July Market Recap: Short USD Assets!

A major event "Golden September" is coming. At the beginning of the month, the intensive small data directly knocked down the dollar assets before the non-farm payroll, exposing the fragile sentiment of the global market. It seems that everyone is doing the same thing as in July - shorting dollar assets.

What happened?

1. The U.S. Fundamentals are not "Seeing the Light"

• Manufacturing PMI: The final value of the August Markit Manufacturing PMI and the August ISM Manufacturing PMI released on Tuesday were slightly lower, but this slight decline boosted the sentiment reversal of U.S. stocks. That night, the S&P fell by more than 2% and the Nasdaq fell by more than 3%. After the data was released, the 2-year U.S. bond yield fell by 3 basis points, with a single-day decline of 7 basis points.

• JOLTS: Normally, JOLTS data, which is released with a one-month delay, is already lagging behind, so the impact of past JOLTS data on the market has been relatively small. However, the July data this year was really bad, with a significant drop in job vacancies, the job vacancy-to-unemployment ratio hitting a 3-year low, voluntary quit rate approaching a low since 2020, and layoffs reaching a 17-month high. Even the non-cyclical sectors such as healthcare and government that have been supporting the U.S. job market are starting to show poor performance.

Figure 1: U.S. JOLTS Job Vacancies

• Beige Book: The August Beige Book showed that the number of U.S. regions with stable or declining economies increased from 5 in July to 9. Consumer spending slowed down in most regions, manufacturing declined, and home sales were weak. Under the pressure from JOLTS and the Beige Book, the 1-year SOFR overnight rate plummeted by 12 basis points, and the market's pricing for a 50 basis point rate cut by the Fed in September surged again.

• ADP: The expected value for August ADP was 145,000, but the actual value was 99,000, indicating a pessimistic outlook for private sector employment.

• Services PMI: The final values of the August Markit Services PMI and the August ISM Non-Manufacturing PMI were slightly better. The service industry is truly the last pillar supporting the U.S. economy. If the service industry cools down one day, the U.S. may be facing a hard landing...

2. Renewed Panic in U.S. Stocks

As mentioned earlier, after the emotional recovery in August, the market seems to have the urgent intention to sell off U.S. stocks again. The sharp drop in U.S. stocks on September 3rd led to the VIX index rising above 20 again, while all three major stock indices seem to have a "M-top" pattern indicating a possible peak and pullback. The negative sentiment in U.S. stocks has also spread to European and Japanese stocks, and the Australian dollar, which is most affected by global stock markets, has shown significant declines in both direct and cross rates

2. VIX Index Rises Again

3. S&P 500 Index Daily Chart Shows "M Top" Pattern

3. U.S. Bonds and Dollar Index Revisit July Trajectory

The U.S. Dollar Index, which failed to break above 102, has retraced to the 101 level in recent days under various pressures from minor data. The U.S. bond market is similar, with the 1-year SOFR dropping to a low of 4.05% yesterday, approaching the lowest level since early August after the non-farm payroll announcement. Therefore, from the recent trend, market sentiment remains fragile. While the U.S. Dollar Index appears to have bottomed out and rebounded in the last week of August, any negative data could trigger enthusiastic trading once again for a 50 basis point rate cut in September, regardless of how insignificant the data may seem.

4. DXY Technicals Still in a Downtrend Channel

Next, will the U.S. Dollar Index and U.S. bond yields hold the previous lows or set new lows? The August non-farm payroll data will reveal the key direction for the next trend, with the outcome to be revealed tonight at 20:30.

Author: Zhang Haoyu, Source: Morning Market, Original Title: "Fragile Market"