any recession given its leading exposure to the more defensive DIY segment (~80% of sales). In addition, its DIFM growth was accelerating pre-COVID and we think it can gain more share in that segment going forward. In our view, ongoing share gains coupled with solid expense management should allow AZO to overcome headwinds from less driving in the near- to medium-term. These advantages seem priced in currently.”

FEDEX: The Memphis, Tennessee-based multinational delivery services company is expected to report its fiscal first-quarter earnings of $5.00 per share, which represents year-over-year growth of about 3% from $4.87 per share seen in the same period a year ago.

The delivery firm would post revenue growth of about 13% to $21.8 billion. In the last four quarters, on average, FedEx has beaten earnings estimates over 28%.

“August quarter remained strong, although we are seeing some delays in shipments, which we expect management to address,” noted Helane Becker, equity analyst at Cowen.

“We are approaching the peak shipping season and expect to see ~50K new hires to handle what is likely to be record demand. Looking ahead, FedEx (FDX) should finally finish the TNT integration; European operations should show that.”

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE SEPTEMBER 21

Ticker Company EPS Forecast
AZO AutoZone $29.71
FDX FedEx $4.94
ADBE Adobe Systems $3.01
KGF Kingfisher £12.20
CBRL Cracker Barrel Old Country Store $2.33
NEOG Neogen $0.16

 

Wednesday (September 22)

Ticker Company EPS Forecast
KBH Kb Home $1.61
FUL HB Fuller $0.79
BBBY Bed Bath & Beyond Inc. $0.52
UNFI United Natural Foods $0.80
GIS General Mills $0.89

 

Thursday (September 23)

IN THE SPOTLIGHT: NIKE, COSTCO WHOLESALE

NIKE: The world’s largest athletic footwear and apparel seller is expected to report its fiscal first-quarter earnings of $1.12 per share, which represents year-over-year growth of about 18%, up from $0.95 per share seen in the same period a year ago.

The Beaverton, Oregon-based footwear retailer would post year-over-year revenue growth of over 18% to $12.6 billion.

“Investors are focused on the Vietnam factory closures impact on FY revenue guidance. Our analysis & mgmt guidance conservatism suggests minimal risk. But high valuation requires beat & raise quarters – stock price pullback possible & we’re buyers on any weakness. Reiterate Overweight; raise price target to $221,” noted Kimberly Greenberger, equity analyst at Morgan Stanley.

Nike (NKE) trades at the high end of its historical valuation range, & investors expect quarterly beats & guidance raises. Unchanged or lowered FY guidance on temporary, Vietnam-driven headwinds could result in a stock pullback. We would be buyers on any potential weakness.”

COSTCO WHOLESALE: The world’s fifth-largest retailer is expected to report its fiscal fourth-quarter earnings of $3.56 per share, which represents year-over-year growth of over 1.4% from $3.51 per share seen in the same period a year ago. The Fridley, Minnesota-based medical company would post revenue growth of about 18% to around $63 billion.

TAKE A LOOK AT OUR EARNINGS CALENDAR FOR THE FULL RELEASES FOR THE SEPTEMBER 23

Ticker Company EPS Forecast
ACN Accenture $2.18
DRI Darden Restaurants $1.64
NKE Nike $1.12
COST Costco Wholesale $3.56
MTN Vail Resorts -$3.46
PRGS Progress Software $0.82

 

Friday (September 24)

Ticker Company EPS Forecast
CCL Carnival -$1.43
CUK Carnival -$1.45
CCL Carnival -£1.45

 

The Week Ahead – Central Banks back in Focus with the BoE and the FED in Action

On the Macro

It’s a quiet week ahead on the economic calendar, with 37 stats in focus in the week ending 17th September. In the week prior, 62 stats had also been in focus.

For the Dollar:

Prelim private sector PMIs for September will be in focus on Thursday.

Expect the services PMI to be the key stat of the week.

Other stats include housing sector data that will likely have a muted impact on the Dollar and the broader market.

The main event of the week, however, is the FOMC monetary policy decision on Wednesday.

With the markets expecting the FED to stand pat, the economic and interest rate projections and press conference will be pivotal. FED Chair Powell prepped the markets for the tapering to begin this year. The markets are not expecting any hint of a shift in policy on interest rates, however…

In the week ending 17th September, the Dollar Spot Index rose by 0.66% to 93.195.

For the EUR:

It’s a relatively busy week on the economic data front.

Prelim September private sector PMIs for France, Germany, and the Eurozone will draw plenty of interest on Thursday.

While Germany’s manufacturing PMI is key, expect influence from the entire data set. Market concerns over the economic recovery have tested support for riskier assets. Softer PMI numbers would test EUR support on the day.

For the week, the EUR fell by 0.75% to $1.1725.

For the Pound:

It’s a relatively busy week ahead on the economic calendar.

On the economic data front, CBI Industrial Trend Orders and prelim private sector PMIs are due out.

Expect the services PMI for September to be the key stat on Thursday.

While the stats will influence, the BoE’s monetary policy decision on Thursday will be the main event.

Persistent inflationary pressure has raised the prospects of a sooner rather than later move by the BoE. Weak retail sales figures have made things less clear, however.

Expect any dissent to drive the Pound towards $1.40 levels.

The Pound ended the week down by 0.71% to $1.3741.

For the Loonie:

It’s another quiet week ahead on the economic calendar.

Early in the week, house price figures for August are due out. The numbers are not expected to have a material impact on the Loonie, however.

Retail sales figures for July, due out on Thursday, will influence, however. Another sharp increase in spending would deliver the Loonie with much-needed support.

The Loonie ended the week down 0.57% to C$1.2764 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

There are no major stats to provide the Aussie Dollar with direction.

