Markets calmed by Powell put

A look at the day ahead in European and global markets from Wayne Cole.

Asia has seen an extension of Powell’s rally so far on Monday, with yields and the dollar lower and most stocks higher. The major exception is the Nikkei, which really doesn’t appreciate the yen climbing to 144.00 per dollar.

Oil prices rose 0.7 percent after Israel and Hezbollah exchanged volleys of rockets and airstrikes on Sunday, raising concerns about possible supply disruptions if the conflict escalates.

Powell put the cat among the pigeons by suddenly emphasizing the health of the labor market over inflation, basically saying the Fed will not tolerate a weaker employment outlook. That lowered the bar for a huge 50 basis point cut in September, with futures now implying a 38% chance of such a move and 103 basis points of easing by Christmas.

Ten-year yields of 3.79% are just 10 basis points below the two-year, and it can’t be long before the curve turns positive. Indeed, it’s surprising that it hasn’t happened already, especially given the scale of Treasury issuance, and suggests something more is keeping long-term yields down.

Time is also running out for the inverted curve to predict a recession, though the Atlanta Fed’s GDPNow measure slowed to an annualized 2.0% from 2.4% in mid-month. Friday’s real consumer spending numbers will help refine that number and could actually be more important than the core PCE deflator given Powell’s focus on growth and employment.

Flash EU inflation estimates are also due on Friday, and analysts assume it will be good enough for the ECB to cut as expected on September 19.

The other main event of the week will be Nvidia’s results on Wednesday, where it will need to beat the consensus by a lot to justify its stratospheric level of 37 forward gains.

Markets are looking for sales of $28.8 billion and guidance for Q3 around $32 billion, and it will have to beat that by at least a few billion. The options carry a move of 9% or more after the results, a serious amount of cash considering its market cap is nearly $3.2 trillion.

Key developments that could influence markets on Monday:

– The Riksbank publishes the minutes of the monetary policy meeting

– German Ifo business climate for August

– US durable goods orders, Dallas Fed manufacturing survey

– Federal Reserve Bank of San Francisco President Mary Daly speaks

(By Wayne Cole; Editing by Muralikumar Anantharaman)