Dollar And Dow Nervous Anxiety Before Powell And Key Inflation Reading

(MENAFN- DailyFX) Dow, Liquidity, Volatility, Recession, Jackson Hole and Dollar Talking Points:

  • The Market Perspective: S&P 500 Bearish Below 4,100; USDJPY Bearish Below 134.00
  • A late-session charge from the Dow and other US indices didn't register as a confidence move but rather a sharp increase in persistent anxiety and anticipation
  • The Jackson Hole Symposium will be a top headline throughout Friday, but Powell's speech and a key economic data point will present the most concentrated event risk hit

Looking for Relief from Anticipation and Anxiety

The convergence of the thin liquidity typical of the seasonal doldrums and anticipation for imminent event risk rendered peak distortion for the speculative markets this past session. That said, the real question is whether the confirmation of the highly anticipated data and rhetoric can override our summer constraints and charge a clear view from the markets. Tracking the benchmark US indices this past session, we saw the by-product of the distorted market conditions. Up until the final 30 minutes of the active trading session Thursday, the Dow Jones Industrial Average held onto its narrowest three-day trading range since December. The ultimate break to close out the day didn't register as a last-minute charge of conviction but rather a result of even more concentrated liquidity heading into this week's top event risk. Rather than taking stock of the biggest jump in two weeks or a charge back above the 20-day SMA or the range proximity, I think the most interesting reading of the Dow is the 10-day to 60-day ATR ratio. Activity levels have sharply deflated through recent days.

Chart of Dow Index with 20 and 100-day SMA, 1-Day ROC and 10 Day - 60Day ATR Ratio (Daily)

Chart Created on Tradingview Platform

Taking a look at the retail traders' perspective of the 'blue chip' US index, there was already a significant rebalance from the 7-month extreme in net short exposure that was registered through the peak a few weeks ago. While we are not at a truly balanced level, it is much closer to a point where this particular segment of the crowd can be swayed either way. What is interesting though about the retail's perspective is that they continue to carry an unusual influence over the broader market. Under 'normal' trading conditions, their perspective (and often bad habits) is drowned out by the greater reach of the professional, institutional and official participants. Yet, in the 'doldrums', the speculative mentality can come through more clearly. While there is serious event risk for Friday and into next week, I think the motivation to force the masses back into the market early is a low probability.

Chart of the Dow Jones Industrial Average Overlaid with Retail Trader Positioning from IG (Daily)

Chart Created on DailyFX

Market Conditions Versus Other Analytical Approaches

There are some interesting technical pictures to be found among the most representative risk assets and the docket for Friday certainly carries the charge of serious fundamental event risk. However, I still hold market conditions to be a more systemically important influence and there remains a curb on the way activity is likely to unfold. One of my favorite topics of late has been the impact that liquidity has on the system. Through the summer doldrums, there is a significant drain on participation that tends to blunt trends and distort the response to event risk. While more often categorized with the more traditional analysis techniques, I consider 'risk trends' to be another component of market conditions. Historically, when there is a convergence of motivations from technical breaks to productive themes, we have seen the markets gain enough traction to spur enter a self-sustaining cycle that seems to blow through technical barriers and cast aside economic updates. Sentiment can be an aggregator and overriding; but in that capacity, its inertia can also exert serious influence.

Scale of Risk Appetite Intensity

Chart Created by John Kicklighter

So, with the market struggling with participation and a stubborn 'risk' backdrop, we can take a closer look at an important fundamental theme that we have been feeding this past week: recession fears. Through this past session, there was additional fodder for those evaluating economic contraction. There were sentiment surveys from Germany, Canada, Brazil and New Zealand; but the second US GDP reading for 2Q carried its own interest. Initially, the world's largest economy had reported a -0.8 percent contraction that was downgraded to a -0.6 percent slump, but that is little relief when the unofficial definition for 'recession' was two consecutive quarters of contraction until the NBER disputed that designation recently. I think this concern will remain a threat moving forward, but for now, its influence remains unmoored.

Chart of Google Search Ranking for 'Inflation', 'Recession', 'Bear Market' and 'Bull Market' (Monthly)

Chart by John Kicklighter with Data from Google Trends

What to Watch Moving Forward: Friday, Next Week, The Dollar

Through the final trading day of the week, there is a range of notable event risk to keep tabs on outside of the US docket. The German, French and Italian sentiment data; Eurozone lending figures and Japanese inflation figures all reflect serious implications for global economic health. That said, all of that will be cast to the side by the US listings. First and foremost we have the Jackson Hole Economic Symposium which has crowded out much of the recent market headlines, but where there is a serious dispersion of impact. The problem here is that this is a long event that spans multiple days. It is hard to exact a clear impact on the market stretched out over such a period. It is possible that Powell's speech at 14:00 GMT can represent the pinnacle of impact, but I am watching the Fed's favorite inflation indicator – the PCE deflator – as a more impartial catalyst for trader sentiment.

Global Calendar of Top Macro Economic Event Risk for the Next 24 Hours

Calendar Created by John Kicklighter

Another important consideration as we weigh through the Friday headlines, is that conditions are not likely to reverse course. We will continue to slog through the summer doldrums and not leave the fog of restraint until after the Labor Day holiday in the US. On the other hand, while liquidity will be constrained, we have a density of high-level event risk scheduled out over the coming week. That means that we can still struggle through thin liquidity, but the instance of many acute events could trigger short-term volatility. Beware trading conditions next week, but also appreciate that anticipation may curb the response on Friday.

Global Calendar of Top Macro Economic Event Risk for Next Week

Calendar Created by John Kicklighter

Finally, a note to the market that finds itself at the crossroads of the most fundamental lines. The US Dollar has struggled for direction since its run back to its multi-decade high through Monday. For the Greenback, we have interest rate expectations that Powell and the Symposium will tap into. However, there is also the sensitivity to recession risk that could just as readily position the benchmark currency in its safe haven status as disadvantage the Dollar as a representative of the US economy. What view and theme carries the most weight? The USD will go a long way to sorting that out.

Chart of the DXY Dollar Index with 50-Day SMA Overlaid with 2-Year Yield and VIX Combo (Daily)

Chart Created on Tradingview Platform


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