Sive Morten
Special Consultant to the FPA
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Fundamentals
This week was tricky for trading as markets' expectations of coming NFP report and other events bring a lot of volatility, making difficult to set the direction. Until NFP report we were made it relatively good, while job report numbers have exceeded all most optimistic expectations and broken our expectations. It seems that it is more time needed until recession impacts job market as well.
Market overview
The dollar rallied across the board on Friday, notching its biggest daily percentage gain since mid-June against the yen, after a stronger-than-expected U.S. payrolls report suggested the Federal Reserve may need to continue aggressively raising interest rates in the near term. The U.S. dollar index , which measures the greenback against a basket of currencies, sharply extended gains following the report, which showed nonfarm payrolls increased by 528,000 jobs last month, the largest gain since February. That was well above economists' expectations.
Despite that we have impressive NFP numbers, guys, we should not relax. As we've mentioned last week, the weekly claims data keep going higher week by week, and more and more companies report on hiring freezing or even layoffs. As Zero Hedge reports - Amazon, one of the largest tech employers in the world, has revealed that it is now hiring at the slowest pace since 2019 and has cut over 100,000 employees globally in the June quarter, likely due to the dramatic economic slowdown since 2021.
This news comes as multiple companies are announcing layoffs and hiring freezes. Google parent Alphabet Inc. is instituting a hiring freeze. Apple is slowing its hiring this year. Coinbase is cutting 18% of it's staff. Microsoft has announced a hiring slowdown. Netflix has cut at least 500 employees recently, not including contractor cuts. Peloton is firing over 2800 workers so far this year. Online brokerage Robinhood terminated 9% of its workforce in April. Twitter cut 30% of its talent acquisition team this past month but declined to give a specific number of layoffs. The list goes on and on.
We could see wage grown - 0.5% monthly on average, but this is only 6% per year, while inflation (at least officially) is 9%:
Thus, it is not surprising why amount of vacancies decrease month by month:
Sooner or later but these layoffs will find the way into NFP statistics. We were hurry a bit in our timing judgement, where it should happen, but it doesn't mean that we deny our view now. We still suggest that unemployment will start to rise and relatively soon.
The steep reversal from only a year ago highlights the swift nature of the economic downturn and also shows how dependent the tech industry is on consumers having large amounts of expendable income. When the financial environment gets tight, Big Tech corporations are among the first to feel the crunch because most of them offer very little in terms of necessities
The S&P 500 headed lower, Treasury yields advanced and the dollar rose on Friday after the U.S. July employment report blasted past expectations, raising the odds of continued monetary tightening from the Federal Reserve. Wall Street pared losses as the session progressed. At close, the Nasdaq joined the bellwether index in the red and the blue-chip Dow reversed course to end in positive territory.
U.S. Treasury yields rose and a closely watched part of the yield curve touched its deepest inversion since August 2000 on increased odds of another 75 basis point interest rate hike from the central bank in September.
This is general market reaction, folks - stocks have dropped and USD has raised, because good job market performance suggests more freedom to the Fed in interest rates policy decisions. Why recent rate change to 2.25% has not shown yet direct negative impact on jobs - it lets them to rise more. This perspective, in turn, supports dollar strength, bonds and makes pressure on the stocks. According to BofA, annualized S&P return, adjusted for inflation is the worst since 1872...
Market expectations on USD, EUR performance
The dollar's strength has yet to peak, according to a majority of currency strategists polled by Reuters who were however divided on when the currency's advance would come to an end. The greenback slipped from a decade high in mid-July but quickly snapped back when three Fed officials made it clear the central bank was "completely united" on increasing rates to a level that would put a dent in the highest U.S. inflation since the 1980s.
With the Fed expected to stay ahead of its peers in the tightening cycle by some measure, and the global economy expected to slow significantly, a path for the dollar to weaken meaningfully or for most other currencies to stage a comeback is difficult to forge. In the Aug. 1-3 poll, a strong majority of more than 70% of strategists, or 40 of 56, who answered an additional question said the dollar's strength hasn't yet peaked.
Asked when it would peak, 14 said within three months, 19 said within six months, another six said within a year and one said within two years. Only 16 said it already had. "For the USD to weaken, the Fed has to be more concerned about growth than about inflation, and we are not there yet," said Michalis Rousakis, G10 FX strategist at Bank of America Securities.
