August Service ISM Surged, Heating up Concerns Over Inflation
The Institute for Supply Management released the ISM services index for August, which showed a recovery in business activity. The index unexpectedly rose to 54.5 from market expectations of 52.5, up from 52.7 in July and reaching a six-month peak.
From the analysis of the service industry portfolio, as many as 13 of the 18 industries surveyed by the ISM non-manufacturing industry have increased.
Industries such as catering and accommodation, real estate leasing, construction, retail, transportation and warehousing have shown steady expansion of new order demand and willingness to recruit.
The service industry data was better than expected, driving up treasury yields, meanwhile, putting pressure on stock markets. The three major U.S. stock indexes all ended in decline.
The ISM Non-Manufacturing Index profile
The ISM Non-Manufacturing Index is a comprehensive indicator that tracks non-manufacturing activities such as employment trends, prices, new orders and other sub-items.
The index takes 50 as the critical point. If the index is at 50, it means that the economy of this month remains unchanged from the previous month; if the index is above 50 for several consecutive months, it indicates that non-manufacturing activities are expanding and prices are rising, implying that the overall economy is in expanding state.
On the contrary, when the index is below the 50 level, it means that the overall economy is in a state of contraction.
(Service PMI, Institute for Supply Management ISM)
Conclusion
The August ISM services index report has introduced a level of unpredictability and excitement to the financial landscape. It’s not just a data report; it’s a narrative, a story with twists and turns that continue to unfold.
To stay updated on this ever-evolving economic drama and gain access to expert analysis, make sure to follow our platform closely. We offer the key to unraveling the complex world of finance and economics, providing you with a structured approach to understanding the latest developments.
Disclaimer
Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Written on September 7, 2023 at 9:33 am, by mervin
Comments Off on August ISM Surprise: A Perspective On Economic Fireworks
Fundamentally, yesterday the United States released ISM data on the service industry, just like the market outlook shared on Monday. The Fed is currently looking for data support. Consumption is one of the three economic carriages in the United States. The good performance of the ISM service industry PMI will greatly stimulate the bullish trend of the US dollar. The PMI data unexpectedly strengthened in August to 54.5, reflecting sustained strength in consumer demand and the overall economy and strengthening hopes that the United States can avoid recession. It also brings potential signs that inflation will still rise, and the dollar will maintain a certain bullish trend until the data is digested this week.
Technically, the gold finally fell below the 33-day and 7-day moving average yesterday, and the market’s short trend is relatively clear.
(Daily chart of XAU/USD, source: Ultima Markets MT4)
The stochastic oscillator also sent a short signal, and the market on the daily chart has a probability of going back to the moving average lines during the Asian session.
(4-hour chart of XAU/USD, source: Ultima Markets MT4)
On the 4-hour chart, after the market peaked and fell below the neckline this week, the moving average lines subsequently made a dead cross which is kind of short signal. It is worth noting that the stochastic oscillator currently indicates that the market is about to bottom out, and there is a certain probability of rebound or consolidation.
(1-hour chart of XAU/USD, source: Ultima Markets MT4)
According to the pivot indicator in Ultima Markets MT4, the pivot of the day was 1919.46.
Bullish above 1919.46, the first target is 1923.54, and the second target is 1933.25
Bearish below 1919.46, the first target is 1909.75, the second target is 1905.56
Disclaimer
Comments, news, research, analysis, prices and other information contained in this article can only be regarded as general market information, provided only to help readers understand the market situation, and do not constitute investment advice. Ultima Markets will not be responsible for any damage or loss (including but not limited to any loss of profits) that may arise from the direct or indirect use or reliance on such information.
Written on September 7, 2023 at 9:20 am, by mervin
At last, the euro has shrugged off bad economic news and inflation has come under control. It might be the time for ECB to reconsider its tightening monetary policy . Investors will focus on whether the European Central Bank will pause interest rate hikes in September as expected.
