Stocks come off highs, dollar edges up in thin trade

Updated August 18, 2022


*Fed officials saw need to slow rate hike pace “at some point”

*Yuan hovers near three-month low on Fed tightening, geopolitical tensions

*Australia surprisingly shed jobs, giving RBA more flexibility

*US dollar firm as Fed digs in for inflation fight

US equities paused from their week-long advance. The S&P500 retreated from its 200-day moving average on mixed US retail sales and earnings from Target and Lowe’s. The blue-chip index dropped 0.72% and the Nasdaq shed 1.21%. The downbeat sentiment has continued in Asia where markets are mostly lower. European futures are pointing to a slightly higher open. But US futures are in the red.

USD maintained an upward bias though printed an “inside day”. The session was choppy again, pulling back from initial advances. EUR was lacklustre after recent momentum was capped by resistance near 1.02. GBP is lower and closing in on support around 1.22. This comes on the back of recession fears and the 40-year inflation peak. USD/JPY is trying to make a new cycle high above the 50-day SMA at 135.39. The Antipodeans sold off sharply yesterday. Weak Australian jobs data overnight has seen AUD hit its 50-day SMA at 0.6920.

Event takeaway – FOMC minutes show rates rising further

The minutes to the July Fed meeting suggest policymakers will continue to tighten policy. But some officials are getting more concerned that they could end up going too hard. This means they may need to reverse course more abruptly with cuts next year. Since this meeting, we’ve had manufacturing leading indicators point to more weakness. But the job market remains tight. The fall in gasoline prices is also giving hope that rampant inflation has peaked.

There are still many more risk events to come before the next Fed meeting on 21 September. The NFP data and another CPI report are due next month. More immediately, we get the Fed’s Jackson Hole conference next week. This will give central bankers a chance to shape rate expectations, with no real forward-looking guidance in the minutes. Markets currently give a 57% chance of a 50bp rate hike for the Fed meeting next month.

Chart of the Day – DJ30 hits major resistance  

The Dow Jones Industrial Average halted its run of five straight days of gains. US retail sales rose above expectations with nominal control group sales growing by 0.8%. But we had disappointing earnings from US retailer Target whose CEO spoke of a “very challenging environment”. The stellar run in the Dow had been boosted by results from both Walmart and Home Depot earlier in the week. These two components are seen as important bellwethers for the health of the US consumer.

The big rebound in the Dow from the June low at 26,653 has been impressive. A strong upward channel has developed with bullish consolidation around the 100-day SMA at 32,639 at the end of July. An upside breakout followed but we are now overbought on the RSI. A major Fib level of the January to June move is capping more upside at 34,163. The 200-day SMA sits at 33,880.

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