Time now for a market overview from Macrowire.
The S&P 500, Russell 2000, and the NYC Composite index closing at fresh records yesterday.
And back to back July inflation prints in the US the past several days weighing on Fed rate hike odds with over 60% chance that the central bank now holds in September, at least for now.
As for the FX market, the US dollar index has seen a pullback along with rate hike expectations right now in New York morning trade.
We are looking at the index below the 100 level and the greenback is facing a Storm safe haven demand as well as rate differentials and US equity exceptionalism all at potential risk at the same time we are seeing low volatility with the COs safely hanging out in the safe zone.
Well joining us on this Friday morning to share copays macro insights is Karl Shimoda copay's chief market strategist.
Carl, good morning.
Thank you so much for joining us.
So I do.
To get your perspective on what we're seeing across the markets in particular FX, but first, let's start out with the US equity markets.
Now.
It goes without saying that speculators are still heavily crowded into dollar loans and carry trades are complacently expanding.
But given the fact that there's a lot going on in terms of rate differentials, what is your take on the stock market and record highs we're seeing here in the US?
Yeah, I think, uh, the, the stock markets are looking, uh, fairly choppy at this point.
Uh, we are seeing a little rebalancing happening under the, under the surface of the, of the markets as we roll into September.
Um, there is, you know, sort of a, a growing, uh, wariness of, uh, being sort of overcrowded into AI trades, um, and, you know, I think, I think what this is doing is sort of slowing the second derivative of the market.
It, it's not necessarily weighing on overall indices, but we are seeing that sort of momentum trade beginning to fade and a little bit of reallocation happening within investor portfolios outside the US as well.
Yes, and I do want to get your perspective on what we're seeing in terms of Fed fund futures because on the heels of that sluggish non-farm payrolls number as well as mostly in line inflation figures, we are digesting retail sales here in the US and of course.
We do get more earnings coming out at the end of this month, but at least for now we are looking at an over 60% chance that the Fed holds.
So how much of a shift in language from Petro wars would it take to actually trigger a repricing when it comes to currency markets?
Yeah, I think, you know, we are seeing again that sort of second derivative turning negative, right?
We have, uh, that negative payrolls print, the soft, uh, inflation data, um, you know, if we look at, uh control group retail sales, which was released this morning, um, at, you know, -0.4%, that's the worst number since January of 2025.
Um, and you're looking at economic surprise indices that are turning, you know, turning down quite sharply, and, and so, now.
The question is, does Kevin Warsh, you know, sort of ratify market views?
Does he come out and, you know, uh, give us more information on the Fed's reaction function?
Does he attempt to correct sort of that information vacuum that came out of the last two meetings?
Um, we don't know at this point.
It could be a non-event.
We could see Jackson Hole this year being, you know, a complete non-event, a snooze fest for traders, or alternatively, as you sort of mentioned there.
You know, we could see that volatility shock sort of unfolding and, and a big reappraisal of what the Fed's going to do in September, you know, coming out of that meeting.
And, and so what does all of that mean?
It, it does mean to me that implied volatility in equity markets, in the bond market, and across FX markets may be a little bit low here, um, and that we are a little, a little complacent going into the event risks that, uh, that are, that are set up to, to land in the next couple of weeks.
And Carl, while I have you here and while we're talking central banks, of course I do have to talk about the Bank of Japan.
So speculators are still heavily piled into dollar loans while chasing yield through carry trades in the lower yielding currencies.
So how high is the risk of a sudden unwind driven liquidation if positions do get squeezed?
Yeah, so right now we have, uh, you know, this, this expectation that the Bank of Japan is going to move very gradually, that it's going to potentially hike in September, but continue at that sort of six month pace of, of tightening policy.
Um, this is keeping rate differentials between, uh, the yen and the rest of the world, uh, very, very, very wide, um, and.
Leading to a resumption of carry trade flows.
So, you know, investors are borrowing in, in yen, they're investing in other currencies, uh, they're hoping to capitalize on the, on the, you know, wide rate gap.
Um, and, you know, what this, this exposes the market to is an unwind.
If we do see, you know, the, the Bank of Japan turning more hawkish, if we see intervention efforts, um, By Japan and the US, um, really taking hold, um, or we see a shock to, you know, global markets, we could see that unwind really quickly.
And, and so, you know, I think this is another factor that, that, uh, investors should be watching as they look at this sort of, you know, very stable, very calm, uh, market backdrop that we see across global markets right now.
And finally, Carl, before I let you go, we have about 60 seconds here.
So where do you stand when it comes to US exceptionalism?
Yeah, I think it's fading.
I think, you know, the three sort of pillars that were supporting the dollar, um, over the last couple of months are beginning to sort of, you know, erode all at once.
Uh, the positive rate differentials, uh, that were, you know, in existence between the dollar and other currencies are beginning to, to fade.
Um, we have headline fatigue sort of kicking in, um, as, you know, the Strait of Hormuz remains blocked, but energy prices don't move that much.
Um, and at the same time, you know, the, the case for, uh, investing in US markets as opposed to other markets is beginning to, you know, go, go into, into reverse here a little bit as other markets begin to outperform, right?
If we look at the last 18 months, markets outside the US have outperformed the US and, and so, there's a very good case right now for diversifying out of the dollar, um, and rebalancing a little bit as you go into September.
Well, Carl, well, we will have to leave it there for today, but I appreciate your time.
Thank you so much for joining us on this Friday morning and thank you so much for your perspectives.
For sure, thank you.