(Inflation rates in the euro zone in the past year)
ECB’s Dilemma: To Hike or Not to Hike
The August PMI report due on Wed. is going to be in the spotlight. Forecasts show the manufacturing sector slumps further, and start to take a toll on services sector, endangering the euro zone economy.
With sluggish numbers, the ECB could take a break in September rate hike, however, the euro might receive a hit. Most economists believe the ECB will pause rate hikes in September but see room for an increase before the end of 2023 amid rising inflation.
Lagarde’s Utterances: A Market Barometer
Separately, at the Jackson Hole Global Central Bank Economic Symposium on Saturday, European Central Bank President Lagarde’s speech is going to be very important. Investors will look for clues from the review.
U.S. Economic Resilience
Based on data released in the past week, the US economy continued to maintain a strong momentum. Retail sales and manufacturing figures unexpectedly rose as residential numbers climbed. The strength of the U.S. dollar has caused the euro to remain in a downward trend.
(EUR/USD daily cycle, Ultima Markets MT4)
July 4th represents a turning point at present. If it is broken, the upward momentum will subside, leaving little hope for EUR/USD to stage a rebound.
Market Volatility: The Lagarde Effect
It is worth noting that the overall volatility of the euro against the US dollar has slowed down significantly. Both the overall volatility on the chart and the average level of the 200 -period ATR indicators are declining. As a result, Lagarde’s speech is going to shift the market volatility.
Conclusion
In conclusion, as we navigate the complex web of economic variables, ECB President Lagarde’s words loom large on the horizon.
The ECB’s delicate balancing act and the resilient U.S. economy have set the stage for a captivating narrative in the world of finance.
For investors and market participants, astutely decoding the signals emanating from these developments will be essential in making informed decisions.
Disclaimer
Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Japan announced the latest July core CPI annual rate excluding fresh foods rose 3.1% year-over-year, slightly down from 3.3% in the previous month.
The figure matched with the Bank of Japan’s expectation. The slowdown is linked to lower energy prices, especially data from the Tokyo region showing a slight deceleration in inflation.
(Japan’s inflation level in the past year)
A Cautious Approach by the Bank of Japan
The BOJ’s holding back on raising rates makes a sharp contrast to its peers. The Bank of Japan has taken steps to curb potential economic risks, including allowing long-term government bond yields to rise to 1%. However, the monetary policies have not prevented the yen from depreciation.
The USD/JPY Exchange Rate
The exchange rate of USD/JPY began to fall in the past two days but remained above the high of 145. Over time, Japan’s low rate could lead to capital outflows, putting downward pressure on the yen.
(USD/JPY daily cycle, Ultima Markets MT4)
External Factors at Play
The future of the yen is not solely determined by Japan’s economic policies. External factors, such as global crises or recessions, can play a crucial role in shaping the currency’s fate. A crisis or recession might deter further rate cuts, yet the strength of the U.S. economy reduces this possibility.
A Turning Point at 150
Although the Japanese government could intervene the yen’s depreciation, its long-term course might remain unchanged. 150 marks a turning point. If USD/JPY rises above it, the Bank of Japan is expected to step into the market.
The Ongoing Tug-of-War
In summary, Japan’s inflation levels and the state of the global economy continue to be key determinants in the yen’s value. Under the current circumstances, the Bank of Japan’s easing policy is likely to support the trend of yen depreciation.
However, it’s essential to remember that external factors can still bring about short-term changes in this delicate balance.
Disclaimer
Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Fundamentally speaking, Japan’s inflation has not declined, which increases the probability of the Bank of Japan’s future tightening policy. After a long-term depreciation, the yen has space for a short-term rebound. AUD/JPY has less room for arbitrage than USD/JPY. With strong USD, please watch out for AUD/JPY bear.
Technically speaking, the AUD/JPY daily stochastic oscillator shows a dead cross, falling below the 50 median line.