While there are no major stats, the RBA monetary policy meeting minutes on Tuesday will influence. The markets will be looking for forward guidance following the latest lockdown measures.

The Aussie Dollar ended the week down by 1.05% to $0.7279.

For the Kiwi Dollar:

It’s another quiet week ahead.

Early in the week, consumer sentiment figures for the 3rd quarter will be in focus.

Trade data, due out on Friday, will be the key numbers for the week, however.

Away from the economic calendar, however, COVID-19 news updates will also be key.

The Kiwi Dollar ended the week down by 1.03% to $0.7040.

For the Japanese Yen:

It’s a relatively busy week on the economic calendar.

Inflation and prelim private sector PMIs are due out on Friday. We don’t expect the numbers to influence the Yen, however.

On the monetary policy front, the BoJ is in action on Wednesday. We aren’t expecting any surprises, however, as the Delta variant continues to deliver economic uncertainty.

The Japanese Yen rose by 0.01% to ¥109.93 against the U.S Dollar.

Out of China

There are also no major stats due out of China for the markets to consider, with the Chinese markets closed early in the week.

On the monetary policy front, the PBoC is in action. We don’t expect any changes to the Loan Prime Rates, however.

The Chinese Yuan ended the week down by 0.34% to CNY6.4661 against the U.S Dollar.

Geo-Politics

Iran, China, and Russia remain the main areas of interest for the markets. News updates from the Middle East, in particular, will need continued monitoring following recent events in Afghanistan.

U.S Mortgage Rates Fall Ahead of the FOMC Meet and Projections

Mortgage rates were relatively flat once more, with 30-year fixed rates falling by just 2 basis points. After a 1 basis point rise in the week prior, rates fell the 6th time in 11-weeks.

In the week ending 16th September, 30-year fixed rates fell by 2 basis points to 2.86%.

30-year mortgage rates have risen just once beyond the 3% mark Since 21st April.

Compared to this time last year, 30-year fixed rates were down by just 1 basis point.

30-year fixed rates were still down by 208 basis points since November 2018’s last peak of 4.94%.

Economic Data from the Week

It was a relatively busy first half of the week, with inflation figures for August in focus on Tuesday.

Softer inflation figures pegged back mortgage rates in the week.

In August, the U.S core annual rate of inflation slipped from 4.3% to 4.0%. While softer, the continued spike in inflation left a FED tapering on the table for this year.

On Wednesday, industrial production and NY Empire State Manufacturing data failed to drive yields in spite of upbeat numbers.

The NY Empire State Manufacturing Index climbed from 18.3 to 34.3 in September. Industrial production rose by 0.4% in August, following a 0.8% increase in July.

While the stats from the U.S were upbeat, economic data from China raised yet more red flags over the Chinese economic recovery.

In August, industrial production increased by 5.3%, year-on-year, which was down from 6.4% in July. Fixed asset investments also disappointed, rising by 8.9% versus 10.3% in July. Both fell short of forecasts.

Freddie Mac Rates

The weekly average rates for new mortgages as of 16th September were quoted by Freddie Mac to be:

  • 30-year fixed rates decreased by 2 basis points to 2.86% in the week. This time last year, rates had stood at 2.87%. The average fee remained unchanged at 0.7 points.
  • 15-year fixed fell by 7 basis points 2.12% in the week. Rates were down by 23 basis points from 2.35% a year ago. The average fee remained unchanged at 0.6 points.
  • 5-year fixed rates increased by 9 basis point to 2.51%. Rates were down by 45 points from 2.96% a year ago. The average fee fell from 0.3 points to 0.1 point.

According to Freddie Mac,

  • Mortgage rates continued to remain flat, reflecting the markets’ view that prospects for the economy have dimmed as a result of the latest spike in new COVID-19 cases.
  • Fundamental changes to the economy are occurring, however, which will likely lead to significant investment and new post-pandemic economic models that will spur economic growth.
  • Such changes include increased migration, a continuation of remote work, increased use of automation, and focus on a more energy efficient and resilience economy.

Mortgage Bankers’ Association Rates

For the week ending 10th September, the rates were:

  • Average interest rates for 30-year fixed with conforming loan balances remained unchanged at 3.03%. Points decreased from 0.33 to 0.32 (incl. origination fee) for 80% LTV loans.
  • Average 30-year fixed mortgage rates backed by FHA fell from 3.07% to 3.04%. Points fell from 0.30 to 0.27 (incl. origination fee) for 80% LTV loans.
  • Average 30-year rates for jumbo loan balances decreased from 3.14% to 3.13%. Points declined from 0.30 to 0.21 (incl. origination fee) for 80% LTV loans.

Weekly figures released by the Mortgage Bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, increased by 0.3% in the week ending 10th September. In the previous week, the index had declined by 1.9%

The Refinance Index declined by 3% and was 3% lower than the same week a year ago. The index had also fallen by 3% in the week prior.

In the week ending 10th September, the refinance share of mortgage activity fell from 66.8% to 64.9%. The share had remained unchanged at 66.8% in the week prior.

According to the MBA,

  • Purchase applications, after adjusting for the impact of Labor Day, increased over 7% to their highest level since Apr-21.
  • Compared with Sept-2020, which was in the middle of a significant upswing in home purchases, applications were down 11%.
  • The average loan size for a purchase application rose to $396,800, with a competitive purchase market pushing sales prices upwards.
  • By contrast, refinance applications fell to their slowest pace since early July.

For the week ahead

It’s a quieter week ahead on the economic data front. Economic data is limited to housing sector data that should have a muted impact on yields.

The market focus will be on the FOMC monetary policy decision and projections due late on Wednesday.

A hawkish FED would push yields northwards that should support a pickup in mortgage rates in the coming weeks.