The euro touched parity with the dollar last month, hitting a near two-decade low, and is down more than 10% in 2022. It was forecast to gain over 6% from current levels by next July and was expected to trade around $1.02, $1.05 and $1.08 in the next three, six and 12 months respectively. Those median forecasts, the lowest in a Reuters FX poll since 2017, showed a deteriorating outlook for the common currency.
While only a handful of analysts expected the euro to trade at or below parity versus the dollar over the forecast horizon in a July poll, about one-third of the over 60 strategists now forecast it to revisit those levels in the next three months.
Despite its recent rally when U.S. Treasury yields tumbled, the safe-haven Japanese yen is down about 14% for the year, making it the biggest loser among its major peers. The carry trade currency was expected to claw back some of those losses and gain about 5% to trade around 127 per dollar in a year.
In general, these expectations have reasonable background. Eurostat reports 36.1% Producer price inflation this week.
It is no surprising price jump in energy sector, but take a look - non- durable consumer goods - 12.5%, durable goods - 9.5% and intermediate goods price rise for 23.8%
The consumption power is decreasing on background of rising prices. This is unavoidable lead to economy slowdown and GDP drop in next quarter, as we've mentioned about it last week. When we've digged recent GDP report, showed positive numbers.
Consumers in the euro zone are bracing for the economy to shrink and for high inflation to continue eating into their income in the next year, a European Central Bank survey showed on Thursday. The Consumer Expectations Survey, used by policymakers for input in their deliberations and published on Thursday for the first time, showed households were beginning to lose faith in the ECB's ability to bring inflation back down to its 2% goal.
Consumers also expected the economy to contract by 1.3% in the coming 12 months. By comparison, the ECB expects inflation to average 6.8% in 2022 before falling to 3.5% in 2023 and 2.1% in 2024. It sees growth at 3.7% this year, 2.8% next year and 1.6% in 2024. EU Personal consumption is decreasing and now is dropping for 3.7%:
While in Germany it decreases for 8.8% - worst result since 1995, the whole history of observations. Thus, EUR has very blur perspectives against USD in near term.
Next week Wednesday's July U.S. inflation print is shaping up as a key test for a summer rally in U.S. stocks that has lifted the S&P 500 to multi-week highs. The benchmark index is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than previously anticipated.
Fed officials have pushed back against the idea that they will be less aggressive in a so-called dovish pivot. Any signs that inflation is not yet peaking after the Fed's 225 bps worth of rate hikes could provide a reality check to markets hopeful of a soft landing for the economy. Analysts polled by Reuters forecast annual inflation at 8.9% in July versus 9.1% in June, which was the largest increase since 1981
BOE RATE DECISION
And few words, on BoE rate decision, as it has become really hot topic. It is a bit difficult to me to make judgement on what really is going on in UK now, as our forum members (Hi, Brett ) tells that nothing terrible happens. Previously was the times of high inflation, and Britain was able to pass them. My opinion is based on official statistics, media and BoE reports.
UK now has highest mortgage rate in recent 5 years around 4.6% which is very close to 25 year peak at 4.65-4.7%.
Data on weakness in the British economy keeps coming. A survey on Thursday showed British construction companies reported their biggest fall in activity in more than two years last month, as house-builders scaled back work and civil engineering firms faced a dearth of new contracts
The Guardian reports - UK inflation will soar to ‘astronomical’ levels over next year, thinktank warns. The National Institute of Economic and Social Research also forecast a long recession that would last into next year and hit millions of the most vulnerable households, especially in the worst-off parts of the country.
Money markets expectation for rate hikes this year were little changed immediately after the BoE rate move, with markets expecting another 95 bps of hikes by December. So, the BoE tells the same, actually.
One of the first silent rules of action for any authority of any country is not to fall in frustration. The darkest news should be introduced as optimistic as possible. If everything is really bad, you need to come up with new words (such as "recession" that was invented in the late 30's) and sometimes turn to blind eye on some phenomena. But last week BoE has given up and publicly recognized serious economic problems.
The Bank of England has raised the rate by 0.50% (the maximum for 27 years), to 1.75%;. At the same time, forecasts for the economy (recession will begin at the end of this year and will last at least 5 quarters) and inflation (+13.3% per year in the autumn) are very gloomy. As BoE publicly shows shocking inflation forecast at 13.3% - the soap opera on temporal inflation which should start decreasing is coming to an end. The recession is officially recognized, and along with it - expectations of a sharp drop in wealth and the standard of living of the population.
