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There are few trades as appealing, or as risky, as trying to catch a market reversal. The idea of entering at the turning point and riding the new trend is exciting. However, most traders fail to consistently produce good trading outcomes on this potential, often entering too early without confirmation, and thus get caught at a pause point of a continuing powerful move.Trend reversals can indeed offer excellent reward-to-risk potential, but as with any trading approach, only when approached systematically, the confluence of key factors, and timing.

What Is a High-Probability Entry?

Before diving into reversals specifically, let’s define what we mean by a high-probability entry.A high-probability entry is a trade taken in conditions where:

• There is clear evidence from price action and structure
• There is an alignment with the overall market context, such as timing, favourable price levels, and volatility
• Risk can be logically defined and limited to within your tolerable limits
• It may offer a favourable risk-to-reward profile (providing you execute following a pre-defined plan)

This approach should underpin all trading strategy development. And be consistently executed according to your defined rules, which must be constantly reviewed and refined based on trading evidence.

Reversal vs. Retracement: Know the Difference

Many traders confuse a retracement with a reversal, often with potentially costly consequences. It is ok to exit on a retracement and be ready to go again if there is a breach of the previous swing high. But this must be part of your plan, with a strategy for trend continuation in place. However, if your plan suggests that you DON’T want to exit on retracements, then the following table gives some guidance on what potential differences may be. RetracementReversalA temporary move against the trendA complete shift in directional controlPrice often continues in original directionPrice begins trending in the opposite directionHealthy part of a trend’s rhythmMarks the end of a trendTypically shallow, to a Fib/MA/structureOften deep, may break previous swing structureVolume often reduced after swing high if long or swing low if short.Volume often increased after swing high if long or visa versa.

Understanding Trend Exhaustion

Before any reversal occurs, the existing trend must show signs of exhaustion. This is the first phase of a potential turning point — and one of the most overlooked.

How Trend Exhaustion Looks on a Chart:

• Climactic candles – multiple wide-range bars with expanding bodies.
• Failed breakouts – price pushes through a level but fails to hold.
• Reduced momentum – smaller candles, overlapping wicks, indecision bars.
• Volume spikes with no follow-through – smart money distributing or exiting.
• Multiple tests of the same level – a sign that the trend is running out of energy.

The Anatomy of a High-Probability Reversal

A strong reversal setup typically has three key factors that can be supportive of a of follow-through.

1. Location – Price at a Key Zone

• Major support/resistance level honoured
• Prior swing highs or lows at a similar price point
• Higher timeframe structure – I,e, agreement on a 4 hourly chart as well as an hourly.

In simple terms, if the price isn’t at a meaningful location, a meaningful reversal is less likely to occur.

2. Previous Signs of Trend Exhaustion

We have covered this above, with evidence that the current trend has now weakened, and there is some justification to prepare to enter a counter-trend.

3. Structural Confirmation

This is the trading trigger you are looking for as a potential signal for entry. Structural confirmation transforms an idea (“the price might reverse”) into an actual setup (“the reversal is underway”).Look for the following four signs:

• Trendline or key short-term moving average breached
• Lower highs and lower lows in an uptrend or higher lows in a downtrend
• Confirmation that a key swing point has been honoured
• Evidence that a retest and rejection of the broken structure has occurred.

This shows that momentum has not just stalled, it has now shifted.

Context Filters

Reversals are more likely to succeed when conditions are supported by other factors. This is to do with the identification of a strong market context where reversals are more likely to happen. These may include:

• Time of day: The open of London or US sessions, or into session close when there may be some profit taking on a previously strong move
• Volatility extremes: Price has expanded beyond its normal daily range (ATR-based or visually evidenced on a chart)
• Market sentiment: Everyone is already long at the top or short at the bottom — setting up for a squeeze
• Catalysts: Reactions to news, or data, that may cause a significant one-sided move

Adding context could make the difference between a technically correct trade and one that may offer a higher probability of going in your desired direction.

Recognising Common Reversal Patterns

There are classic chart patterns that may help visually reinforce the principles. They reflect exhaustion, rejection, and structural change, and may encourage many traders to follow the move, adding extra momentum to any initial move. PatternSignal TypeKey ClueConfirmation NeededDouble Top/BottomReversal StructureRepeated rejection of key levelBreak of swing low/high between peaksHead & ShouldersMomentum FailureFailed retest after strong pushNeckline breakPin BarExhaustion CandleSharp rejection with long wickOpposite-direction close after the pinEngulfingSudden Power ShiftOne candle overtakes previous rangeFollow-through candleRounding Top/BottomSlow Institutional TurnGradual stalling and reversalNeckline break of curveBreak of Structure (BoS)Structural ConfirmationNew higher low/lower high, support breakRetest and failure to reclaim broken level⚠️ These patterns should not be traded in isolation. Use them with context and only after signs of exhaustion and structure shifts.

