US STOCKS: Russell Index - Consolidates New All-Time Highs, Eyes 2500
The Russell 2000 overnight range was 2431.621 - 2466.887, closing +0.59%. The Russell 2000 is consolidating its new all-time highs. The Russell will be the biggest beneficiary of a new cutting cycle which the dot plots point to, but the caveat does remain around growth. Having broken through the highs I would suggest the leveraged shorts would be paring back their exposure as small caps could potentially begin to build momentum higher. CFTC data for last week though points to the opposite with leveraged funds holding onto their conviction and even adding slightly to shorts. Focus will be turning toward the 2500 area and then beyond.
- Bloomberg - “With financial conditions easing further on Fed cuts and the fiscal pulse improving in the first half of 2026. That favors laggards such as small caps, secular story stocks and cyclicals. The Russell 2000’s breakout to fresh highs and relative outperformance versus the Nasdaq, which started pre-FOMC, confirms the rotation should continue. Positioning in small caps remains light, leaving room for acceleration as systematic demand stays supportive, especially from vol-control strategies, according to a note out from Hedgeye Thursday.”
- “The heavier weighting of interest-rate sensitive stocks and sectors is an obvious explanation for this, and indeed some analysts have indeed been calling for small-cap outperformance since the Fed came back into play. While that doesn’t mean that stock-market operators should sell their Nvidia and buy Fred’s Hardware Emporium, it does suggest that the resumption of policy easing does imply a somewhat broader list of potential market winners. Whether they will keep outperforming in the short run if Treasury yields correct higher is another question.” - BBG
- CFTC data shows leveraged funds actually added to their shorts again last week to -90215( previously -87081). This has been cut back from a high of around -117000 at the beginning of August.
- These shorts would most likely be held against longs in other sectors which have done remarkably well and so the losses would not be as acute, but a move through all-time highs might make some of these reconsider the position.
Fig 1: Russell 2000 Weekly Chart
Source: MNI - Market News/Bloomberg Finance L.P
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FED: NatWest Now Sees Cuts In 2025, Starting In September
As with Deutsche earlier, NatWest has changed its Fed call after the Powell Jackson Hole speech to reflect a 25bp September cut. Previously, the call was for no cuts in 2025. The new baseline outlook includes further 25bp cuts in December and March, bringing rates closer to neutral ("however, the changing composition of the committee becomes far less clear once Powell term expires in May").
- "While the August jobs and CPI reports will be watched carefully, it is clear to us that Powell has already seen enough to decide renewed action to counter downside economic risks is likely warranted, and so we now look for a 25 basis point rate cut on September 17th.
- "We expect officials will very much downplay the likelihood of a 50bp rate cut leading up to the jobs data, but we have to admit if the report is "weak enough" (e.g., the unemployment rate increases by 0.3pct to 4.5% (where officials had it at year end) anything can happen and wouldn't rule anything out. However, given the latest pivot and with financial markets pricing (86% of a 25bp rate cut) a lot has to happen (unemployment rate 3-handle and core CPI +0.5%) for the FOMC to undeliver and hold off from a rate cut in September. "
USDCAD TECHS: Bull Cycle Hindered
- RES 4: 1.4111 High Apr 10
- RES 3: 1.4019 38.2% retracement of the Feb 3 - Jun 16 bear leg
- RES 2: 1.3968 High May 20
- RES 1: 1.3925 High Aug 22
- PRICE: 1.3840 @ 16:55 BST Aug 22
- SUP 1: 1.3794 20-day EMA
- SUP 2: 1.3769/22 50-day EMA / Low Aug 22
- SUP 3: 1.3576 Low Jul 23
- SUP 4: 1.3557/40 Low Jul 3 / Low Jun 16 and the bear trigger
Gains this week in USDCAD and the breach of resistance at 1.3879, the Aug 1 high, marked a positive development, however the slippage into the Friday close undermines this sentiment - for now. Moving average studies have crossed and are in a bull-mode position, reinforcing current conditions. An extension higher would signal scope for a climb towards 1.4019, a Fibonacci retracement. On the downside, support to watch lies at 1.3769, the 50-day EMA - a level not yet challenged by the correction lower.
CANADA: Q2 Expected To See GDP Contraction, BOC's Estimate Looks Too Negative
The June retail sales release helps wrap up the last major data before Canadian Q2 GDP is released on Friday August 29.
- Current Bloomberg analyst consensus shows Q2 is expected to show a 0.7% Q/Q annualized contraction, versus +2.2% in Q1. The private sector consensus is more optimistic than the Bank of Canada's -1.5% estimate in its July Monetary Policy Report (which MNI thinks is too low) but the component-by-component breakdown is similar if of differing magnitudes.
- Widely expected are: a softening in household consumption growth (+1.2% in Q1), with a pickup in government spending, continued weakness in fixed investment (-3.0% in Q1) though with residential outperforming business capital formation, and a reversal of Q2's positive contribution from net exports. In short, the data are expected to confirm that trade activity was brought forward to Q1 ahead of tariffs, with the effects reversing in Q2.
- Going forward, the BOC envisages growth resuming in Q3 (+1.0% in its "current tariff" scenario). In the meantime, a weak Q2 reading could provide Governing Council with more conviction to resume easing rates in September, with the July meeting decision noting "If a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate".
