The US markets closed higher in yesterday’s trading session, buoyed by the release of the Federal Reserve’s meeting minutes and a notably weaker revised jobs report.
This combination heightened expectations of a rate cut by the Federal Open Market Committee (FOMC) in September, driving investor optimism.
Nasdaq Leads the Charge
The Nasdaq climbed 0.57%, spearheading the rally. Meanwhile, the S&P 500 gained 0.42%, and the Dow Jones Industrial Average edged up 0.14%. The drop in US Treasury yields to two-week lows further supported the bullish sentiment.
The 2-year Treasury yield dipped by 7.2 basis points to 3.928%, while the benchmark 10-year yield slid by 2.6 basis points to 3.791%.
Oil and Gold
Energy prices continued their downward trajectory as Brent crude declined by 1.49%, closing at $76.05 per barrel, and West Texas Intermediate (WTI) dropped by 1.69% to $71.93.
In contrast, gold held its ground near historic highs, inching up by 0.1% to $2,516 per ounce, as the weak dollar sustained the appeal of the safe-haven asset.
Fed Rate Cut Expectations Surge
Following the latest revised jobs data, the odds of a substantial rate cut from the Federal Reserve surged. The Bureau of Labor Statistics reported that job numbers between April 2023 and March 2024 were overestimated by 818,000 positions—prompting speculation of a 50-basis-point cut in the FOMC’s September meeting.
The likelihood of such a cut jumped to 37%, up from 25% the day prior. This dovish shift in sentiment is pushing markets to anticipate more accommodative policy from the Fed as it grapples with a weaker labour market.
Anticipation Builds Ahead of Jackson Hole
Despite a flurry of macroeconomic data expected today, investors’ eyes are firmly set on Jerome Powell’s upcoming speech at Jackson Hole on Friday. Powell’s address is likely to provide clarity on the Fed’s monetary policy trajectory, cementing market expectations for a September rate cut.
Traders are also looking out for key releases including Flash PMI data across major global economies, weekly US unemployment claims, and Existing Home Sales data. These releases, however, are expected to have a limited impact barring significant deviations from expectations.
Impact on the US Dollar
The US dollar index (DXY) extended its losses after the Fed minutes, briefly dipping below the 101-level.
The dovish undertone from the Fed has accelerated the greenback’s recent slide, which has been in a pronounced downtrend. If today’s PMI numbers disappoint, we could see the dollar continue its decline, further buoying commodity prices like gold and supporting risk assets.
Asia Markets: Key Themes for August 22, 2024
Australia: Business Activity Picks Up
Australia’s flash Composite PMI for August pointed to an improvement in business activity, primarily driven by the services sector.
New orders rose for the first time since May, and employment levels saw growth, signalling potential for continued momentum. The Australian dollar was trading around 0.6740 and is expected to remain supported throughout the day as market sentiment remains optimistic.
Japan: Services Sector Outperforms
In Japan, business activity reached its highest level since May 2023, with the services sector leading the charge. The flash Composite PMI reading hit 53.0, indicating robust expansion. However, manufacturing continues to contract, tempering overall optimism. Despite the positive PMI figures, demand for the yen remains tepid, with USD/JPY hovering above 145.
What to Watch: The Dollar Index (DXY)
With the US flash Composite PMI data due at 2:45 pm GMT, all eyes are on how the dollar reacts to any surprises. After six months of growth, the US manufacturing sector contracted in July and is expected to show further weakness.
Should the data miss expectations, the dollar’s decline could accelerate, with the DXY poised to break further below the 101-level.
Sector Spotlight: Commodities and Currencies
Gold
Gold remains elevated amid expectations of a weakening dollar. The metal’s upward momentum could persist if US data disappoints and reinforces the dovish outlook for the Fed. In the short term, the next 24 hours show a weak bullish bias for gold.
AUD
The Australian dollar stands to benefit from strong domestic PMI data. Coupled with optimism surrounding the services sector, the Aussie could maintain its upward trajectory. Expect a medium bullish bias for AUD in the next 24 hours.
NZD
The Kiwi has found support after the release of dovish FOMC minutes, pushing the currency to an overnight high of 0.6178. As of this morning, it has retraced slightly, with support and resistance levels at 0.6090 and 0.6200 respectively. Today’s outlook for NZD remains medium bullish.
JPY
Despite robust PMI readings, demand for the yen remains weak. With USD/JPY staying above the 145-level, a weak bearish bias is expected in the near term.
Key Takeaways for Traders:
Markets anticipate a Fed rate cut in September, with dovish signals pushing odds for a 50-basis-point reduction up to 37%.
Jackson Hole remains the focal point for investors, as Powell’s comments on Friday could set the tone for the Fed’s policy outlook.
Commodities like gold continue to thrive on the back of a weaker dollar, while currencies like AUD and NZD are buoyed by domestic strength and global sentiment.
The next few days promise significant market movements, with volatility expected to increase as we approach the Jackson Hole event. Keep a close eye on PMI releases and any surprises from the US data to adjust trading strategies accordingly.
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