Note that something similar has to happen in the United States soon. And only the EU leadership is still holding on, although statistics for individual countries there look threatening. Let's see what the July statistics will look like.
Conclusion
This week we've made a tactical miss - changes in US job market are yet to come, while we thought that they already should be visible. This doesn't change our long term view and long-term target of 0.9 by EUR/USD. Strategically we do not see any changes in overall situation and do not see any signs for optimism yet.
Reuters poll on dollar strength mentioned above and our discussion of Fed future strategy in recent Gold market report perfectly agree to each other. Our expectations suggest 1-2 rate hike by the Fed until the end of the year of total amount of 0.75-1% that should provide support to the dollar. Reuters poll tells that dollar should reach the peak within 3-6 months. UBS comments also confirms our 0.9 target, suggesting that EUR should drop below the parity. Besides, the fundamental statistics balance will play in favor of this scenario.
I mean that if US statistics mostly shows already recession in all spheres - inflation, consumption, sentiment, GDP, PMI etc., EUR data is still disguised by the calculation basis. Recent EU data is calculated to the pit of Covid years. This is the reason why EU GDP is still positive. Some EU countries have had the strength reserves in a way of good trading balance (such as a Germany) that is deteriorating slowly. That's why EU data is yet to become worse that should change the EUR/USD balance not in favor of the latter. All these moments make us keep our long-term bearish view on EUR intact.
To be continued with technical analysis below...
This week was tricky for trading as markets' expectations of coming NFP report and other events bring a lot of volatility, making difficult to set the direction. Until NFP report we were made it relatively good, while job report numbers have exceeded all most optimistic expectations and broken our expectations. It seems that it is more time needed until recession impacts job market as well.
Market overview
The dollar rallied across the board on Friday, notching its biggest daily percentage gain since mid-June against the yen, after a stronger-than-expected U.S. payrolls report suggested the Federal Reserve may need to continue aggressively raising interest rates in the near term. The U.S. dollar index , which measures the greenback against a basket of currencies, sharply extended gains following the report, which showed nonfarm payrolls increased by 528,000 jobs last month, the largest gain since February. That was well above economists' expectations.
"This is a much stronger report than was expected. ... What it means is the Fed cannot pivot at this point. The Federal Reserve has to continue to hike rates. The folks who are saying let's take it more slowly are being shoved aside here with this report," said Axel Merk, president and chief investment officer at Merk Investment in Palo Alto, California. "The dollar is stronger against almost everything. The U.S. is performing when the general mood is that the world is slowing down."
Despite that we have impressive NFP numbers, guys, we should not relax. As we've mentioned last week, the weekly claims data keep going higher week by week, and more and more companies report on hiring freezing or even layoffs. As Zero Hedge reports - Amazon, one of the largest tech employers in the world, has revealed that it is now hiring at the slowest pace since 2019 and has cut over 100,000 employees globally in the June quarter, likely due to the dramatic economic slowdown since 2021.
This news comes as multiple companies are announcing layoffs and hiring freezes. Google parent Alphabet Inc. is instituting a hiring freeze. Apple is slowing its hiring this year. Coinbase is cutting 18% of it's staff. Microsoft has announced a hiring slowdown. Netflix has cut at least 500 employees recently, not including contractor cuts. Peloton is firing over 2800 workers so far this year. Online brokerage Robinhood terminated 9% of its workforce in April. Twitter cut 30% of its talent acquisition team this past month but declined to give a specific number of layoffs. The list goes on and on.
We could see wage grown - 0.5% monthly on average, but this is only 6% per year, while inflation (at least officially) is 9%:
Thus, it is not surprising why amount of vacancies decrease month by month:
Sooner or later but these layoffs will find the way into NFP statistics. We were hurry a bit in our timing judgement, where it should happen, but it doesn't mean that we deny our view now. We still suggest that unemployment will start to rise and relatively soon.
The steep reversal from only a year ago highlights the swift nature of the economic downturn and also shows how dependent the tech industry is on consumers having large amounts of expendable income. When the financial environment gets tight, Big Tech corporations are among the first to feel the crunch because most of them offer very little in terms of necessities
The S&P 500 headed lower, Treasury yields advanced and the dollar rose on Friday after the U.S. July employment report blasted past expectations, raising the odds of continued monetary tightening from the Federal Reserve. Wall Street pared losses as the session progressed. At close, the Nasdaq joined the bellwether index in the red and the blue-chip Dow reversed course to end in positive territory.