(Golden daily cycle, Ultima Markets MT4)
The exchange rate began to decline after falling below the 65- day moving average. It is worth noting that before the short-term moving average crosses again, the market has a high probability of touching the 240 -day moving average and rising again.
(AUD/JPY in 1 -hour period, Ultima Markets MT4)
In 1-hour period, the bearish trend is obvious, and the exchange has fallen below the 2400 -period moving average. However, there is a certain probability that it will find support and rebound there. You may wait for short entry here.
(AUD/JPY in 1 -hour period, Ultima Markets MT4)
According to the pivot indicator in Ultima Markets MT4, the central price is 93.489,
Bullish above 93.489, the first target is 93.759, and the second target 94.272.
Bearish below 93.489, the first target is 92.987, and the second target is 92.706.
Disclaimer Comments, news, research, analysis, price, and all information contained in the article only serve as general information for readers and do not suggest any advice. Ultima Markets has taken reasonable measures to provide up-to-date information, but cannot guarantee accuracy, and may modify without notice. Ultima Markets will not be responsible for any loss incurred due to the application of the information provided.
Let’s turn the clock back to the end of last year. At that time, most investors and economists predicted that the US economy would inevitably suffer a recession in 2023 because of the environment of high interest rates.
But today, at the end of July, the Federal Reserve once again raised the federal funds rate by 25 basis points, lifting the target range of the rate to 5.25% to 5.5%, the highest level since 2001.
However, the US economy shows no sign of recession. As of writing, the US NASDAQ, S&P 500 and Dow Jones index went up 39.45%, 16.86% and 6.16% respectively so far this year.
So, will there still be a recession? If there is still the possibility of a recession, when will it happen?
The three major indexes of U. S. stocks are still rising so far this year.
Current situation: the market is still strong
Judging from the current market situation, the US Commerce Department announced on July 27th that GDP in the second quarter of this year grew 2.4% from a year earlier, up from 2% in the first quarter.
At the same time, the Ministry of Commerce said that compared with the first quarter of this year, the higher GDP growth rate in the second quarter reflected a rebound in private sector inventory investment and an increase in non-residential fixed investment. This seems to suggest that the US economy will not experience a hard landing any time soon.
Coincidentally, the US labor market has also shown resilience. The labor department announced on August 4th that the unemployment rate fell to 3.5% in July, down 0.1% from June and nearing a half-century low, while wages rose slightly, with the average hourly wage rising 0.4% in July from a year earlier. The current low unemployment rate also reflects a robust US economy.
Let’s take another look at the inflation data that the Fed is most concerned about. The US Bureau of Labor Statistics reported that the consumer price index (CPI) rose 3.2% in July from a year earlier, up slightly from 3% in June, reflecting rising food prices and still high housing costs.
But beyond that, the rest of the inflation-related data was mostly good news, especially the core CPI data, which excludes food and energy items, slowed further from a year earlier, from 4.8% in June to 4.7% in July. Although inflation has not been suppressed yet, the overall situation has improved significantly than before.
In short, there is a lot of data showing that market vitality is still strong, and it seems that the risk of recession is getting farther and farther away.
Looking back on history: the Truth behind high interest rates
Although the US economy is not showing obvious signs of recession at the moment, is this enough to indicate that recession fears are not enough to worry about? As the saying goes, there is nothing new under the sun. If we look back on history, it is not difficult to find that this may not be the time to rest easy.
In February 2008, it was only months before the collapse of 158-year-old Lehman Brothers. But Ben Bernanke, then chairman of the Federal Reserve, said that while the economic situation was not optimistic, he did not think the US economy would be at risk of recession. And at that time, there were not a few economists who supported this view.
When it comes to the financial crash that swept the global economy in 2008, this crisis actually did not appear at the peak of the high interest rate environment. Contrary to most people’s stereotype, the “Lehman moment” came after the Fed had cut interest rates sharply in a row.
