Outlook: A little risk-off never hurt anyone and makes a regular appearance on a Tuesday. Now that the US scored some points on the geopolitical stage, it’s only respectful to suspend a slow-motion sell-off for a while. Equities down, gold up, all is right with the world or at least it seems to make some kind of sense. Unless you are bound up in a yen trade, which rolls merrily on without rhyme nor reason. We can’t wait for a break in the 10-year differential to see what happens. It may take a while. See the chart from Bloomberg depicting the BoA forecast for the 10-year–a slide to 2%. Good grief! With Fed funds expected at 3-3.5%, how can this make sense? Either the market is dead-wrong about the Fed’s resolve or wrong about how fast recession shows up. The phrase “recession deniers” has popped up, as though economic measurement is a political theme. The Economist magazine, by the way, favors the no-recession verdict of two negative quarters. Now check out the dollar/yen against the 10-year differential. The relationship is fairly clear and implies that if the dollar/yen is leading this time, the sell-off against the yen is a carry-trade closure in anticipation of exactly what the BoA forecast holds. This is very hard to wrap your head around. Actually, carry trades are hard to wrap you head around. Sentiment, squishy or not, is actually easier. But the point remains that selling the dollar on falling yields implies a lack of confidence in the resilience and robustness of the US economy on that other side of the Pacific, while the BoJ has set not only a cap, but also a floor, and is remarkably steadfast. We would put the odds of this outcome at low, but you can’t fight the tape. Actually, what the yen traders are fighting is the Fed. Here the RBA language is useful–normalize but not on a pre-set path. We ignore that word normalize at our peril. When inflation is more than double or triple the recent norm, meaning 4-6-8%, “normalization” means bringing it back to everyone’s target rate, 2%. Never mind actual inflation was below 2% for quite some time. Two percent is the norm. If it took only one year for inflation to get there, what does that imply about how long it will take it fix it and how much the base rate has to rise to get the fix? Alas, we can deduce nothing about how long or how much. Conditions are sufficiently different–Covid supply chain problems, Russia invasion–from past occasions that history is a poor guide. What we do know is that conditions can change dramatically and quickly. Check out that inventory subindex from the ISM again. And we still await the NY Fed’s Global Supply Chain Pressure Index, last updated for March (in May). Gimme a break. The Statistica series ends in January on the chart but the text shows a drop to 2.41 points in June from 2.9 points in May. You’d think we had better information on such a critical factor. Several reports have data without associated dates (like PwC). Bottom line, the nay-sayers like the carry trade unwinders might be right. Inflation could be crashing lower–without triggering a recession (in the US, anyway)–and the central banks could be pulling in their horns early, by which we mean March 2023, not Dec 2023. We doubt it, of course. Granted, things can move quickly but inflation is sticky as all get-out, especially in places like housing–although even there we are seeing price drops. So the new risk is the risk that inflation is transitory, after all. This is a dangerous stance to take, it should go without saying. Watch JOLTS today. Trading Economics expected the job openings to slip a little from over 11 million to 11 million on the dot. Recession? Ha. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!

EUR/USD - 1.0268 Although euro's erratic rise from last week's low at 1.0097 (Wed) to a 1-week high of 1.0275 in New York yesterday suggests correction from 1.0278 has ended, subsequent retreat may yield further choppy swings and below 1.0226 (New York low) would head towards 1.0206, break, 1.0165/70. On the upside, a daily close above 1.0278 is needed to extend rise from 0.9953 (July) to 1.0320/25 later. Data to be released on Tuesday: Australia building permits, RBA interest rate decision, New Zealand GDT price. U.K. Nationwide house price, Swiss consumer confidence, manufacturing PMI. U.S. redbook, JOLTS job openings, Canada S&P manufacturing PMI.  

