TRACKRECORD DAILY
Published in

TRACKRECORD DAILY

The Fed & Its 2% Inflation Target

The Federal Reserve may soon unveil plans to allow for inflation to stay longer above 2% to get average inflation closer to the 2% target.

Tech stocks stayed strong, but Gold and Silver stole the show with an aggressive move higher as the market gets word that the Federal Reserve may soon unveil plans to allow for inflation to stay longer above 2% to get average inflation closer to the 2% target. As we pointed out before, this is extremely important because doing so will mean rates will be kept lower even when inflation forecasts start to creep higher. Hard assets such as Gold trade higher when real yields (Interest rate minus inflation) goes down, so higher inflation leads to higher Gold!

Fundamentals and technicals are aligned. Stay on the path!

WHAT HAPPENED YESTERDAY

As of New York Close 4 Aug 2020,

MARKET MOVEMENTS

  • Dollar edged lower in choppy trade against a basket of currencies on Tuesday, choking off a recent rally fuelled by Dollar bears taking profits on short positions, while investors waited in vain for results from talks in Washington on the next round of coronavirus relief.
  • Australia’s central bank left its cash rate at a record low of 0.25% on Tuesday, a widely expected decision as it has ruled out further easing for the moment amid much economic uncertainty. The RBA also reiterated that the COVID-19 economic downturn had not been as severe as first feared, but cautioned the new lockdown in Victoria state would have a major impact on growth. The tone was more upbeat than expected, leading to a recovery in the AUD.
  • U.S. Factory Orders report for June, which increased 6.2% m/m (5.2%) following a downwardly revised 7.7% increase (from 8.0%) in May. The key takeaway from the report is the affirmation that business spending picked up in June as economies reopened, evidenced by a 3.4% increase in new orders for nondefense capital goods excluding aircraft that was up slightly from the 3.3% increase noted in the Advance Durable Goods Orders report.
  • Within the tech space, Microsoft (MSFT 213.29, -3.25, -1.5%) cooled off from yesterday’s TikTok-driven rally, while Advanced Micro Devices (AMD 85.04, +7.37) surged 9.5% intraday to fresh record highs. AMD shot higher after Jefferies raised its price target on the stock to $95 from $86 on a view that it will capitalize on Intel’s (INTC 49.13, +0.83, +1.7%) production issues.

HEADLINES:

WHITE HOUSE SEEKS DEAL THIS WEEK WITH CONGRESSIONAL DEMOCRATS ON VIRUS BILL

White House negotiators on Tuesday vowed to work “around the clock” with congressional Democrats to try to reach a deal on coronavirus relief by the end of this week, as the pandemic takes a heavy toll on American life.

Following an afternoon meeting of the four main negotiators, Treasury Secretary Steven Mnuchin raised the possibility of a deal by week’s end, which could clear the way for votes in the Senate and House of Representatives.

Mnuchin said negotiators would now “work around the clock” and have set a timeline “so that the legislation can be then passed next week” if a tentative deal is in hand. But Mnuchin warned that “we’re not going anywhere close” to the $3.4 trillion that Democrats have been seeking. He did not elaborate.

“Do we believe that we can get the kind of bold, strong bill that America needs? We do,” Senate Democratic Leader Chuck Schumer said in his most upbeat assessment yet.

Thematic Context: “We can move very quickly with the Democrats on these issues. We’ve moved quickly before, and I see no reason why we can’t move quickly again,” Mnuchin said. “And if there are issues that take longer, we’ll deal with those as well.” — 27th July 2020

“ We believe Mnuchin, and this impasse is a movie we have seen before. A deal will come, or the markets will force it out of their hands. Any dips in the Nasdaq is a gift to be bought.” — 3rd Aug 2020

TRUMP SOWS CONFUSION WITH TWEET URGING ‘VOTE BY MAIL’ IN FLORIDA

After weeks of railing against what he has claimed are the potential risks of voting by mail, Trump on Tuesday urged voters in at least one Republican state — Florida — to vote by any means.