In order to cool the apparently overheated housing market at that time, the Federal Reserve raised the federal funds rate to a high of 5.25% on June 29, 2006, and maintained it for more than a year.
It was not until September 18, 2007, that interest rates were cut by 50 basis points. By the time Lehman collapsed in September 2008, the federal funds rate had already fallen to 2%, entering a low-interest environment.
So, here comes the question, why is the recession still breaking out when interest rates have fallen and the pressure for high interest rates is gone? To answer this question, we need to quote an economic concept here: real interest rate.
The so-called real interest rate refers to the real interest rate level shown by the nominal interest rate after excluding the impact of inflation. If it is expressed in a mathematical formula, it is:
Real interest rate = Nominal interest rate – Inflation rate
Understanding the concept of real interest rates will be of great significance for us to analyze the truth behind high interest rates in the United States! Because corporate borrowing is a normal phenomenon in economic activity. Since borrowing is involved, interest rates are naturally an unavoidable topic. Only at favorable interest rates can the economy get a corresponding boost.
Let’s give a few simple examples here. It is a well-known fact that the inflation rate in the United States remained high last year. Let’s assume that at some point last year, inflation rate was as high as 8%, while the nominal interest rate in the United States was 4%. The high interest rate level of 4% seems to put a lot of pressure on corporate borrowing. However, once we introduce the concept of real interest rate, we will find that the interest rate level of 4% interest rate will not cause any pressure.
Because 4% (nominal interest rate) minus 8% (inflation rate), you get a real interest rate of -4%. At this time, the real interest rate is simply negative. In other words, although enterprises bear the cost of interest rates of 4%, due to the existence of 8% inflation, the prices of products or services produced by enterprises will naturally be pushed up by 8% by inflation.
As a result, enterprises can still make a profit of 4% just from borrowing. Therefore, as long as the real interest rate is negative, simply high nominal interest rates will not necessarily have a recession impact on the economy, because the cost of debt is negative. This is the reason why U. S. stocks still rise all the way in a high interest rate environment.
But let’s give another example. What if nominal interest rates go up all the way and inflation rate starts to fall? For example, suppose the nominal interest rate rises to 5%, while inflation falls to 3%. In this case, the real interest rate becomes +2%, and the previously negative cost of debt has been completely turned into a positive number. And this is what is happening to the US economy right now.
So, what kind of pressure will happen to the economy once real interest rates are negative? With regard to this question, we only need to look back at the past history and the answer is clear at a glance.
The trend of US inflation and the federal funds rate over the past 25 years.
The blue line: the US inflation rate; the black line: the federal funds rate (or the nominal interest rate).
By looking at the chart above, we can clearly see that in the past 25 years, there are two time periods when the nominal interest rate is higher than the inflation rate, or namely the real interest rate is positive. These two time periods correspond to the two red circles in the above chart.
These two periods roughly correspond to the dotcom crisis in the United States in 2000-01 and the global financial crisis in 2007-08. Thus, when the cost of debt is negative, economic activities tend to develop smoothly, and once the cost of debt is positive, crises often follow.
Outlook: the hidden danger of recession has not been eliminated
Bloomberg conducted a poll among economists last December when 70% of economists thought the US economy would suffer a recession within the next 12 months. But by July this year, that number had fallen to 58%.
Similar surveys are common in many mainstream financial institutions. Goldman Sachs, which thought there was no recession in the US economy as early as last year, further lowered the probability of a recession in the next 12 months to just 20% in July.
It seems that the risk of recession has once again been forgotten by economists. But through the above analysis of real interest rates and a review of history, we can see that the hidden dangers of the current recession have not been completely eliminated.
The trend of US inflation and the federal funds rate over the past year.
The blue line: the US inflation rate; the black line: the US federal funds rate (or the nominal interest rate).
The chart above reflects the trend of US inflation and the federal funds rate over the past year. The red circle in the picture reflects that real interest rates have reached a turning point from negative to positive at the end of last year and the beginning of this year.
