28th August - Jackson Hole Gets Underway
Yesterday saw the start of the Jackson Hole Symposium, with the main event being today when Fed Chair Warsh gives his speech (3 pm UK time). Yesterday lacked a major news event, so the markets were either reacting to the PCE/Nvidia news from Wednesday or were preparing themselves for the speech today. The only new piece of news was the weekly US unemployment claims, which were 5k below expected. Continuing claims were also below expected, backing up the low-hiring, low-firing nature of the US labour market at present.
The theme of the Symposium is "Financial Innovation: Implications for Payments and Policy" and is broadly looking at payments technology and global financial integration. The irony of this was not lost on a number of journalists, a gathering of central bankers headed by the US, talking about global integration whilst the US Treasury threatens to remove countries from the US dollar system if they trade with Iran. Discussions about global integration whilst the dollar's central role is being used as an explicit weapon. This, along with the American economic status as a whole, should make for a fascinating speech later today.
Outside of the Symposium itself, we saw oil gain some ground yesterday after falls through most of the week, with Brent gaining 2.25% to sit at $90.90. Energy prices are below the wartime highs but are still elevated compared to the pre-Iran war levels. This will continue to have an impact on inflation, as we saw on Wednesday with the PCE figures from the US. There have been no real developments from the Middle East for a few days, bar the comments from the US to flesh out 'Operation Economic Outcast'. It does not really seem as though we will have a resolution soon, so it would not surprise me to see these higher oil prices potentially through to the new year.
Forex
Currency markets were quiet yesterday, which is exactly what you would expect from a session sandwiched between two major events. The dollar firmed slightly, with EUR/USD falling 0.05% to 1.1648 and GBP/USD down 0.02% to 1.3593, while USD/JPY ticked up 0.06% to 159.39. All very small moves, and this morning has been more of the same as the market waits.
The exception, as it has been all week, was the Aussie. AUD/USD gained another 0.30% to close at 0.7193 and has pushed on again this morning to 0.7198, putting it within touching distance of 0.72. That is now three consecutive sessions of gains since Tuesday's CPI, which makes it a genuine trend rather than a reaction to a single data point. The logic behind it is straightforward enough, with the RBA holding a hiking bias while the Fed is widely expected to stay on hold, so the rate differential is moving in the Aussie's favour. The one caveat is that a hawkish Warsh this afternoon would narrow that gap again fairly quickly, so I would not be adding to Aussie longs before 3pm.
Sterling is worth a brief mention. It has stabilised after Wednesday's unexplained 0.38% fall, but it has not recovered any of that ground either. So the underperformance has stuck rather than reversed, which is mildly telling in itself. As I said yesterday, one session without a catalyst is noise, but a fall that simply sits there rather than being bought back suggests there may be something behind it. Still one to watch rather than act on.
The bigger picture for the dollar has not changed, and it is the reason today matters so much. The dollar has fallen on rising yields and it has fallen on falling yields, which tells you the market is not trading rate differentials at all, it is trading confidence in the issuer. If Warsh acknowledges the Treasury's intervention in the bond market this afternoon, or the tension it creates with the Fed's own objectives, that will be the most important thing he says regardless of what he does with the rate outlook.
Indices
Yesterday was a strong session on the surface but a genuinely odd one underneath. Nvidia jumped 8.4% following Wednesday's results and dragged the Nasdaq up 1.32% with it, and the software names joined in, with the iShares Expanded Tech-Software ETF rising 7.6% on the back of strong results from Salesforce, CrowdStrike and Okta.
The problem is what happened everywhere else. Technology was the only S&P 500 sector to advance on the day, with ten of the eleven finishing lower, led by declines in the defensives such as healthcare, utilities and consumer staples. So this was not a broad risk-on rally at all. It was money being pulled out of everything else and pushed into the AI complex on the back of a single earnings report.
There is another detail that I find hard to ignore. The semiconductor ETF only rose 1.17% on the day, meaning it lagged the Nasdaq itself despite Nvidia surging 8.4%. On the best possible news the sector could have received, the wider chip complex still could not keep pace with the index. That does not strike me as a sector in rude health.
For the rotation we have been tracking all year, yesterday was a complete reversal of the pattern. Value up and growth down became tech up and everything else down, in the space of a single session. The question is whether that holds, and I suspect it does not. A one-day rotation driven by one company's results is not the same as a change in direction, and the breadth beneath it was about as poor as you will see on a day when the Nasdaq gains over 1%.
One other story worth flagging, though it remains unconfirmed. Nvidia has reportedly agreed to buy Hugging Face, the leading repository of open-source AI models, for $12.9 billion, according to Business Insider and The Information citing anonymous sources. If it is accurate, the logic is interesting. Back in July we discussed how an open-source model matching frontier performance undermined the case for the enormous proprietary capex being spent across the sector. Buying the home of open-source AI is about as direct a response to that risk as you could make.
Precious Metals
Gold closed flat yesterday at $4,600 after reaching a high of $4,642, while silver rose 1.07% to close at $69.27, having touched $69.73 during the session. So that is now a fifth consecutive session in which silver has approached $70 and been turned away. It has finally broken through in the last few moments, but the fact that it took five attempts across a week tells you how much resistance is sitting at that level, and I would want to see it close above there before treating the break as meaningful.
The more interesting story is the divergence between the two. Gold has now been flat to slightly lower for three sessions while silver has continued to grind higher, and the gold to silver ratio has compressed from around 70 a fortnight ago to roughly 66 today. That is a significant move in a relatively short space of time, and there are two possible explanations for it that point in very different directions.
The generous reading is that silver is playing catch-up on the industrial side, helped along by resilient US data and the strength we saw in tech yesterday. Silver has that dual role that gold does not, so a market that is simultaneously worried about US debt and reasonably comfortable about industrial demand should favour silver over gold. The less generous reading is that speculative money has rotated out of gold and into the higher-beta metal, which historically tends to be a late-stage signal rather than a healthy one. Silver has run from around $62 to just over $70 in eight sessions, a move of roughly 13%, and moves of that size in that timeframe do not usually occur at the beginning of a trend.
I am still waiting for my retracement, and gold going nowhere for three sessions is the closest thing I have had to one. That is not a pullback, it is a pause, and it is not the entry I have been holding out for. Warsh this afternoon is the most plausible catalyst for something more meaningful. A hawkish tone would give the metals a genuine test and would be the pullback I want to see. Anything dovish and I suspect this market simply carries on without me.
Today's Market Drivers
Fed Chair Warsh Speaks, 3 pm UK time - The main event of the Jackson Hole Symposium, his comments on interest rates and any commentary on the US Treasury bond announcement will move markets.
CAD GDP data release, 1:30 pm UK time - This should only affect the CAD, but will give us key information on how the Canadian economy is performing with a trade war with the US looming.
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