FOUR Trader Reversal Traps to Avoid

Even with a solid framework, it’s easy to fall into common traps:

1. Trying to pick the exact top or bottom - Wait for price to prove the turn, don’t anticipate and enter early
2. Entering against the higher timeframe trend – Zooming out and checking alignment with higher timeframes may be prudent to reduce the likelihood of having to fight momentum on larger timeframes.
3. Trading every reversal signal - Not all signals are valid or particularly strong. Look for the confluence of multiple factors covered earlier, not just the presence of a pattern.
4. Letting bias override evidence - Just because you want a reversal to happen, it NEVER  means it is there unless backed up by evidence.

Don’t Forget the Full Trading Story

A great setup means nothing without excellent execution. These ESSENTIAL facts are critical as with any trade, but there will never be an apology for reinforcing these.

Patience and execution discipline

Wait for your full criteria to be met. Avoid “almost” setups that feel tempting but don’t fully align with your full plan criteria. Likewise, when all your boxes are ticked, then take action.

Exit strategy

Use a mix of targets, structure-based trails, or scaling out, and know in advance how you’ll manage the trade once it starts moving.High-probability entries are only one part of a winning trade. Exit efficiently or you’ll waste great entry setups because of poor execution. There are many traders in this position; make sure you are not one of them.

Summary

High-probability reversals are not about being right at the top or bottom when you enter; this is rarely possible and adds additional risk without confirmation. They are about recognising and being ready when the trend is potentially changing, and taking action when:

• Price is at a key level
• The current trend shows clear signs of exhaustion
• Structure confirms the shift
• And context supports the move

Trade the evidence and your plan, not just what you think is likely to happen. Be patient, be ready, and when the setup is there, execute your trade with confidence.

Global markets continue to search for anything they can grasp onto that points to possible signs of progress on global trade tensions, and by anything, we do mean ‘anything’ – truth social posts, X posts, this person heard from this person something tangible. It shows just how volatile this current market really is that inuendo and whim is being treated as fact.Back in the ‘tangible’ real world, the other white knight that is being watched ever closely is some form of possible policy backstop from central banks - Particularly the Federal Reserve. Considering the President’s consistent input here that US rates should be lower either through a post or a media rant, so far this has not moved the Fed one inch.While the recent 90-day tariff pause from Liberation Day has provided a temporary market reprieve, the underlying trade tensions, especially between the U.S. and China, remain largely unresolved. In fact, we would argue they are only getting stronger as nations and blocs are now looking to each other to offset the US trade impasse.China remains the most consequential player in this landscape, and despite the pause, the effective U.S. (weighted-average) tariff rate on goods has only fallen modestly, just 3%, from a 24% peak to 21% year-to-date.Beijing appears to be holding the ‘better hand’ currently; the additional back down from Washington with its ‘exemption’ on electronics is case in point. Just take Apple as the example, down over 23% since its peak in December last year, and it is the poster child for the full impact of Trump’s program. This back-down is showing just how much strain the US is experiencing with Beijing playing hardball.Think about it: a US$3,000 iPhone versus a Samsung that, even with tariffs, could be as much as 20% less for the US consumers. That’s a killer for the Silicon Valley Titan and Trump’s plan on the whole.This just shows the structural nature of the U.S.-China trade imbalance and the scale of bilateral tariffs already in place.As negotiations remain tentative and tensions persist, the market is left navigating a landscape shaped by potential escalation, geopolitical signalling, and the lingering question of whether or even what policymakers will/can do if economic or market stress intensifies.China: Market KingmakerAs mentioned, the modest drop in the effective tariff rate even after a 90-day pause highlights the entrenched nature of the dispute. The sheer scale of U.S.-China trade means that even minor changes have significant global implications. While no breakthrough appears imminent, traders and investors alike continue to watch for any sign of constructive engagement – which currently does not exist, if we are honest.Any sign of negotiation could take place, or even if there is a modest de-escalation, it could trigger a risk-on response across asset classes as seen in the final part of the week beginning 7 March 2025. This is why China is now the market kingmaker – it is currently holding firm on ‘escalating’ when responding to Washington’s moves.The indicator we all need to watch for around US/China relations is US Treasury Bonds. Any sign that Beijing is turning from escalation to de-escalation should produce a rally sharply here as market flows have been dominated by heightened cash preference as persistent stagflation concerns, coupled with recession risks.Where’s the Fed at?Will the Federal Reserve step in to support markets? The better question is, can it step in? From a traditional standpoint with rate cuts – no. However, there are other mechanisms like exemptions to the Supplementary Leverage Ratio (this is the amount of tier one capital required to be held at US banks), which was temporarily introduced during the 2020 pandemic crisis. A repeat of that policy would increase the banking system’s capacity to absorb government bonds without triggering capital constraints.More aggressive tools, such as direct purchases at the long end of the U.S. yield curve, are considered much less likely in the current macro environment, and Fed officials have been cautious in their recent commentary around this idea.Realistically, there are limited signs of funding stress and a relatively high threshold for intervention; the probability of a "Fed put" being activated near-term appears low to non-existent. This means the Fed is just as much a spectator as we are.The FX flowWith US exceptionalism now on the blink, the broader trend of US dollar weakness is expected to persist, but the weak spots may change.Rather than concentrating on current account surplus currencies such as JPY and CHF, the weakness may broaden out to risk-sensitive FX like AUD, NZD, and CAD. Just take a look at the bounce back in AUDUSD at the backend of the 7 March week’s trading – a 3.8% jump in 2 days is unheard of.The euro is expected to perform well across both “risk-on” and “risk-off” tariff scenarios, driven by long-term capital reallocation and structural factors within the euro area.We need to highlight Japan and South Korea – both nations have shown signs they are willing to engage with Washington, and the response from the market was huge. More importantly, the administration has responded positively. This puts JPY and KRW in a more positive light than peers, and they would be wary of being exposed as a deal would put them into upside air very quickly.Outlook: Cloudy but clearing – chance of tariff showers later in the week.Markets remain in a holding pattern, waiting for clearer signals on trade policy.The recent softening of rhetoric from the U.S., particularly in response to financial market volatility, suggests some room for constructive negotiations—especially with countries outside China.The 90-day pause has provided some breathing space, but it will need to be followed by tangible progress if market sentiment is to turn, and on that metric, the outlook is still cloudy but clearing. Yet tariff risks retain high later in the period as the 90-day period looks to expire and specific tariffs (healthcare, electronics, etc) get announced.

This coming Friday sees the January core PCE inflation data – the Fed’s preferred measure of inflation. Now most are forecasting that it should confirm that inflation has eased compared to this time last year. The consensus estimate has the monthly increase at 0.2 per cent with the annual rate at 2.5 per cent.

Now that is premised on a range of factors, they are also based on the fact the newly installed administration was not in power when these numbers were being collated. For now then – here are the key issues of the PCE read this Friday: Inflation Expectations: A temporary blip? Or is this the ‘transitory v structural debate again? – Upside impactor Several surveys are showing some upward movement in price expectations, mainly down to tariffs and other new external impacts.

Most don’t see this as a sign of a new inflationary trend but that is cold comfort considering how wrong these forecasts have been over the past three years. Case in point here is the University of Michigan’s 5 to 10 year inflation expectations which jumped to 3.5 per cent in February release, highest of this cycle. The caveat is that while this figure is high, historically this read has run above actual inflation, even when inflation was stable at 2 per cent, even so – a 1.5 per cent miss seems way out and even a 2.8 to 2.9 per cent read would be an issue for further cuts and the current US inflation story.

Other things to keep in mind: Tariffs were front and centre in February and clearly remain a political and geopolitical risk/threat. It should die down in the coming weeks as the administration settles in, the news cycle moves and the size of the tariffs retreat – that is until something causes the President to react. But March should be quieter – but the year will be volatile.

Countering the University of Michigan survey is the New York Fed’s, which hasn’t shown a major shift. If the increase in expectations were widespread, this would move the dial and would be more concerning. It makes the NY Fed data all the more interesting ahead of its launch.

We should also point out February’s manufacturing PMI showed rising input and output prices, while service sector price indices eased – why? Tariffs. This aligns with the 10% tariffs on Chinese imports that kicked in earlier this month.

With 25% steel and aluminium tariffs set for March 12, some price pressures may persist in March. Used Car Prices: A Temporary Divergence? – Down side impactor Used car prices in CPI have been running hotter than expected, especially relative to wholesale prices, which typically lead by a few months. And, this even after the surge in used car prices during the COVID era.

This market has remained above trend but is easing a Manheim wholesale used car prices fell 1.1 per cent month on month in early February, reinforcing our view that CPI inflation in this category has limited room to rise. If consumer demand were truly driving higher prices, we’d expect to see wholesale prices moving up as well which hasn’t happened. New York Congestion Pricing: Is this one and done?

A big policy pitch from the President for the state of New York was the congestion charging throughout New York City. True to its word the Trump administration revoked approval for congestion pricing in New York City, which had gone into effect in early January. This is likely to be the reason for the 2.6 per cent month on month spike in motor vehicle fees within CPI.

If the fee is ultimately scrapped, we’d expect an equivalent pullback in this CPI category. But with legal challenges keeping the fee in place for now – it was a double hit. One to watch.

Housing & Shelter: Watching LA Zillow’s single-family rent index rose 0.33 per cent month on month in January, consistent with shelter inflation continuing to slow – but still growing above historical averages. However it is not even across the country - Los Angeles rents spiked 1 per cent month on month - the biggest monthly jump since early 2022. The recent fires may have played a role, and if this strength persists, we could see upward pressure on shelter inflation later this year.

Median home prices remained flat in January, and with the broader housing market cooling, long-term upside risk to shelter inflation remains limited. In short, this Friday’s PCE is going to a line ball read – any hit that inflation is continuing to defy expectations as it has since September, the Fed will be dealt out of the rate market in 2025 and the USD, US bonds and risk exposures with debt are going to see reasonable movements. Which brings us to the other elephant in the market trading room – Tariffs on silver things.

Tariff Changes on Steel and Aluminium: Who really pays? We have been reluctant to write about the steel and aluminium tariffs that were announced on February 11. The Trump administration confirmed its plan to reinstate full tariffs on imported steel and aluminium—a move that will significantly impact both industries and consumers.

These tariffs are scheduled to start in early March, these Section 232 import tariffs will impose a 25% duty on steel and aluminium products, with aluminium tariffs rising from the previous 10% to 25%. Right now every nation on the planet (including Australia) is in Washington trying to wiggle their way out of the impending price surge – so far there is radio silence from the administration on if it will budge on any of the changes. Memory Lane If we take the 2018 tariffs as a guide, history suggests that once domestic stockpiles are depleted and buyers turn to global markets, U.S. prices will likely rise to reflect most of these duties.

However, exemptions may still be granted, particularly for aluminium, where the U.S. depends heavily on imports about 85% of aluminium consumption comes from overseas. While U.S. importers will bear roughly 80% of the tariff costs, exporters may need to lower prices to remain competitive—assuming they can’t find better pricing in other markets. Other things to be aware of from a trading point of view - The U.S. imports ~ 70 per cent of its primary aluminium Canada.

Who is the biggest play in that Canadian market? Rio Tinto. And it's not just Canada Rio Tinto ships approximately 1.75 million tonnes of aluminium annually from Canada and Australia.

Nearly 45 per cent of Rio Tinto’s U.S. aluminium sales are value-added products, which carries a premium of $200-$300 per tonne over London Metal Exchange (LME) prices. That is something that very much irks the President. Couple this with the fact physical delivery in the U.S. is also at a premium price and that gives you an average price estimate that could rise by ~40 per cent to approximately $1,036 per tonne ($0.50/lb), up from the 2024 average of $427 per tonne.

The thing is Rio Tinto itself is forecasting strong demand in North America, and its Value-add pricing is unlikely to change as domestic suppliers can’t easily replace the volumes it needs. In short, price pressure is coming – and suppliers will likely win out over the consumer. So what about Steel?

The U.S. imports 25-30 per cent of its steel so it’s not as reliant on this product as aluminium, but 80 per cent of those imports are currently exempt under Section 232 which is about to scrap it. That means the tariffs will impact around 18 million tonnes of steel imports annually, with: 35-40 per cent being flat products, 20-25 per cent semi-finished steel, and the rest covering long steel, pipes, tubes, and stainless steel. The Trump administration has signalled concerns over semi-finished steel imports, particularly Brazilian slab imports (~3-4 million tonnes per year).

What Does This Mean for Steel Prices? All things being equal - U.S. domestic steel prices will rise in full alignment with the 25% tariff on affected imports. The short and tall of it For both steel and aluminium, the reintroduction of tariffs means higher prices for U.S. buyers, particularly once inventories run down and imports reflect the new duty rates.

While exemptions remain a possibility, businesses reliant on imported metals should prepare for cost increases and potential supply disruptions. Traders should be ready for volatility, margin changes and erratic conditions as the administration rages over pricing issues.

First – let us just say that as we suspected the AUD jolted all over the place on the release of the May CPI – the read was much stronger than consensus and the fallout from the read ongoing. But, and it’s a but, we predicted the AUD’s initial bullish reaction was counted by once again point to the fact parts of the monthly read can be explained away by changes made in May 2023. With that trade taken care of – we need to look to how things might transpire over the next period.

And that means digging through the monthly read for what matters and what doesn’t and thus start to assess an environment where the ‘frighten hawk’ that is the RBA moves on rates. May CPI 4.0% year on year – highest read since November 2023 So where are we? The non-seasonally adjusted monthly CPI indicator for May 2024 came in at 4.0% year-on-year smashing market consensus 3.8%, marking the highest rate since November 2023, the third consecutive monthly rise and marking 5 months since inflation was on a downward trajectory.

This jump needs to be put into context too April 2024 CPI was 3.6% year on year, the trough of 3.4% year on year observed from December to February feels like a distant memory. However as we mentioned above the market has found reason to back track on its initial bullishness most likely due to the month-over-month CPI in May 2024 decreased by -0.1% aligning with the 'seasonal average' of -0.1% since 2017. Compare that to the +0.7% month on month increase in April 2024, well above the seasonal average of +0.3%.

However the RBA doesn’t use headline CPI seasonally adjusted or not – it cares about core inflation which strips out the top and bottom 15%. And that means looking at trimmed mean CPI. The trimmed mean CPI, spiked to 4.4% year on year, also the highest reading since November 2023.

This marks a significant reacceleration from the 3.8% year on year low in January and the 4.1% year on year rate seen last month. As has been the case for most of 2024 goods inflation has remained steady holding around 3.3% year on year. The issue is services inflation which has surged to 4.8% year on year.

Another part of the inflation ‘story’ as to why inflation is so high has been global supply. However, the data has proven this to be false. Tradables (inflation that has international exposure) although rebounding in May to 1.6% from 1.1% is well below current inflation issues.

Non-tradables (domestic only facing inflation) remains well above target at 5.2% in May from 5.0% in April. This is a domestic-led spending issue and why the RBA is in play. Key Date: 31 July Second quarter CPI is out July 31 – as mentioned in Part 1 there is still some inputs that will be released in the coming 4 weeks that will shift expectation and consensus.

But in the main the consensus read now are pretty close to the final reads. The headline CPI is now expected to rise by 1.0% quarter on quarter (range 0.7% - 1.2) and 3.9% year on year (range 3.6% to 4.1%), above the RBA's May 2024 Statement on Monetary Policy (SOMP) forecast of 3.8% but possibly ‘tolerable’ but only just. A caveat to this figure is fuel price expectations for June, which sits at a decline of -1% month on month, which would subtract approximately ~4 basis points from the headline CPI.

But we digress as the trimmed mean consensus forecasts however are a concern and might not be tolerable for the RBA. Consensus forecasts for trimmed mean sits at 1.0% quarter on quarter (range 0.8 to 1.1%) and for a year on year increase of 3.9% year on year rise (range: 3.7% to 4.1%) also above the RBA's forecast of 3.8% year on year. Any slip into 4% on the trimmed mean figure and Augst 6 will be green lit.

The trade So how to position for the coming 5 weeks ahead of the August 6 meeting. Firstly understand that consensus amongst the economic world is the August meeting has a 35% risk of seeing a hike. The market is stronger at 45% - however it was as high as 61% at the peak of the bullishness post the inflation drop.

We should also point out that pre-June 5 the pricing in the market was for cuts not hikes. Showing just how fast and hard the interbank and bond markets have swung around. We also need to return to Governor Bullock's hawkish June press conference where the Board considered a rate hike and did not entertain a rate cut.

We also pointed out that every time the Board has added this sentence to the statement: The Board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome. It has seen a rise in the preceding meeting. We believe this give the upside potential more impetus and that will positively push the AUD higher over the coming weeks something we think is not fully factored into trading to date.

Then there are the other asset classes. Hikes complicates the outlook for equities, particularly as inflation remains sticky, especially in the services. Thus which sectors and areas of the equity market sure we be on the look to for signs of stress?

A prolong period of weakness in domestic trading conditions and the likely rise of frugal consumer behaviour will present challenging earnings for first half of fiscal year 2025 for discretionary and service sector stocks. Couple this with evidence of a slowdown in housing activity, material handling, product and construction stock are also likely to face pressure in early FY25. Need to also address Banks – which have been one of the best trades in FY24 with CBA leading the pack here, the question that remains however is that bank price growth in FY24 has been due to rate cut expectations and optimistic credit-quality risks.

This explains the elevated bank trading multiples. Weakening housing activity, will likely see investors questioning multiples of this nature in the near future. Trading the inflation story over the coming 5 weeks will be fascinating.

We have been discussing Sahms’ law for the last few weeks. This is the regression indicator that signals the possibility of recession. For those that can't remember, Sahms' recession indicator is when the three-month moving average of the unemployment rate has risen by more than 0.5 per cent from the previous 12 month low.

Every time this has happened since 1950 the US has entered a recession. Which brings us to last Friday’s non-farm payroll (NFP). NFP August jobs report revealed that total nonfarm payrolls grew by just 142,000, while private sector job growth amounted to a meagre 118,000.

That is the lowest read since COVID and both figures fell well short of consensus expectations. Even more concerning, revisions to June and July payrolls subtracted a combined 86,000 jobs, further underscoring the weakness in the labour market. That is on top of the 816,000 downward revisions of the January through May figures which saw the NFP overestimating the monthly employment figures by 69,000.

The next piece of the puzzle – a piece that backs the Sahms’ law puzzle is the three-month average for private sector job growth has now fallen below 100,000 per month, a pace that typically signals the onset of a recession.. However some are pointing to the fact that the unemployment rate ticked down slightly from 4.3 per cent to 4.2 per cent in August as a mixed signal and that maybe things aren’t as bad as the headlines. However this modest improvement was largely due to rounding, as the unrounded rate was effectively unchanged (4.22 per cent in August vs. 4.25 per cent in July).

This followed an earlier increase in unemployment, which had been trending higher over the past few months. The rise in the unemployment rate, combined with slowing job growth, indicates that the labour market is likely to weaken further unless the Fed moves to ease policy – which is why we are asking – has the Fed dropped the ball by not moving already? Let’s explore that further Data from the Job Openings and Labor Turnover Survey (JOLTS) shows that firms are hiring at the slowest rate in a decade, outside of the pandemic period.

Job openings fell to 7.673 million in July, which was significantly faster than expected and brought the ratio of job openings to unemployed persons to 1.07-to-1, down from the elevated levels seen during the pandemic. This decline in job openings suggests that the labour market is normalising, but it also raises the risk of a sharper increase in unemployment in the coming months as the ratio inverts. It's not only the multitude of employment indicators flashing risk.

Other indicators reinforce the case for concern. Take the auto sales numbers, which fell below expectations, with an annualised sales rate of 15.1 million vehicles, suggesting there is now a slowdown in consumer spending. The decline in auto sales historically spreads to weaker production and employment in the auto industry, as companies adjust staffing levels in response to reduced demand.

Meanwhile, mortgage applications for new home purchases remain subdued despite a drop in mortgage rates over the last four months on rate cut expectations. The lacklustre performance in both the auto and housing markets adds to the broader picture of economic weakness. The signs are pretty clear- the slowdown is on and as the Fed weighs its options ahead of the September meeting – the final piece of the puzzle is coming inflation.

It must be said that inflation remains a key focus. Core Consumer Price Index (CPI) inflation is expected to rise by just 0.2 per cent month-on-month in August, reinforcing the view that inflation has slowed considerably, but year on year CPI is still above the Fed 2 per cent target. Inflationary pressures are easing and the greater risk to the Fed's mandate appears to be the labour market rather than inflation, but it could be the moderator on those calls for the Fed to go hard when it starts cutting.

We need to watch categories like medical services and airfares as these are ones we need to see bigger falls in the rates of price growth and could influence the Fed's decision-making. But again, the overall trend suggests inflation is no longer the primary concern. Similarly, the Producer Price Index (PPI) is expected to show a modest increase of 0.2% month-over-month, further indicating that inflationary pressures are tapering off.

Jobless claims data will also be closely watched in the coming weeks. Continuing claims are expected to rebound after an unexpected drop, driven in part by a temporary decline in claims in Puerto Rico. Any significant rise in jobless claims, particularly initial claims, could signal a shift towards more active layoffs.

Can they catch the ball? All the data mentioned highlight our concerns about the trajectory of the U.S. economy. There are clear signs of a substantial slowdown and growing risk of recession.

Thus the question now is can the Fed catch slowdown before it turns into a recession? The answer is muddled as the Federal Reserve's response to the weakening outlook remains uncertain. The base case is for the Fed to initiate a series of rate cuts in the coming months.

Currently, projections indicate that the Fed may cut rates by 50 basis points (bp) in September followed by a smaller 25 bp cuts over the proceeding meetings. However, the pace and magnitude of these cuts remain open to adjustment, depending on the evolving economic conditions. While this is the view of the market, the Fed is not as united as this – for example: Federal Reserve Governor Christopher Waller has expressed a more measured approach.

In his September 6, 2024 speech, Waller emphasised that he prefers to see more data before endorsing larger rate cuts of 50 bp rather than the more conservative 25 bp. He signalled that the Federal Open Market Committee (FOMC) needs to remain flexible and should adjust its actions based on new data rather than adhering to preconceived timelines for rate cuts. The issue with this view is that data is retrospective and by the time it's presented it would be too late to catch the slowdown.

He expressed willingness to support larger cuts if the data shows further deterioration, drawing parallels to his previous support for front-loading rate hikes when inflation surged in 2022. But again – the argument against this stance is it could be too little too late. Waller’s remarks suggest that the Fed could adopt a cautious approach in September, potentially starting with a 25 bp cut but leaving room for larger cuts if economic data continues to weaken at either the November or December meeting.

So could the Fed drop the ball? We think the word to use here is “fumble”. There are clear signs of disagreements around, size, speed and effects of cuts, which may cause them to fumble the response in the interim, over the medium term it will align, whether they catch or drop the ball – time will tell.

In short – we are in for a volatile period in FX, already the USD has been falling on rate fundamentals, but rallies on recession fears. The drive to safe havens over risk plays will be a strong theme in the coming period and will likely override any interest rate differential trade plays that present. It is going to be an interesting period culminating in the US election in November, thus be ready to be nimble and accept swings that seem to go against traditional trading theories.

So FY24 earnings are now done and from what we can see the results have been on the whole slightly better than expected. The catch is the numbers that we've seen for early FY25 which suggested any momentum we had from 2024 may be gone. So here are 8 things that caught our attention from the earnings season just completed.

Resilient Economy and Earnings Performance Resilience surprises remain: The Australian economy has shown remarkable resilience despite higher inflation and overall global pessimism. The resilience was reflected in the ASX 300, which closed the reporting season with a net earnings beat of 3 percentage points - a solid beat of the Street's consensus. This beat was primarily driven by better-than-expected margins, indicating that companies are effectively managing cost pressures through flexes in wages, inventories and nonessential costs.

The small guy is falling by wayside: However, the reporting outside of the ASX 300 paints a completely different picture. Over 53 per cent of firms missed estimates, size cost efficiencies and other methods larger firms can take were unable to be matched by their smaller counterparts. The fall in the ex-ASX 300 stocks was probably missed by most as it represents a small fraction of the ASX.

But nonetheless it's important to highlight as it's likely that what was seen in FY24 in small cap stocks will probably spread up into the larger market. Season on season slowdown is gaining momentum Smaller Beats what also caught our attention is the three-percentage point beat of this earnings season is 4 percentage points less than the beat in February which saw a seven-percentage point upside. That trend has been like this now for three consecutive halves and it's probable it will continue into the first half of FY25.

The current outlook from the reporting season is a slowing cycle, reducing the likelihood of positive economic surprises and earnings upgrades. Dividend Trends Going Oprah - Dividend Surprises: Reporting season ended with dividend surprises that were more aligned with earnings surprises, with a modest DPS (Dividends Per Share) beat of 2 percentage points. This marked a significant improvement from the initial weeks of the reporting season when conservative payout strategies led to more dividend misses.

The stronger dividends toward the end of the season signal some confidence in the future outlook despite conservative guidance. However, firms that did have banked franking credits or capital in the bank from previous periods they went Oprah and handed out ‘special dividends’ like confetti. While this was met with shareholder glee, it does also suggest that firms cannot see opportunity to deploy this capital in the current conditions.

That reenforces the views from point 2. Winners and Losers - Performance Growth Stocks Outperform: Growth stocks emerged as the clear winners of the reporting season, with a net beat of 30 percentage points. This performance was driven by strong margin surprises and the best free cash flow (FCF) surprise among any group.

However, there was a slight miss on sales, which was more than offset by higher margins. Sectors like Technology and Health were key contributors to the outperformance of Growth stocks. Stand out performers were the likes of SQ2, HUB, and TPW.

Globally-exposed Cyclicals Underperform: Global Cyclicals were the most disappointing, led by falling margins and sales misses. The earnings misses were attributed to slowing global growth and the rising Australian Dollar. Despite these challenges, Global Cyclicals did follow the dividend trend surprised to the upside.

Contrarian view might be to consider Global Cyclicals with the possibility the AUD begins to fade on RBA rate cuts in 2025. Mixed Results in Other Sectors: Resources: Ended the season with an equal number of beats and misses. Margins were slightly better than expected, and there was a positive cash flow surprise for some companies.

However, the sector faced significant downgrades, with FY25 earnings now expected to fall by 3.2 per cent. Industrials: Delivered growth with a nine per cent upside in EPS increases, although slightly below expectations. Defensives drove most of this growth, insurers however such as QBE, SUN, and HLI were drags.

Banks: Banks received net upgrades for FY25 earnings due to delayed rate cuts and lower-than-expected bad debts. However, earnings are still forecasted to fall by around 3 per cent in FY25. Defensives: Had a challenging reporting season, with net misses on margins.

Several major defensive stocks missed expectations and faced downgrades for FY25, which led to negative share price reactions. Future Gazing - Guidance and Earnings Outlook Vigilant Guidance has caused downgrades: As expected, many companies used the reporting season to reset earnings expectations. About 40 per cent in fact provided forecasts below consensus expectations, which in turn led to earnings downgrades for FY25 from the Street.

This cautious approach reflects the uncertainty in the economic environment and the potential for slower growth ahead, which was reflected in the FY24 numbers. Flat Earnings Forecast for FY25: The initial expectation of approximately 10 per cent earnings growth for FY25 has completely evaporated to just 0.1 per cent growth (yes, you read that correctly). This revision includes adjustments for the treatment of CDIs like NEM, which reduced earnings by 2.8 percentage point, and negative revisions in response to weaker-than-expected results, guidance, and lower commodity prices.

Resources were particularly impacted, with a 7.7 percentage point downgrade, leading to a forecasted earnings decline of 2.8 percent for the sector. Gazing into FY26: Early projections for FY26 suggest a 1.3 percent decline in earnings, driven by the expected declines in Resources and Banks due to net interest margins and commodity prices. However, Industrials are currently projected to deliver a 10.4 percent EPS growth, would argue this seems optimistic given the slowing economic cycle.

The Consensus Downgrades to 2025 Earnings: The consensus for ASX 300 earnings in 2025 was downgraded by 3 per cent during the reporting season. This reflects a broad range of negative revisions, with 23 percent of stocks facing downgrades. Biggest losers were sectors like Energy, Media, Utilities, Mining, Health, and Capital Goods all saw significant consensus downgrades, with Media particularly facing downgrades as budgets are slashed in half.

Flip side Tech, Telecom, Banks, and Financial Services, saw aggregate earnings upgrades. Notably, 78 percent of the banking sector received upgrades, reflecting some resilience in this group. Cash Flow and Margin Surprises Positive Cash Flow: Operating cash flow was a positive surprise, with 2 percentage point increase for Industrial and Resource stocks reporting cash flow at least 10 per cent above expectations.

The main drivers of this cash flow surprise were lower-than-expected tax and interest costs, along with positive EBITDA margin surprises. Capex: There were slightly more companies with higher-than-expected capex, but the impact on overall Free Cash Flow (FCF) was modest. Significant positive FCF surprises were seen in companies like TLS, QAN, and BHP, while WES, CSL, and WOW had negative surprises.

Final nuts and bolts Seasonal Downgrade Patterns: The peak in downgrades typically occurs during the full-year reporting season, so the significant downgrades seen in August are not necessarily a negative signal for the market. As the year progresses, the pace of downgrades may slow, and there could be some positive guidance surprises during the 2024 AGM season. However, with a slowing economic cycle, the likelihood of positive surprises is lower compared to 2023.

Overall, the reporting season highlighted the resilience of the Australian economy and the challenges facing certain sectors. While Growth stocks outperformed, the outlook for FY25 remains cautious with flat earnings growth and sector-specific headwinds. Investors will need to navigate a mixed landscape with potential opportunities in contrarian plays like Global Cyclicals, but also be mindful of the broader economic uncertainties.