Global Markets Review: Dow Dumps Exxon and Fed Targets Inflation

Japan PM Abe resigns; Nasdaq marches on


Federal Reserve Chair Jerome Powell revised the central bank's policy framework when he signaled the adoption of "Average Inflation Targeting." The Dow Jones Industrial Average (DJIA) had to reconfigure its components due in large part to Apple Inc.'s (AAPL) four-for-one stock split. Japan's Prime Minister Shinzo Abe resigned, citing health reasons, although he intimated that he will serve out his term, which ends in September 2021. Global indices continued to advance as U.S and Chinese officials tried to reassure markets that the trade deal will be implemented.

Key Takeaways

  • In adopting "Average Inflation Targeting," the Fed has made being dovish an official policy.
  • Exxon Mobil Corporation (XOM), the longest-tenured Dow component and the most valuable U.S. publicly traded company as late as 2014, was booted from the DJIA.
  • The New Zealand dollar (NZD) was the week's best performing currency, while the U.S. dollar (USD) was the worst.

Key Economic Events (last week)

  • (New Zealand) Retail Sales – Second quarter retail sales fell by 14.6%, which was better than market expectations of -16.3% but still registered as the largest drop since the series began in 1995. Moreover, last quarter's figure was also revised lower as lockdowns triggered by COVID-19 severely dented demand.
  • (U.S.) Conference Board Consumer Confidence Consumer confidence posted a reading of 84.8 in August, which is lower than forecasts of 93, and July's figure was revised lower to 91.7 as well. This survey of about 3,000 households is especially relevant now as it asks respondents to rate current (Present Situation Index) and future (Expectations Index) overall economic conditions. The Present Situation Index fell 84.2, sharply lower than July's reading of 95.9, while the Expectations Index declined to 85.2 from last month's reading of 88.9.
  • (U.S.) Durable Goods Orders – The durable goods orders headline figure came in at 11.2%, much higher than the 4.4% that analysts were expecting, and last month's numbers were also revised higher. The core data, which excludes transportation items, posted a reading of 2.4%, beating expectations of 1.9%, even as July was revised higher. However, optimism was tempered a bit as the rate of order growth slowed from the prior month, further adding to concerns that the rebound was slowing down.  
  • (Australia) Private Capital Expenditure (quarterly) – Second quarter capital expenditure (capex) spending fell by 5.9%, which was not as weak as market forecasts of -8.2%, although first quarter data was revised lower to -2.1%.
  • (U.S.) Preliminary GDP (quarterly) – Preliminary gross domestic product (GDP) fell by 31.7%, which was better than both consensus forecasts of -32.5% and the earlier released Advanced GDP figure of -32.9%.
  • (U.S.) Unemployment Claims (weekly)Unemployment claims rose by 1.106 million, which exceeded forecasts of 1 million. This marks 22 out of 23 weeks in which this key metric of the labor market has topped the 1 million mark.
  •  (U.S.) Fed Chair Powell Speech – Federal Reserve Chair Jerome Powell, in his highly anticipated (virtual) Jackson Hole speech, announced that the Fed will adopt the strategy of "Average Inflation Targeting" going forward.
  • (Canada) GDP (monthly) – This monthly indicator of economic activity posted a reading of 6.5%, beating analyst forecasts of 5.2%. This marks the second consecutive month in which Canada's economy grew more than expected.
  • (U.S.) Core PCE Price Index – The personal consumption expenditures (PCE) price index for July came in at 0.3%, lower than forecasts of 0.5%, although last month's figure was revised up to 0.3%.
  • (U.S.) Personal Spending – Consumer spending, which accounts for about 67% of U.S. economic activity, rose 1.9%, which was better than the 1.5% that was forecast. Last month's figure was revised higher to 6.2% as well.
  • (U.S.) Chicago PMI – A survey of 200 purchasing managers in the Chicago area posted a reading of 51.2, which was both in line with expectations and expansionary.

