What does the Switch to Average Inflation Lead to?

Fundamentals are re-exerting themselves again. This will drive the price of hard assets higher and the USD will weaken over time.

Published in

TRACKRECORD DAILY

7 min readAug 31, 2020

With the dust from the Powell’s speech at the Jackson Hole symposium on Thursday settling, the fundamentals are re-exerting themselves. As we said, a switch to average inflation targeting will drive the price of hard assets higher and the USD will weaken over time.

If you are unfamiliar with what I’m going to say next, it means you haven’t been paying attention. Stick to the path. The gift that keeps on giving will keep on giving.

TRADING PLAN

Gold & Silver — Looks like the grind higher has resumed. Keep to the path
AUD -

AUD/USD — Broken above .7250–60 decisively and that is now the new support. Keep long

AUD/NZD — Back to near term support at 1.0880–90, location to add to longs.

3. EUR/JPY — Came off the top end of recent range of 124.40–50 to 126.40–50 and now in the middle of the range. Near term support at 12500–10 is a good place to buy back some of what we sold at the top end of the range.

Key risk remains higher US yields leading to a stronger USD. Weekend risk over, the new week is starting with the trend of USD weakness especially against precious metals and AUD looking strong.

WHAT HAPPENED YESTERDAY

Market Movements as of New York Close 28 Aug 2020

U.S. Personal income increased 0.4% m/m in July (consensus -0.2%), which was much better than expected, and personal spending rose 1.9% m/m (consensus +1.5%), which was also much better than expected. The PCE Price Index and core-PCE Price Index both increased 0.3% m/m and were weaker than expected increases of 0.4% and 0.5%, respectively. That left the PCE Price Index up 1.0% yr/yr, versus 0.9% in June, and the core PCE Price Index up 1.3% yr/yr, versus 1.1% in June. The income gain was driven by an increase in compensation (+1.3% m/m), which more than offset a 1.7% m/m decrease in personal current transfer receipts. In other words, the income gain was driven by people returning to work as the economy reopened.
The final University of Michigan Index of Consumer Sentiment for August ticked up to 74.1 (consensus 72.8) from the preliminary reading of 72.8. The final reading for July was 72.5. Consumer sentiment has been slow to rebound and that the incremental improvement seen has been based simply on the view that things couldn’t get worse than they were at the depths of the shutdown period. The Chicago PMI for August decreased to 51.2 from 51.9 in July.
Dollar fell on Friday as the Fed’s new policy framework suggested that interest rates would remain low for a very long time to come, while the JPY surged after Japanese Prime Minister Shinzo Abe announced his resignation. The JPY significantly strengthened against the Dollar after the news that Abe, Japan’s longest-serving prime minister, would step down due to worsening health. Concerns about a possible shift away from Abe’s expansionary economic policy, known as Abenomics, which generally tries to weaken the JPY drove the move in the safe-haven currency. However, as Abe will be staying to choose his successor, a drastic policy change is unlikely. BoJ has since reassured the markets that their policy will be unchanged after Abe’s departure.
In the tech space, Workday (WDAY 243.88, +27.25, +12.6%), HP Inc. (HPQ 19.85, +1.15, +6.2%), Dell (DELL 66.21, +3.78, +6.1%), and VMware (VMW 146.09, +3.19, +2.2%) stood out as earnings winners. Semiconductor stocks also chipped in a solid outing, evident by the 2.0% increase in the Philadelphia Semiconductor Index.
India on Sunday reported the biggest single-day jump (India’s 78,761 cases exceeded the 77,299 recorded in the United States on July 16) in coronavirus infections, as the epicentre shifts to the south Asian giant. Despite the surging case numbers, Prime Minister Narendra Modi has been pushing for a return to normalcy to lessen the economic pain of the pandemic, having earlier imposed strict lockdowns of the country’s 1.3 billion people. The subway will start running on Sept. 7 for the first time since March, when India imposed the world’s strictest lockdown.

HEADLINES:

WHITE HOUSE SUGGESTS $1.3 TRILLION AID BILL; PELOSI SAYS NOT ENOUGH

Trump is willing to sign a $1.3 trillion coronavirus relief bill, a top aide said on Friday, but Democratic House of Representatives Speaker Nancy Pelosi said the sum was not enough to meet the needs of the American people.

Trump said later that Pelosi was only interested in bailing out states run by Democrats, casting doubt on chances of reviving stalled talks for another round of fiscal stimulus. The new figure was put forward by White House Chief of Staff Mark Meadows, marking a $300 billion increase from an initial $1 trillion offer from the White House and Senate Republicans.

Pelosi said on Thursday after a 25-minute phone call with Meadows that Democrats were willing to go down to $2.2 trillion and demanded that the Trump administration accept that figure before negotiations could resume.

The $1.3 trillion has been offered in private, Meadows said. Negotiations have involved Pelosi, Meadows, Treasury Secretary Steven Mnuchin and Senate Democratic leader Chuck Schumer.

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

“Either Congress passes the bill, or the markets will force it out of their hands via a selloff. We maintain that any meaningful retracements (approx -10%) in Nasdaq can be bought.” — 9th Aug 2020

CHINA’S NEW TECH EXPORT CONTROLS COULD GIVE BEIJING A SAY ON TikTok SALE

China’s new rules around tech exports mean ByteDance’s sale of TikTok’s U.S. operations could need Beijing’s approval, a Chinese trade expert told state media, a requirement that would complicate the forced and politically charged divestment.

ByteDance has been ordered by Trump to divest short video app TikTok — which is challenging the order — in the United States amid security concerns over the personal data it handles.

However, China late on Friday revised a list of technologies that are banned or restricted for export for the first time in 12 years and Cui Fan, a professor of international trade at the University of International Business and Economics in Beijing, said the changes would apply to TikTok.

It can take up to 30 days to obtain preliminary approval to export the technology.

TikTok’s secret weapon is believed to be its recommendation engine that keeps users glued to their screens. This engine, or algorithm, powers TikTok’s “For You” page, which recommends the next video to watch based on an analysis of your behaviour.

China’s foreign ministry has said that it opposes the executive orders Trump has placed on TikTok and that Beijing will defend the legitimate rights and interests of Chinese businesses.

PM ABE’S RESIGNATION, WHAT’S NEXT?

The abrupt resignation of Japan’s longest-serving prime minister, Shinzo Abe, triggered an election in his Liberal Democratic Party (LDP) to replace him as its president, followed by a vote in parliament to elect a new prime minister.

Abe and his cabinet will run the government until a new premier is elected but will not be able to adopt new policies. The winner of the party election will hold the post until the end of Abe’s LDP term in September 2021.

The new party president is virtually assured the premiership, since the LDP has a majority in parliament’s lower house.

The LDP will hold a slimmed-down election to avoid a political vacuum, aiming for a vote around Sept. 13–15, public broadcaster NHK said on Sunday.

DAY AHEAD

Busy Week For AUD

As a possible fiscal cliff looms in the United States, the August nonfarm payrolls report will be a crucial test for the strength of the economic recovery, making it the highlight of a relatively busier week as summer draws to an end. Canadian employment figures are also on the agenda, while the latest PMIs out of China will be important for market sentiment. But it is the AUD that could see the most crossfire out of the major currencies as, apart from a policy meeting by the Reserve Bank of Australia,(Tuesday) there will be a flurry of data releases.