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MARKETS

Well, there’s never a dull moment in the market, especially on Fed Day, which just happened to coincide with month-end rebalancing—and what a month-end melt-up it was! Investors staged a dynamic rebound amid a rally in beaten-down chipmakers, with the latest economic data bolstering bets that the Federal Reserve will signal a rate cut in September. Private sector payrolls played nice with the Fed, and the Employment Cost Index came in a tad softer than consensus, setting the stage for Chair Powell’s much-anticipated post-FOMC forward guidance.

My very early morning (2 AM) coffee read suggests that the Fed remains data-dependent, as always. However, it now appears that the ‘more good data’ bar isn’t as high as before, particularly with labour market developments rolling over.

Sure, there's a lot of economic wood to chop between now and September 18, but the main takeaway is that with the rates market knocking on September’s rate cut door, investors are all in for a slice-and-dice affair at the next Fed confab. The market’s propensity for future rate cuts will be inversely related to the intensity of the economic "wood chop." In other words, if the data plays ball with the Fed, we could be in for a rate cut bonanza that will surely avoid the dreaded lump of coal in the holiday stocking.

Still, many are left scratching their heads, wondering why the restrictive policy is still warranted if the labour market’s back in equilibrium and inflation pressures are cooling. That’s a story to be revisited with tomorrow’s NFP, which could start the catcalls for a 50 bp trim in September. But let’s be objective here: if the Fed ushers in a surprise cut or signals a more aggressive rate cut trajectory than the current centrist market debate, it might signal a case of "what doomsday economic prophecy does the Fed know that we don’t?"

To what degree politics is holding the Fed back is simply a question I can't answer at this stage, but it's definitely part of the equation. So, while we keep an eye on the data, let's hope the economic reports align and pave the way for a merry rate-cut season.

The interplay and steady relationship between stocks and rates lies at the heart of today's market moves. According to the modern-day stock market operator playbook, the lower bond yields go, the higher tech stocks seemingly move. Helping those big boys along today, Nvidia Corp (NVDA). surged 12% after being renamed the top US chip pick by Morgan Stanley analysts, perhaps convincing some investors that the company's lofty spending on AI will pay off in spades.

Back to the real world: Gold, Oil, and the Yen are rallying as the Middle East powder keg erupts yet again after the assassination of Hamas leader Ismail Haniyeh in Iran, allegedly from an Israeli missile strike. This serves as a stark reminder that the world is not a safe place as the oil market and cross-asset traders brace for the next retaliatory flash point.

So, while we celebrate the market’s temporary bounce, let’s not forget the underlying volatility and geopolitical tensions that keep us all on our toes. And remember, even the most thrilling rollercoasters have their ups and downs—hold on tight!

FOREX

The Bank of Japan raised its benchmark rate to around 0.25% and announced plans to reduce bond buying, underscoring Governor Kazuo Ueda’s determination to normalize policy. Despite months of speculation, this move was a bit of a surprise to a market that had pegged the chances at a mere 50-50.

On my first take, I misread the crowd trade, thinking that 152 would hold. However, I trust most savvy traders had some USD/JPY plunge protection in place, as the market quickly priced in a more hawkish BoJ stance following Governor Ueda’s presser. A rapid descent for USD/JPY followed, reinforcing FX trader rule number one: never fade a central bank surprise.

Although I’ve been fairly critical of Ueda in the past, I must admit this move was a central banking masterpiece. The BoJ managed not to shock the market or out-hawk expectations over the top—a delicate balance indeed. It's been a straightforward currency move so far, which is good news on many levels. Most notably, it allows the BoJ to have their cake and eat it, too.

Even if the USD/JPY remains supported by speculative longs, the picture is becoming more favourable for the JPY. The drop in US front-end yields and a nudge higher in TONA make a shift back to the 155+ USD/JPY zone unlikely. Short-term momentum traders are now positioning for the coup de grâce, or in simpler terms, ready to stick a fork in USD/JPY, hoping some gnarly stops are placed lower.

Thankfully, with dovish Fed overtones, we’re not dealing with my Bermuda Triangle trade or the negative convexity feedback loop. It seems many in the carry trade realm saw the writing on the wall and either headed for the hills or hedged their +150 USD/JPY break-even carry trades.

While I think I will stick with the plunge protection trades—long JPY and long gold— are now an all-weather solid strategy, I'm still mulling over a few other trades. But with the BoJ done and dusted, that's a wrap, folks. As the dog days of summer begin, I honestly couldn't care less about the NFP. It's finally time to return to holiday mode after a July interruption that was well worth it. I'll update the weekend blog but'll be back in full swing after US Labor Day in early September.

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