Economic data continue to point to strength in the US with GDP growing 3.8% in 2Q, significantly above the consensus estimates of 3.3% and 3.0% released in August and July respectively, marking a sharp turnaround compared with the contraction in 1Q. The Atlanta Fed's GDP-Now model also points to 3.9% annualised growth, supported by ongoing personal income and spending beats. In terms of inflation, the PCE Index rose at an annual rate of 2.7% in August (Prev. 2.6%), its highest in six months, pointing to stickier inflation.
Liquidity dynamics have shifted since June, with an increasing US Treasury cash balance and declining US Reserve balances at the Fed, both serving as a short-term drag on liquidity and a headwind for the riskier parts of the market. While US indices continue their uptrend, the riskier segments such as cryptocurrencies have underperformed, with the liquidity drag also likely reflected in the outflows from leveraged semiconductor ETFs. Hedge funds, despite maintaining five-year-high gross exposure, have significantly reduced allocations to MAG 7 stocks, now near a five-year low, indicating a likely shift toward lagging sectors. We anticipate the liquidity drain will soon ease, reflected in the recent rebound in crypto markets, likely serving as a read-across to a breakout in European indices, which attempted to breakout several times over the last few months.
Assuming there is no government shutdown on the 1 October, the NFP print on Friday will dominate market attention this week, given the negative revisions and slowdown in new hiring. Economists estimate a +50k headline print (prev. +22k) and +60k for private payrolls (prev. +38k) while the unemployment rate is expected to remain unchanged at 4.3%. Other data is the JOLTS report (Tuesday), the ISM manufacturing and ADP (Wednesday), Jobless claims (Thursday) and ISM services (Friday). In Europe focus is on the CPI prints for Germany, France and Italy (Tuesday) and the Eurozone (Wednesday).
We propose Long SX5E Dec25 5675 calls to play the likely break out (Spot: 5507, Fut 5532).