The RBA will likely increase the cash rate by 50 basis points. Australian inflation continues to rise in the second quarter of the year. AUD/USD is technically bullish and near a critical Fibonacci resistance level. The Reserve Bank of Australia will announce its monetary policy decision on Tuesday, August 2. Market participants anticipate another 50 bps cash rate hike. The central bank has accelerated the pace of tightening in June and has already hiked 125 bps this year, bringing the key rate to the current 1.35%. Australian policymakers noted in their July statement that the cash rate’s current level is “well below” what they consider a neutral one, which should be “at least” 2.5%. Nevertheless – and along with many other central banks – the RBA is juggling to contain inflation without restricting economic growth. The annual inflation rate rose by 6.1% in the second quarter of the year from 5.1% in Q1. It was slightly below-expected but still on the rise. It seems unlikely that the central bank will hike by 75 bps, but there are some chances of a 25 bps movement. Policymakers could turn cautious considering the impact higher rates may have on household spending, slowing further economic activity. AUD/USD possible scenarios A smaller-than-anticipated hike should have a negative impact on the Australian dollar, sending AUD/USD sharply lower, particularly if the market sentiment deteriorates ahead of the announcement. A 75 bps hike, on the other hand, could fuel gains towards the 0.7100 figure. Whether gains will be sustainable or if the rally will be seen as a selling opportunity will depend on investors’ perception of risk. From a technical perspective, AUD/USD heads into the release with a bullish bias. The pair has neared the 61.8% retracement of its latest daily slide between 0.7282 and 0.6680 at 0.7050, the immediate resistance level ahead of the 0.7100 figure. A break through the latter will require a quite hawkish RBA hinting at an aggressive path ahead. A move below 0.6990, on the other hand, will open the door for a slide towards 0.6910, the 38.2% retracement of the aforementioned decline.

Outlook: The week has PMI’s already out and the US to come (with services on Wednesday). The Institute for Supply Management mfg index is expected to fall to 52.1 in July from 53, with all eyes on prices paid. We have two central bank meetings, Australia and UK, on Thursday. Later in the week it’s a ton of industrial output data, including German orders. As usual, though, attention is going to center on US nonfarm payrolls on Friday, with everyone ignoring JOLTS tomorrow. About the yen–we switched to long yen against the dollar, euro and AUD without any real confidence it will last. Probably the question about to rise to the surface is intervention should this turn into a runaway train. We doubt anyone can name the area where the BoJ runs out of patience but some obvious numbers come to mind, like the previous dollar low at 126.36 from May 24. We show the weekly chart to highlight how big a deal this really is. We are inclined to think the previous low is not meaningful and the line in the sand, when it comes, will be far lower, like 115. The key idea to justify jawboning/intervention is “lack of stability.” Wait for that word. It would be helpful if we understood the motivation behind traders buying yen again in the absence of some scary risk favor. It seems to be a sui generis move without rhyme nor reason. If it’s a function of expecting the yield diff not to widen because the Fed will chicken out, that’s a super high-risk “reason.” About that recession: for what it’s worth, the Atlanta Fed has now started to show us Q3 and it’s back in the black at 2.1%. We get another estimate today. No choice–we must speak about the elephant in the room. All economists say the definition of recession as two negative quarters is not a good definition, and damn the NBER. Non-economists are royally ticked off by that and accuse economists of every crime possible, including old-fashioned incompetence. (Republicans say Dems are liars, which is rich.) This is unfair because the underlying assumption is wrong–that economists have reliable semi-scientific models of how economies work, every economist agrees with them, including definitions of words, and those models are correct a high percentage of the time. For example, last week’s law requiring companies with a billion dollars is revenue can no longer use loopholes to avoid paying any tax at all (GE, Google) and must pay a minimum tax of 15%. Economists who favor tax fairness approve. Economists who assert (without evidence) that the tax steals money that can go to R&D disapprove. Who’s right? Well, possibly both camps. To criticize economists for not agreeing on the definition of recession implies everyone agrees that GDP, which is an aggregate, is the best criterion. But see the chart below from Oxford Economics–we can divvy up GDP to show weakness, not outright recession. It’s not really a basic misunderstanding of what economics can and cannot do. It’s a desire to over-simplify a horrifyingly complex and complicated machine with literally millions of moving parts. Quick, think of another profession where diagnosis and prognosis is so slippery. We can do better forecasting employment and wage growth than cancer recurrence, for example. In fact, the statistics on nutrition and various health maladies are so bad we might as well live on coffee and eggs. (Eggs are no longer a cholesterol issue, by the way. Coffee has spun from awful to wonderful three times we know of.) And despite the simply wonderful advances in meteorology, if you live in Kansas you are lucky to get a one-hour tornado warning. Economics is not a science. It’s called a social science, but that’s just a courtesy because we do use statistics and we do build models, without having the ability to bring into those models critical factors like demographics and other structurals. Every tourist knows Europe has far better infrastructure than the US. Which airport do you prefer, Geneva or LaGuardia? How does this affect logistics and economic growth? Some economist somewhere knows. You can bet the chief economist of the city of Los Angeles hates looking at the port data and trying to incorporate it into the forecast for (say) city tax revenue. But binding all the data into one model is literally impossible (Wharton tried and gave up long ago) and has to be done piecemeal, which takes the patience of Job. And yet really first-class economists can offer such refinements if we only have the patience to pay attention and drive deep instead of simply accepting “stockbroker economics.” We are guilty of accepting stockbroker economics ourselves–when nonfarm payrolls misses the forecast by x, by know which way the S&P and the dollar will go. If...