U.S. Treasury yields rose and a closely watched part of the yield curve touched its deepest inversion since August 2000 on increased odds of another 75 basis point interest rate hike from the central bank in September.
The employment report "telegraphed some work needs to be done on the Fed’s side, regarding their interest rate policy," said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. "That was certainly the market’s initial reaction. The employment data raises the prospect of a soft landing," Keator said, adding that Fed Chair Jerome Powell has "pointed to the fact that a strong labor market has not historically accompanied recessions."
This is general market reaction, folks - stocks have dropped and USD has raised, because good job market performance suggests more freedom to the Fed in interest rates policy decisions. Why recent rate change to 2.25% has not shown yet direct negative impact on jobs - it lets them to rise more. This perspective, in turn, supports dollar strength, bonds and makes pressure on the stocks. According to BofA, annualized S&P return, adjusted for inflation is the worst since 1872...
Market expectations on USD, EUR performance
The dollar's strength has yet to peak, according to a majority of currency strategists polled by Reuters who were however divided on when the currency's advance would come to an end. The greenback slipped from a decade high in mid-July but quickly snapped back when three Fed officials made it clear the central bank was "completely united" on increasing rates to a level that would put a dent in the highest U.S. inflation since the 1980s.
With the Fed expected to stay ahead of its peers in the tightening cycle by some measure, and the global economy expected to slow significantly, a path for the dollar to weaken meaningfully or for most other currencies to stage a comeback is difficult to forge. In the Aug. 1-3 poll, a strong majority of more than 70% of strategists, or 40 of 56, who answered an additional question said the dollar's strength hasn't yet peaked.
Asked when it would peak, 14 said within three months, 19 said within six months, another six said within a year and one said within two years. Only 16 said it already had. "For the USD to weaken, the Fed has to be more concerned about growth than about inflation, and we are not there yet," said Michalis Rousakis, G10 FX strategist at Bank of America Securities.
"In the very long run, let's say two or three or four years from now, the dollar will probably be considerably weaker. But in the 12-month timeframe we're looking at relatively small moves," said Brian Rose, senior economist at UBS Global Wealth Management.
The euro touched parity with the dollar last month, hitting a near two-decade low, and is down more than 10% in 2022. It was forecast to gain over 6% from current levels by next July and was expected to trade around $1.02, $1.05 and $1.08 in the next three, six and 12 months respectively. Those median forecasts, the lowest in a Reuters FX poll since 2017, showed a deteriorating outlook for the common currency.
While only a handful of analysts expected the euro to trade at or below parity versus the dollar over the forecast horizon in a July poll, about one-third of the over 60 strategists now forecast it to revisit those levels in the next three months.
"In the short term we're looking for the dollar to maintain its strength, especially against the euro. So we think there's a chance the euro will drop below parity," Rose said.
Despite its recent rally when U.S. Treasury yields tumbled, the safe-haven Japanese yen is down about 14% for the year, making it the biggest loser among its major peers. The carry trade currency was expected to claw back some of those losses and gain about 5% to trade around 127 per dollar in a year.
"I think the most relevant question with respect to the dollar is if you're going to sell the dollar, what else do you buy ... you're not going to buy shed loads of yen relative to the U.S. dollar when you're getting much higher yield in dollars," said Jane Foley, head of FX strategy at Rabobank.
In general, these expectations have reasonable background. Eurostat reports 36.1% Producer price inflation this week.
It is no surprising price jump in energy sector, but take a look - non- durable consumer goods - 12.5%, durable goods - 9.5% and intermediate goods price rise for 23.8%
The consumption power is decreasing on background of rising prices. This is unavoidable lead to economy slowdown and GDP drop in next quarter, as we've mentioned about it last week. When we've digged recent GDP report, showed positive numbers.
Consumers in the euro zone are bracing for the economy to shrink and for high inflation to continue eating into their income in the next year, a European Central Bank survey showed on Thursday. The Consumer Expectations Survey, used by policymakers for input in their deliberations and published on Thursday for the first time, showed households were beginning to lose faith in the ECB's ability to bring inflation back down to its 2% goal.