Global Markets Performance

Global markets performance graph
Global markets performance.
FX & Index Performance
Market Best             Worst
Index Nasdaq 100 S&P 500 China A50 Nifty 50 DOW 30 DAX 30 Russell 2000 Nikkei 225



Best Performer Worst Performer

The New Zealand dollar (NZD) was the best performing major last week, followed by the Australian dollar (AUD) and British pound (GBP), as these were the currencies that ended the week on a net positive note. Broad U.S. dollar (USD) weakness and the fact that New Zealand is perceived to be ahead of the curve in dealing with COVID-19 likely boosted the kiwi. The rest of the majors ended the week on a net negative basis, with the USD being the worst performer. It was followed by the Japanese yen (JPY), Canadian dollar (CAD), Swiss franc (CHF), and the euro (EUR).

The weekly Commitments of Traders (COT) report (published by the CFTC) shows that speculators continued to add to the record net long euro positioning while USD net shorts surged on the dovish Powell speech.

Global Indices

Best Performer Worst performer
Nasdaq 100 Nikkei 225

The technology-laden Nasdaq 100 was the top performing U.S. index again, while the Nikkei 225 was the worst, even though it ended the week higher, on news that Prime Minister Abe, who had been in power since 2012, was going to step down. This surprising decision caught the markets off guard, which resulted in a decline in Japanese stocks.

U.S. stock markets benefited from Powell's speech in which he confirmed market speculation that the central bank would revise its monetary policy framework in adopting "Average Inflation Targeting." In doing so, he might have given investors more reason to pile into equities given the clear implication that interest rates will stay lower, longer. "Average Inflation Targeting" means that the Fed will allow inflation to run above 2% for a period of time before it acts to contain it, especially if it has been below 2% for an extended period of time.

The Federal Reserve Board has been trying to inflate the U.S. economy to its previously stated benchmark of 2% since the 2008 financial crisis and has been unsuccessful in achieving it. Over the past few years, there have been calls for the Fed to revise its thinking and allow inflation to exceed the 2% benchmark before taking action. The thinking is that, if authorities are willing to let the economy run hotter for longer, it might spur economic activity to the point where it can actually get to 2%.

With the type of clarity that only hindsight can provide, it is apparent that the equity markets' sharp rebound from the March lows was aided greatly by the fact that investors seeking yield had no recourse but to buy stocks, and the Fed Chair essentially told them that this will be the case for some time to come. The takeaway for equity markets is that the Fed has made being dovish an official policy.

The DJIA made changes to its components brought on by Apple's four-for-one stock split. Of note, Exxon Mobil, the longest-tenured Dow component and the most valuable U.S. publicly traded company as late as 2014, was dumped. So too were Pfizer Inc. (PFE) and Raytheon Technologies Corporation (RTX). The newcomers are, inc. (CRM), Amgen Inc. (AMGN), and Honeywell International Inc. (HON).

Oil, Yields, and Gold

Crude oil (WTI) ended the week up 3.19% as the combination of a fifth consecutive weekly drop in U.S. crude inventories and hurricane Laura bearing down on the U.S. Gulf Coast gave the commodity a boost. U.S. 10-year and German bund yields ended the week higher as investors sought out riskier assets in search of yield. Gold ended the week higher by 1.3% as it consolidates after the sharp rise in August.

Key Economic Events (next week)

Date Time (EST) Event
August 31 9:45 PM (China) Caixin Manufacturing PMI
September 01 12:30 AM (Australia) RBA Monetary Policy
  9:30 AM (Canada) Manufacturing PMI
  10:00 AM (U.S.) ISM Manufacturing PMI
  9:30 PM (Australia) GDP (quarterly)
September 02 8:15 AM (U.S.) ADP Non-farm Employment change
September 03 8:30 AM (U.S.) Unemployment Claims (weekly)
  10:00 AM (U.S.) ISM Service PMI
September 04 8:30 AM (Canada) Employment
    (U.S.) Employment

Chart(s) of Interest – NZD/USD

Chart of NZD/USD (weekly)
NZD/USD (weekly).

NZD/USD's rise is targeting resistance zones between 0.6750 and 0.6790, which, if breached, would bring 0.6970 into focus. Support levels at 0.6488 and 0.6382 would need to be decisively pierced for bearish momentum to reassert itself.

Pivot Points and Fibonacci Retracement Levels

The pivot point is calculated from the previous trading periods' price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument's original move in price.

Pivot points and Fibonacci retracements
Pivot points and Fibonacci retracements.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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