Headlines

*US dollar pauses for breath ahead of Jackson Hole, hawkish Powell expected

*S&P 500 seen a little higher by end of 2022 – Reuters Poll

*UK money markets believe interest rates will hit 4% by March

*ECB’s Panetta: Must be prudent with rate hikes as recession risk rises

US equities slipped for a third consecutive day after early gains were pared back. The S&P 500 closed down 0.22% and the Nasdaq lost 0.07%. Most cyclical sectors like materials and industrials were higher. Real estate underperformed on weak data and higher yields. Asian stocks dipped and are on track for an eighth straight day of losses. Futures are indicating a marginally lower open.

USD consolidated its recent run. It closed 0.4% lower at 108.60 amid soft US economic data. EUR popped up above parity before finishing at 0.9967. GBP fell to a low at 1.1716 before closing above July support at 1.1829. USD/JPY dropped sharply below 136 but trades above this morning. AUD and NZD held above recent lows. AUD is trading around its 50-day SMA at 0.6915.

Data breakdown – Disappointing releases hit the greenback

We had a bunch of economic data released yesterday. US home sales fell 12.6% m/m against expectations for a much smaller drop of 2.5%. A downturn in home sales is often viewed as a leading indicator of a rise in unemployment in the US.

A closely watched survey of activity in the services sector also disappointed. The S&P PMI came in at a 27-month low of 44.1 in August, down from 47.3 the previous month. A reading below 50 denotes a reduction in business activity. This suggests the decline worsened this month rather than easing as economists had predicted. The manufacturing index also dropped more than expected, though it remains above 50. Both input and output price growth remain at elevated levels.

The eurozone PMIs pointed to stagnation and potential recession territory. It was notable that the data was less bad than feared. The flip side was the US numbers that were received badly, and the dollar sold off relatively sharply. This all points to an environment of stagflation, so slow growth and high inflation.

Chart of the Day – Nasdaq back into bear channel

Expectations that Fed policymakers will take a hawkish stance at this week’s symposium in Jackson Hole have hit the rebound in stocks. Higher interest rates can hurt growth and tech companies with high valuations based on future profits. The Nasdaq has certainly been a beneficiary of the market’s hoped-for dovish pivot by the FOMC over the summer. Whether Powell confirms this or sticks to the tightening message on Friday at his keynote speech is key for risky assets.

The tech-laden index hit resistance at a Fib level (61.8%) of the March/June move at 13,650. This week’s sell-off has taken prices back through the midway point of that move at 13,151 which becomes initial resistance. The index is back in the longer-term downward channel with support at the 100-day SMA at 12,724.