Of course, the real interest rate can only be regarded as a temporary transition from negative to positive. But it is not clear whether this situation will last for a long time in the future. If the Fed adjusts its interest rate policy in time, or if inflation rises repeatedly, real interest rates are still likely to return to negative territory. In short, real interest rates already pose a potential danger to the possible risk of recession.
Just as real interest rates in the US showed signs of turning from negative to positive, in August, Fitch Ratings, one of the world’s three largest rating agencies, suddenly downgraded the US credit rating, downgrading its long-term rating from “AAA” to “AA+”. For the downgrade, Fitch said it was mainly due to several key drivers:
1.The level of governance in the United States has deteriorated:
Federal debt has remained high for years, and repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management. All these show that the level of governance in the United States has deteriorated, and public confidence in the government’s financial management has also been undermined.
2.Rising government deficits:
Fitch expected the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden. Additionally, state and local governments were expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022.
Fitch also forecasted a government deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025. The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025.
3.General government debt to climb:
Fitch predicted that US general government debt as a share of GDP will continue to climb, reaching 118.4% in 2025. That is more than 2.5 times higher than the median of 39.3% for “AAA” and 44.7% for “AA” sovereign countries. Fitch’s long-term forecasts show that the debt-to-GDP ratio will rise further, which will increase the vulnerability of US finances to future economic shocks.
Summary
It is worth mentioning that the fattest brown bears usually exist in the autumn before hibernation, and when winter goes to spring, brown bears are instead the weakest.
It is as if before the recession, countries often had plenty of tools in their fiscal toolboxes, which needed to be consumed in order to deal with risks. If there is a day when there are few fiscal instruments left, leaving the Fed with no choice but to slash interest rates, a recession will then be inevitable.
Therefore, in the future, the market should no longer pay more attention to whether the Fed will continue to raise interest rates, but instead focus on what attitude or way the Fed will use to create the expectation of interest rate cuts in the future. This will deserve further attention from the market in the future.
If you have read our article “Basic Types of Charts in Technical Analysis”, now it’s time to unlock the secret with technical analysis indicators. Let’s dive in!
Moving Averages:
Moving averages calculate the average price of a currency pair or any other asset over a specific period, such as 10 days or 50 days, to reveal the trend. By plotting these averages on a chart, you can easily spot if prices are going up or down. They help you identify potential buy or sell signals to make trading decisions like a pro!
Relative Strength Index (RSI):
RSI helps you measure the strength and momentum in the markets. This oscillator ranges from 0 to 100. When it goes above 70, it suggests the asset might be overbought. On the contrary, when it drops below 30, it indicates the asset might be oversold.
Bollinger Bands:
Bollinger bands are like dynamic rubber bands hugging the price chart. They consist of a moving average line in the middle, with two bands above and below, representing standard deviations from the average. When the price moves close to the bands, it could mean a surge in volatility. Bollinger Bands are perfect for identifying potential price breakouts or reversals so that you won’t miss those exciting trading moments!
Summary
You can combine these indicators to build your trading superpower! For example, you might use moving averages to spot trends, RSI to identify overbought or oversold conditions, and Bollinger Bands to confirm potential breakouts. The possibilities are endless, and by blending different indicators, you can develop your own unique trading strategy.
Technical analysis in forex trading is like solving a puzzle using historical price data. It helps us understand the past and make predictions about the future.
What is Technical Analysis?
By studying these puzzle pieces—patterns, trends, support and resistance, and using indicators—we can make predictions about future price movements. But remember, technical analysis is not foolproof. It’s like a game of probabilities, where we use historical clues to make educated guesses about what might happen next. It’s important to combine technical analysis with other forms of analysis, like understanding economic news and managing risks.
By learning technical analysis, people can develop a better understanding of how prices move in the forex market and use this knowledge to make more informed trading decisions. It’s like being a detective, solving puzzles and making predictions based on the clues we find in the charts. Just like any skill, practice and continuous learning are key to becoming better at technical analysis.