S&P (SPY) closes up over 4% on the week. Nasdaq (QQQ) closed with a gain of 4.5% versus a week ago. Dollar loses its grip on power as Yen and Euro rally. A huge week in data terms. The Fed pushed rates higher by 75 basis points and everyone cheered. Equity markets rallied sharply, a curious statement but there you go. We did note that the previous 75 basis point hike in June was met with a sharp sell-off so why the difference this time? Well as we often say the market decides what it wants to do and then shapes the narrative around that outcome. We were told the Fed had turned all dovish because the market wanted and needed to rally. That was the path of least resistance and maximum pain to investors. The Fed merely abandoned guidance it didn't really get all lovey-dovey.  US GDP then came and added to the dovishness. Again more bad news, the US is in recession, but the equity market immediately begins to rally on this so-called bad news. Why? Because it wanted to. Bond yields falling helped high-risk sectors move higher and from there the only hurdle left was earnings. But Apple and Amazon both held up their end of the bargain and so here we are at the end of the week some 5% higher. Right or wrong, you decide. Currently, the market is pricing in a very optimistic setup in our view. Inflation falling from nearly 9% to 3% in 18 months is unprecedented and quite frankly highly unlikely in our view. We are not alone in our view and have some good company!

Recap July 28 - The S&P opened with a 3 handle gap up and then traded another 15 handles higher into a 9:31 AM high. From that high, the S&P declined 45 handles into a 10:27 AM low of the day. From that low, the S&P rallied 87 handles higher into a 3:06 PM high of the day. From that high, the S&P pulled back 8 handles into the close. 7/28 – The major indices had a strong up day to finish with the following closes: DJIA + 332.04; S&P 500 + 48.82; & the Nasdaq Comp. + 130.17. Looking Ahead – Thursday was a strong up day and the market closed near the high of the day. We are now near the end of a a big three way cluster. The strong two day rally, we had provides the set up for a potential high on Friday. The most like scenario is for a Friday AM high. Please see details below. The Now Index has moved back to the NEUTRAL ZONE. Coming events (Stocks potentially respond to all events). B. 7/28 PM – Helio Mars enters Aries. Important change in trend Stocks. C. 7/28 PM – New Moon in Leo. Major change in trend Financials, Grains, Precious Metals, CORN, GOLD, OJ. D. 7/28 AC – Jupiter in Aries Retrograde. Major change in trend Oats. E. 8/01 PM – Pluto Contra-Parallel US Sun. Major change in trend US Stocks, T-Bonds, US Dollar. F. 8/03 AC – Moon’s North Node 90 US Moon. Major change in trend US Stocks, T-Bonds, US Dollar. Stock market key dates Market Math Fibonacci – 7/28. Astro – 7/29, 7/29 AC. Please see below the S&P 500 10 minute chart. Support - 4060, 3970 Resistance – 4088, 4180, 4228. Please see below the S&P 500 Daily chart. Support - 4060, 3970 Resistance – 4088, 4180, 4228.. Please see below the July Planetary Index chart with S&P 500 10 minute bars for results. As of July 27, I am dropping the charts from Pages 25 and 28.