We are getting our favoured 3 -7 day upside in stocks and associated US dollar consolidation. Of course, this is within the context of the overall down-trend for equities, and up-trend for the US dollar.
However, this week’s key data of US CPI and Retail Sales are capable of becoming significant catalysts for fresh trend development in either direction.
It is likely stocks will continue to drift higher into Tuesday’s CPI data, which may well see further improvement as petrol prices have continued to pull back. Other components are still likely to be pointing higher, but fuel prices could well dominate this CPI number.
The market will drift higher into this release and could rally further afterwards even if inflation remains high. Many in the market still choose to favour the idea that all the bad news is already priced in, so the market can rally anyway. So, if inflation is in the vicinity of 8.5% or lower stocks will be a little excited.
US Retail Sales, to be released Thursday, were flat last time, and most definitely risk being a negative number for August. This could then either rattle markets a bit or again be spun by the bulls as an argument to expect the Federal Reserve to pause earlier and pivot.
We have been down this path before and it would not be a surprise to see the market making the same mistake again. That of underestimating the Fed’s commitment to stay the course in the fight against inflation to get it back to the 2%-3% region.
Even, if this does cause economic ‘pain’.
The upward momentum we are seeing in the past few days is likely to be maintained through Thursday, but on the Retail Sales, all things could get even more volatile.
Overall, I prefer the argument that economic complexities are growing, as the slowdown is beginning to bite, and the Fed will continue hiking regardless of what the market may surmise in the short term.
This means the current rally will eventually roll over, but that may be unlikely before some further upside and volatility this week.
The outlook for the US dollar this week is some heavy consolidation but not too much more downside, before stabilising to resume its powerful uptrend.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities