ORLANDO, Florida, Aug 21 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

U.S. stocks fell on Thursday and the dollar and Treasury

yields rose, as solid factory data cast a bit more doubt on the

Fed's readiness to lower interest rates next month. All eyes are

now firmly on Fed Chair Jerome Powell's Jackson Hole speech on

Friday.

More on that below. In my column today, I look at the

apparent contradiction between record inflows into U.S. assets

from abroad, and the 125 basis points of Fed rate cuts traders

are expecting by the end of next year. It doesn't add up.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Fed's expansive experiment in strategy to get a

reboot

at Jackson Hole

2. How Fed Chair Powell has used Jackson Hole to

signal

what's next

3. What's in Trump's trade deal with Europe?

4. Washington's chip stakes look like industrial

policy on

overdrive

5. The UK is back in business. Someone forgot to

tell

British investors: Klement

Today's Key Market Moves

* STOCKS: Britain's FTSE 100 clocks record high for

a

third day, China hits 10-year high. Wall Street's main three

indices fall - S&P 500 down for a fifth day, longest losing

streak this year.

* SHARES/SECTORS: U.S. consumer staples -1.2%,

biggest

fall in two months. Walmart ( WMT ) -4.5%, biggest fall in six months.

* FX: Dollar rises across the board. In G10 FX, it

gains

most against low-yielding Swiss francs and yen. Japan's currency

has biggest fall this month.

* BONDS: Japanese yields hit historic peaks -

10-year

highest since 2008, 20-year since 1999. U.S. curve bear

flattens, chance of Sept Fed hike now barely one-in-four.

* COMMODITIES: Oil rises 1% on stalled

Russia-Ukraine

peace talks, strong U.S. demand. WTI settles at $63.43/bbl.

Today's Talking Points:

* Jackson Hole. Fed Chair Jerome Powell's eighth and

final Jackson Hole speech is almost upon us. There may be three

broad elements of his address to focus on: near-term policy

signals, a new framework for the central bank, and a defense of

his tenure.

All three will be dissected, debated and debunked. The most

important element for investors in the near term will be whether

he leans toward a rate cut next month. These will be his first

public remarks since weak jobs data three weeks ago made a

September rate cut a virtual certainty, according to U.S. rate

futures.

Traders are no longer quite so certain, and rates futures

markets are now barely attaching a one-in-four probability of a

cut, the lowest since that payrolls shock three weeks ago.

* Economic resilience. There were mixed signals in

Thursday's sprinkling of U.S. employment, industry and activity

indicators, but perhaps the most significant was the surprise

strength in the manufacturing purchasing managers' index.

The flash manufacturing PMI for July was 53.3. If confirmed

by the final figure, this will be the highest in three years.

Three Fed officials on Thursday signaled they are not ready to

cut rates right now, and more figures like this PMI report will

make the dovish case even harder to argue.

The PMI surprises were not confined to the U.S. - the latest

reports from Australia, Japan, India, the euro zone and Britain

show that global business activity this month was strong too.

* Trade. After a quiet few days for the global trade wars,

investors got a reminder on Thursday of the brave new world

ahead, as the US and European Union locked in a framework deal

reached last month that includes a 15% U.S. tariff on most EU

imports.

In a 3-1/2-page joint statement, the two sides listed the

commitments made, and senior EU officials said they are still

pressing for lower duties on wine and spirits exports. One of

the most controversial elements of the deal is European

companies' apparent commitment to invest $600 billion in the

U.S. through 2028. Watch this space.

If America is in trouble, why do foreigners keep buying

U.S. assets?

Is the U.S. economic outlook so weak that it warrants

multiple interest rate cuts? Or are U.S. markets pulling in huge

inflows from abroad because the country's outlook is so

attractive?

Both can't be right, yet those are the respective narratives

indicated by current pricing in the rates market and the latest

capital flows data. Something doesn't quite add up.

Much has been written this year about how foreign investors

- spooked by U.S. President Donald Trump's unorthodox, populist

policies - were going to reduce their exposure to U.S. markets

and deploy that capital elsewhere.

But that's not how it is panning out.

Treasury International Capital (TIC) figures last week

showed that foreign investors bought a net $192 billion of U.S.

securities in June. This followed a record net purchase of $326

billion in May, swelled by the largest ever inflow from the

private sector.

Once U.S. investors' purchases of foreign assets are

discounted, the net flow of long-term capital into U.S.

securities in June was still a healthy $151 billion, taking the

total for the second quarter to a record-matching $410 billion.

Zooming out a little further, net inflows in the first half

of this year stood at $643 billion, on course to match the

record $1.3 trillion net inflow from 2022. And in the 12 months

through June, a net $1.27 trillion was poured into U.S. stocks,

Treasuries, agency and corporate debt.

The end of American exceptionalism? It sure doesn't look

like it.

DE-DOLLARIZATION, WHERE ART THOU?

Overseas demand for U.S. assets is clearly strong on an

aggregate level. The explanation may be quite simple: capital

continues to flood into the U.S. because that is where investors

around the world believe they will see the strongest growth and

thus earn the highest returns.

"The flows picture is remarkably robust," says Robin Brooks,

senior fellow at the Brookings Institution in Washington. "I

don't think you can tell a 'de-dollarization' story or 'end of

U.S. exceptionalism' story from these inflows."

True, there is some justification for the de-dollarization

narrative. The greenback is down 10% year to date, having

recorded its worst start to a year in over half a century.

But most of that slump was in the January-April period. In

the last four months, the dollar index has been essentially

flat.

The dollar's weakness despite the influx of global capital

certainly is a head-scratcher. Anecdotal evidence suggests this

move partly reflects foreigners hedging more of their U.S.

exposure, via currency options and derivatives. Short-term moves

based on a dovish Fed outlook may be at play too.

ULTIMATE HEAD-SCRATCHER

But perhaps an even bigger head-scratcher is the disconnect

between Fed expectations, the U.S. growth outlook, and capital

flows.

Traders expect the Fed to cut rates by around 125 basis

points by the end of next year. That is, by far, the most dovish

expectation for any G10 central bank. History suggests easing on

this scale would only occur if there were a pretty sharp

slowdown in economic growth.

True, there are some red flags in the labor market, parts of

'Main Street' and U.S. public finances, even before factoring in

tariff uncertainty. Yet, overall, the U.S. economy appears to be

in reasonably decent shape. Economists at S&P Global Market

Intelligence on Wednesday raised their 2025 and 2026 GDP growth

forecasts to 1.7% and 2.4%, respectively.

Is that an economy in need of six quarter-percentage point

rate cuts over the coming 16 months, or is the growth outlook

relatively rosy precisely because that level of monetary

loosening is expected?

That remains to be seen. For now, investors around the world

continue to hoover up U.S. securities, which suggests they can't

be all that pessimistic about the U.S. - or at least U.S. tech

companies.

It's worth noting that the TIC data showed the large inflows

in May and June were mostly in so-called riskier equities rather

than 'safer' Treasuries, suggesting foreigners may be more

sanguine about Corporate America than the government.

The end of U.S. exceptionalism may be around the corner, but

it's a long bend.

What could move markets tomorrow?

* Japan inflation (July)

* UK consumer confidence (August)

* Germany GDP (Q2, detailed breakdown)

* Canada retail sales (July)

* U.S. Federal Reserve Chair Jerome Powell speaks at Jackson

Hole

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