Backsliding coronavirus data and scant progress on an extension of US coronavirus stimulus are the themes early in the new week. Markets will await the ongoing US negitiations regarding the next stimulus ahead of key ISM data and NFP on Friday. The pound was the top performer last week while the New Zealand dollar lagged. Early on Monday the China Caixin PMI rose to the highest since 2011. US manufacturing ISM is due next. Here is another look at those August seasonals. 

The area around Melbourne, Australia moved into a phase 4 lockdown on the weekend that includes 8 pm curfews and no leaving the house except for essentials. It comes after officials revealed 760 virus cases in the region where they don't know the source of infection. The new rules will last for six weeks.

The Philippines also put on stronger restrictions in Manila and nearby provinces with cases spiking. There is backsliding elsewhere on the virus as well so this could be a preview of what's to come. There's increasingly clear evidence that shortly after restrictions are eased, cases begin to pickup. That paints a back-and-forth picture of the recovery rather than the V-shaped rebound some called for.

The economy will be a big focus in the week ahead with US non-farm payrolls coming Friday. The consensus has been sliding from +2m and now sits at +1.578m. Goldman Sachs was out with a notable weekend call, saying its real-time metrics suggest 1m jobs lost.

In China, however, the picture is better as officials aggressive clamp down on outbreaks. The better-than-expected PMI Monday is a reminder that it was massive Chinese stimulus that dragged the global economy out of the rut in 2009.

Note that after the big runup in Chinese equities to start July the market has consolidated and may have carved out a double bottom.

Although economic data will be important this week, it will be overshadowed by US government stimulus negotiations. The only thing both parties can agree on so far is another $1200 cheque. The longer the stalemate goes on without a sign of progress, the more likely markets are to sour. Keep a close eye on 10-year yields and a potential break of 0.53%.

 

Consolidation in major indices remain the name of the game, while USD is mixed against the major currencies. Silver, gold and the Aussie are the strongest and JPY, Aussie and kiwi are the weakest. (see the chart below for the July performance of major FX and metals vs USD). The dollar continued its slump Thursday but nearby extremes in FX and other markets can't be ignored. Thursday's Premium trade wasted little time to enter +140-pip gain and is in progress.  Wishing you a Eid Adha Mubarak and best of blessing, peace and prosperity. 

US GDP fell a record 32.9% on an annualized basis in Q2 but as we warned yesterday, that was slightly better than the 34.5% consensus. Initial jobless claims were close to the consensus but remain stubbornly high at 1434K. Continuing claims also missed the 16.2m consensus with a rise to 17.0m. That comes with emergency unemployment benefits set to run out today.

Congress may be shifting towards a short-term extension of those benefits and that's something to watch in the day ahead.

Another thing to watch is the turn of the calendar. August is a poor month for risk trades historically (meaning indices usually selloff); it's the weakest month over the past decade for the S&P 500 and Nikkei. It's also a strong one for bonds (that's negative for yields). US 5-year rates hit a record low Thursday and 10s are now flirting with the April low. It's held a number of times since the pandemic and a break below 0.54% would pave the way to return to the March sell-everything low of 0.30%.

With the weak risk averse tone, it's no surprise that August is a negative month for the commodity currencies. It's the softest for AUD/USD and NZD/USD second-softest for the loonie. The Australian dollar has easily been the best performer since mid-March, up more than 17%. Be wary of a pause or worse.

Another strong seasonal trend is in sterling where it's the second-weakest month in GBP/USD and the strongest month for EUR/GBP. Cable has been on a sparking run to 1.31 but there is some resistance at the 1.32 and that will be a tough test after the one-way trip from 1.25.

 

The US dollar drop intensified Wednesday with Powell reiterating a dovish stance. The euro continued its run and was the top performer while USD lagged, but today, GBP is the only gainer vs USD as the greenback gets some month-end relief. The first look at second quarter US GDP on Thursday will show the largest contraction on record. A new Premium trade shall be issued ahead of the US session. 

The largest kneejerk reaction to the FOMC decision was on Powell warning that the pace of improvement in high-frequency indicators had slowed. That sparked a momentary drop in risk trades and a recovery in the US dollar.

The other message was a strong reiteration of what we've heard before: That the Fed is prepared to do whatever is in its power to stimulate the economy during the pandemic. What was missing was anything specific about what that might entail.

Looking ahead, Fed watchers will await how the central bank uses forward guidance using inflation or unemployment.

In terms of overall price action, the trend was towards more US dollar weakness. USD/CHF hit a five year low after the eighth straight day of declines. The euro has made another one-year high as it touched above 1.18.

The main risk for the US dollar in the day ahead is the Q2 GDP report. The consensus is for an astounding -34.8% with estimates ranging from -25.0% to -40.0%. Risks are a touch to the positive side because the advance trade balance was surprisingly strong on Wednesday.

Wednesday's FOMC meeting comes with little fanfare and even less scope for action but it's a opportunity for Powell to lay out the evolution of the economy, and what's left in the playbook. CHF, EUR and GBP are the outperformers, while silver, kiwi and gold are the weakest of the day. Watch what Powell will say about inflation, its targetting and the USD. US consumer confident painted a troubling picture. The Pre-Fed Premium English & Arabic Video for Premium susbcribers is found below

Also watch how Powell answers questions on the US dollar -- as Ashraf alluded to below. 

There are increasing signs of a retrenchment in the US economy. Another came Tuesday with consumer confident falling to 92.6 from 98.3. Economists were forecasting 95.0 but the miss was probably priced into markets after a similar miss in the University of Michigan. The drop in the 'expectations' component was particularly worrisome as it dipped to 91.5 from 106.1. It's one of the better leading indicators and is now only modestly above the pandemic low of 86.

The change in tone isn't an aberration. There are an increasing number of high-frequency indicators that show a flattening in activity, if not backtracking. In terms of that data, the Fed has access to some of the best numbers available.

The market is hungry for that kind of analysis and the risk is that the statement or Powell's comments indicate a souring of the outlook. If so, the market could recoil unless it's accompanied by strong reassurances the Fed is willing to do more. The danger is that vague hints of more action won't be enough for a market that's going to want more than forward guidance or yield curve control.

With all that, the Fed may end up deferring to Congress and the need for fiscal support.

Another main axis for the decision will be the response of precious metals. The recent run-up is in danger of a retracement if the Fed isn't explicit enough about plans to do more. The decision is at 1800 GMT followed by Powell's press conference 30 minutes later.