Fresh stock market record highs as tech soars, US data disappoints, bitcoin softer

Despite a bank holiday for the UK, trading volumes were elevated as investors had more time to appreciate the dovishness of Fed Chair Powell’s speech on Friday.  US stocks rallied to fresh record highs as demand for tech stocks returned on expectations that the Fed is very far away from interest rate increases.

Powell sends markets a dovish message

After Friday’s dovish tapering speech by Fed Chair Powell, a September taper seems very unlikely.   The Fed is behind the curve and a pullback in the stock market will have to wait.  The earliest taper seems like it could be in November and when that happens, fixed income volatility will be extreme.  The Fed is buying both all the TIPS and Mortgage back securities and until they taper, real rates will remain heavy.

The economy has hit peak growth, but the outlook is still solid despite some growing risks over COVID concerns, expiration of unemployment benefits, and the overall impact from Hurricane IDA.  Hurricane IDA left over 1 million Americans without power, and it will take a while to completely assess the damage.

US Data

The Dallas Fed Manufacturing report showed a steeper-than-expected decline as employers continue to struggle to find workers.  Texas business executives are struggling to fill vacancies as workers look for more pay and while some lack skills.  This report does not bode well for the Fed reaching substantial progress in the labor market recovery anytime soon.

Pending homes sales also posted a second consecutive drop as tight inventories and surging prices continue to cool the hot housing market.  The July month-over-month reading fell 1.8%, much worse than the expected 0.3% gain.  The housing market is stabilizing and despite the current delta variant wave, demand for homes should normalize now.

The dollar was in for a choppy session given thin conditions as UK banks closed for a summer bank holiday and month-end rebalancing flows.  Treasury yields will remain heavy and that should prevent the dollar from appreciating much further.

Bitcoin

Institutional investors are taking a break with bitcoin as the world’s largest cryptocurrency is losing momentum.  The headlines are plentiful for bitcoin, but not inspiring enough to take prices back above the USD 50,000 level: India is eyeing a central bank digital currency (CBDC), several tokens from ethereum’s blockchain are surging, Cuba has laid out plans to legalize crypto transactions, and as El Salvador moves forward in facilitating bitcoin transactions.

Bitcoin is stuck, waiting for a fresh catalyst and it will likely struggle in the short-term if demand for US stocks remains strong.

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