Consumers also expected the economy to contract by 1.3% in the coming 12 months. By comparison, the ECB expects inflation to average 6.8% in 2022 before falling to 3.5% in 2023 and 2.1% in 2024. It sees growth at 3.7% this year, 2.8% next year and 1.6% in 2024. EU Personal consumption is decreasing and now is dropping for 3.7%:
While in Germany it decreases for 8.8% - worst result since 1995, the whole history of observations. Thus, EUR has very blur perspectives against USD in near term.
Next week Wednesday's July U.S. inflation print is shaping up as a key test for a summer rally in U.S. stocks that has lifted the S&P 500 to multi-week highs. The benchmark index is up 14% from its mid-June low, supported in part by expectations that the Federal Reserve will be less hawkish than previously anticipated.
Fed officials have pushed back against the idea that they will be less aggressive in a so-called dovish pivot. Any signs that inflation is not yet peaking after the Fed's 225 bps worth of rate hikes could provide a reality check to markets hopeful of a soft landing for the economy. Analysts polled by Reuters forecast annual inflation at 8.9% in July versus 9.1% in June, which was the largest increase since 1981
BOE RATE DECISION
And few words, on BoE rate decision, as it has become really hot topic. It is a bit difficult to me to make judgement on what really is going on in UK now, as our forum members (Hi, Brett ) tells that nothing terrible happens. Previously was the times of high inflation, and Britain was able to pass them. My opinion is based on official statistics, media and BoE reports.
UK now has highest mortgage rate in recent 5 years around 4.6% which is very close to 25 year peak at 4.65-4.7%.
Data on weakness in the British economy keeps coming. A survey on Thursday showed British construction companies reported their biggest fall in activity in more than two years last month, as house-builders scaled back work and civil engineering firms faced a dearth of new contracts
The Guardian reports - UK inflation will soar to ‘astronomical’ levels over next year, thinktank warns. The National Institute of Economic and Social Research also forecast a long recession that would last into next year and hit millions of the most vulnerable households, especially in the worst-off parts of the country.
"The pound is falling despite a 50 bp hike by the BoE. The reaction mostly boils down to the BoE’s pessimistic outlook for the UK economy, with a recession now expected to start in the forth quarter and to extend through next year," said Francesco Pesole, FX strategist at ING.
Money markets expectation for rate hikes this year were little changed immediately after the BoE rate move, with markets expecting another 95 bps of hikes by December. So, the BoE tells the same, actually.
One of the first silent rules of action for any authority of any country is not to fall in frustration. The darkest news should be introduced as optimistic as possible. If everything is really bad, you need to come up with new words (such as "recession" that was invented in the late 30's) and sometimes turn to blind eye on some phenomena. But last week BoE has given up and publicly recognized serious economic problems.
The Bank of England has raised the rate by 0.50% (the maximum for 27 years), to 1.75%;. At the same time, forecasts for the economy (recession will begin at the end of this year and will last at least 5 quarters) and inflation (+13.3% per year in the autumn) are very gloomy. As BoE publicly shows shocking inflation forecast at 13.3% - the soap opera on temporal inflation which should start decreasing is coming to an end. The recession is officially recognized, and along with it - expectations of a sharp drop in wealth and the standard of living of the population.
Note that something similar has to happen in the United States soon. And only the EU leadership is still holding on, although statistics for individual countries there look threatening. Let's see what the July statistics will look like.
Conclusion
This week we've made a tactical miss - changes in US job market are yet to come, while we thought that they already should be visible. This doesn't change our long term view and long-term target of 0.9 by EUR/USD. Strategically we do not see any changes in overall situation and do not see any signs for optimism yet.
Reuters poll on dollar strength mentioned above and our discussion of Fed future strategy in recent Gold market report perfectly agree to each other. Our expectations suggest 1-2 rate hike by the Fed until the end of the year of total amount of 0.75-1% that should provide support to the dollar. Reuters poll tells that dollar should reach the peak within 3-6 months. UBS comments also confirms our 0.9 target, suggesting that EUR should drop below the parity. Besides, the fundamental statistics balance will play in favor of this scenario.
I mean that if US statistics mostly shows already recession in all spheres - inflation, consumption, sentiment, GDP, PMI etc., EUR data is still disguised by the calculation basis. Recent EU data is calculated to the pit of Covid years. This is the reason why EU GDP is still positive. Some EU countries have had the strength reserves in a way of good trading balance (such as a Germany) that is deteriorating slowly. That's why EU data is yet to become worse that should change the EUR/USD balance not in favor of the latter. All these moments make us keep our long-term bearish view on EUR intact.
To be continued with technical analysis below...