Key Components of Technical Analysis
As we mentioned above, traders rely on various clues from the past to predict the future. And here are some key clues frequently used to make predictions:
Price charts:
Price charts show the historical prices of a currency pair, like a line graph or candlestick chart. These charts display the ups and downs in currency prices over time.
Patterns and trends:
Traders look for patterns and trends in the price charts. They observe how prices have moved in the past to identify similar patterns that might happen in the future. For example, they might notice that every time the price goes up a certain amount, it tends to come back down, or vice versa. These patterns are used to predict when the price might go up or down next.
Indicators:
Traders use indicators, which are special calculations based on price data, to obtain more market information. For example, they might use moving averages, which show the average price over a certain period, to identify trends. They can also use oscillators, which help determine if a currency is overbought or oversold.
Summary
Traders can make predictions about future price movements by relying on technical analysis.
Technical analysis consists of many key components, such as price charts, patterns and trends, and indicators.
If you have read our article “Introduction to Technical Analysis”, then you must be aware of the significance of technical analysis, which is used by master traders to predict the ups and downs of the financial markets. In this article, we are going to lift the curtain on the myth of technical analysis: Charts!
Line charts:
Let’s start with the most beginner-friendly chart: the line chart. Line charts display the closing prices of a currency pair, stock, crypto, or any other type of financial asset, over a specific time frame, and these price dots are connected with a line.
This straightforward chart gives a clear picture of price movements, convenient for you to take a quick glance at the market’s overall trend.
Candlestick charts:
Candlestick charts are like little rectangles with wicks on top and bottom. These candles stand for price movements within a specific time period (maybe an hour or a day). The body of the candle indicates the opening and closing prices, while the wicks reveal the highest and lowest prices during that time. By taking advantage of candlestick charts, you can access more details about the magnitude of price movements.
Bar charts:
Bar charts resemble vertical lines with small dashes on each side. The top dash represents the highest price, the bottom dash the lowest price, and the vertical line the opening and closing prices. Sounds like candlestick charts? That’s right. Bar charts are just like cousins of candlestick charts, providing similar information with just a slightly different look.
Summary
Charts help us unravel patterns, trends, and potential price movements. By analyzing these charts, you can make reasonable predictions about where prices might head next, giving you a competitive edge in CFD trading. Charts are your trusty companions to embark on the thrilling journey of trading.
First things first, FOMC stands for the Federal Open Market Committee. Think of it as the mastermind behind the scenes, making decisions that can send shockwaves through the financial markets. In this article, we are going to walk you through the FOMC Meeting, and explain why it is a big deal for you.
Interest rate decision:
Imagine you are at an amusement park, and the FOMC is controlling the speed of the roller coaster. Interest rates are just like the gas pedal for the economy. When the FOMC decides to raise interest rate, borrowing money becomes more costly. This can cool down an overheated economy and tame inflation. On the other hand, when they lower interest rates, borrowing money becomes cheaper, thereby boosting spending and investment. These rate decisions can jolt the values of currency pairs, stocks, or commodities.
Market mood:
Experienced traders tend to analyze every word the FOMC utters during the meeting to predict what’s coming next. If the FOMC hints at rate hikes, traders might expect currency values to rise. If they signal rate cuts, stock prices might skyrocket. You may grab a competitive edge by hunting for clues from their statement.
Volatility swing:
FOMC meetings can feel just like a roller coaster. Currencies might leap, stocks can soar or plummet, and commodities might go on a wild ride. The thrilling volatility may catch inexperienced traders off guard. That’s why knowing when the FOMC is meeting and preparing for their announcements is a savvy move.
Summary
In a nutshell, FOMC decisions about interest rates will impact economies and market expectations, and send waves around the globe. For CFD traders, knowing these meetings and how they can shape the markets will give you an upper hand.
