Last Week's Close

E-mini S&P 500 (September): Settled at 4437, up 35.50 on Friday and down 25.50 on the week

E-mini Nasdaq-100 (September): Settled at 15,086.75, up 158.75 on Friday and down 39.00 on the week

Friday was a strong finish to a very choppy week. Large options open interest expired around the 4400 strikes on Friday, and this certainly was an underlying force driving last week’s volatility. Bill Baruch joined the Yahoo Finance closing bell on Thursday and shared how dealers hedged Gamma upon Wednesday’s close below 4400, sparking a windfall of selling. In the same context, those dealers had to hedge, or buy, upon a sharp upside reversal through 4400. The result was another friendly Friday tape, but major U.S. benchmarks still finished the week in the red.

Dallas Fed President Robert Kaplan spoke on Friday and his comments were seen as supportive to risk assets. Although known as one of the more hawkish committee members, he doesn’t vote until 2023. However, he pointed to the persisting pandemic uncertainties due to the Covid-19 Delta variant, which poked holes in the taper narrative.

Expectations have mounted for Fed Chair Jerome Powell to more clearly, if not officially, communicate a timeline to begin tapering the Federal Reserve’s monthly asset purchases at his Jackson Hole speech on Friday. The market certainly took notice of Kaplan’s comments; if one of the more hawkish members could shy away from the taper conversation due to rising Delta cases, then those more dovish likely would, too.

This is a terrific segue into news that China has reported zero new Covid-19 cases for the first time in a month. According to these developments, China used draconian conditions to crush the virus in essentially 30 days, but the curve has also flattened across Europe, from the U.K. to France and to Italy. 

Cases in the U.S. have risen sharply for a month now and local governments are taking steps to mitigate the spread. Given accelerating job growth and steady inflation far surpassing the Fed’s target, we find it far too early for the Fed to pivot from telegraphing a taper due to this wave of the pandemic. At the end of the day, they would still be easing at a historical pace and with rates at historical lows; they would still be making asset purchases and reinvesting their current holdings. 

We maintain the position that, if this cyclical downturn in growth remains persistent through Q4 2021 and Q1 2022, the Fed will need tools in its toolbelt to respond. Without starting to taper their asset purchases now, their tools will have a limited impact when needed, because they certainly aren’t needed to their full extent right here, right now.

Flash PMIs from the U.S. for August are due at 8:45 a.m. CT. Manufacturing is expected at 62.5, a touch slower than recent months, but still expanding at a historic pace. Similarly, Services are expected at 59.5, and this comes on the heels of ISM’s record-setting read for July. Both Manufacturing and Services from Europe came in a touch below expectations. However, the U.S. Dollar Index remains on its backfoot from Friday’s early high after those comments from Dallas Fed President Robert Kaplan.

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