Trump, who is trailing presumptive Democratic nominee Joe Biden in polls, has repeatedly warned in recent weeks without evidence that mail-in voting could result in widespread fraud.

“Whether you call it Vote by Mail or Absentee Voting, in Florida the election system is Safe and Secure, Tried and True. Florida’s Voting system has been cleaned up (we defeated Democrats attempts at change), so in Florida I encourage all to request a Ballot & Vote by Mail! #MAGA,” Trump wrote.

AUSTRALIAN PM SAYS BUILDING INDO-PACIFIC ALLIANCE WILL BE ‘CRITICAL PRIORITY’

Australia Prime Minister Scott Morrison said on Wednesday that building an Indo-Pacific alliance with like-minded nations will be a “critical priority” for his government, warning the pace of militarisation in the region was unprecedented.

Australia last month said it would boost defence spending by 40% over the next 10 years, buying long-range military equipment that will be focused on the Indo-Pacific region, where both Beijing and Canberra are competing for influence.

Diplomatic tension between China and Australia has worsened recently over issues including an Australian call for an international inquiry into the origin of the coronavirus, and debate about China’s new national security law in Hong Kong.

Morrison said on Wednesday China’s rise as a major economic partner has been good for the global economy, Indo-Pacific region and Australia, “but with economic rise comes responsibility”.

Thematic Context: “As the old adage goes, “the enemy of my enemy is my friend”, in an increasingly polarized world caught in a Thucydides trap (US vs China) which could possibly split the world monetary order into two hegemonic zones, Pro-china aligning with One Belt One Road initiative (commodities priced in RMB) and Pro-U.S. aligning with Blue Dot Programme (commodities priced in USD), we can identify the aligned factions via the existing and forming ideologies (i.e. Pro-U.S. = U.S., Australia, India, UK, Brazil, Japan and Israel, Pro-China = China, Africa, Russia, Central Asia, Iran). — 4th June 2020

FED IS EXPECTED TO MAKE A MAJOR COMMITMENT TO RAMPING UP INFLATION SOON

In the next few months, the Fed will be solidifying a policy outline that would commit it to low rates for years as it pursues an agenda of higher inflation and a return to the full employment picture that vanished as the coronavirus pandemic hit.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

One implication is that the Fed would be slower to tighten policy when it sees inflation rising. In recent days, Fed regional Presidents Robert Kaplan of Dallas and Charles Evans of Chicago have expressed varying levels of support for enhanced guidance. Evans in particular said he would like to keep rates where they are until inflation gets up around 2.5%, which it has not been for most of the past decade.

DAY AHEAD

  1. No Key Data Prints
  • There are no key data prints on today’s economic calendar. U.S. stimulus talks and the virus situation will drive the markets.

TRADING PLAN

  1. AUD is back to its old ways of grinding higher. 0.7180 level is a good level to reduce some longs to allow room to buy the dips should any appear.
  2. Gold & Silver exploded higher. Volatility is increasing again but this is to be expected. Stay on the path.

SENTIMENT

FX

STOCK INDICES

Trading Tip (Click Pic for the full tip)

Want more analysis and trade ideas? Subscribe to the mailing list.

--

--

--

Our market summary condenses the most important market events into a short read.

Recommended from Medium

Why All Signs Point To Real Estate

Inflation Fears are Overblown and the Stock Market will be fine (Probably)

The World Economic Soap Opera Just Goes On And On

Why is Mild Risk Aversion taking hold?

The World Economic Soap Opera Just Goes On And On

“Buy the Dip” is back in fashion

Why is the takeup of energy efficiency programs so low?

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
TrackRecord Trading

TrackRecord Trading

Bringing Wall Street to Main Street

More from Medium

Airline Stocks Surged To All-Time Highs When Oil Was Trading Above $100/Barrel

Will the market continue to rise?

Yield Curve Inversion: Time to Panic?

If witnessing an avalanche was only as common as watching the sun-set.