Sive Morten
Special Consultant to the FPA
- Messages
- 18,551
Fundamentals
It was really the big drama this week on the markets. Everything was natural until Wed, when ADP report has triggered expected upward action, but Fed stepped in right after that and crushed short-term sentiment. Next hit market has got from NFP release, that was totally different from ADP. NFP was good in all aspects - employment, hiring, wage etc. This has led to explosion of speculations around Fed tightening. Besides, the strong effect also could be explained by big difference between Fed behavior this week and July statement last week. It is drastic change in a very short-term period. Once investors were calmed down and it seems that markets have got some time to spend with environment of low rates - Fed statement and NFP crushed the mood.
Market overview
On Wednesday, Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023. He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on the labour market over the next few months. Clarida's comments led investors to price in slightly higher chances of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose. Fed officials have said that improving employment is critical to when they begin to pull back further on extra support they provided for the economy during the pandemic.
The dollar rose sharply on Friday, boosted by a strong U.S. jobs report toward its biggest weekly gain in seven weeks. The report showed jobs grew more than expected in July, pushing bond yields higher on the view that the Federal Reserve may act more quickly to tighten U.S. monetary policy. The report on U.S. nonfarm payrolls showed jobs increased by 943,000 in July compared with the 870,000 forecast by economists polled by Reuters.
Analysts have cautioned it will take more evidence than one jobs report to push U.S. yields significantly higher again. Friday’s yield remained nearly one-half a percentage point lower than at the end of March. Reactions to monthly jobs reports have changed often this year in days following release of the data, strategists at Wells Fargo Securities found when they looked at the 10-year Treasury yield.
Markets will next be watching for comments from Fed policymakers at the symposium of central bankers in Jackson Hole, Wyoming late this month.
When Fed policy makers are confident in U.S. employment gains to raise interest rates, the global economy could be strong enough to bolster riskier currencies instead of the dollar. A recent Reuters poll of strategists showed most predicting a dollar fall over the next year.
An unexpectedly strong jobs number for July has bolstered the case for investors who believe Treasury yields will head higher over the rest of the year, potentially weighing on an equity rally that has taken stocks to record highs.
Some investors believe the robust jobs numbers could support the view that the Federal Reserve, faced with rising inflation and strong growth, may need to unwind its ultra-easy monetary policies sooner than expected. Such an outcome could push yields higher while denting growth stocks and other areas of the market.
That view, however, is complicated by worries over rising COVID-19 cases across the United States that threaten to weigh on growth and the Fed’s insistence that the current surge in inflation is transitory.
In any event, the data will likely ramp up investor focus on this month’s central bank symposium in Jackson Hole, Wyoming. And if August's job growth proves equally as torrid, the summer hiring spree would raise the stakes for next month’s Fed meeting, at which the central bank may outline its plans for rolling back monthly asset purchases
Goldman Sachs, BofA Global Research and BlackRock are among firms that have said yields will rise to near 2% by year-end -- an outcome that could be hastened if a strong economy pushes the Federal Reserve to begin unwinding its ultra-easy monetary policies sooner than expected. Others, like HSBC, have called for yields below current levels.
The better-than-expected labor market report card, however, won't put an end to the debate among Fed policymakers about the exact timing or pace of a reduction in the asset purchases, or of the eventual interest rate increases that some feel should start next year but others not until 2023 or even later.
That's in large part because the bar the Fed set for reducing its bond-buying program - "substantial further progress" toward the Fed's 2% inflation and full employment goals - has never been precisely defined.
It's fairly clear the benchmark has been met on the inflation front, where a surge in post-pandemic spending and bottlenecks in supply chains have helped push the rate of price increases at least temporarily well above that goal. But the interpretation of progress toward full employment varies by policymaker.
A still-large 5.7 million jobs hole versus the pre-pandemic level, a surprising drop in Black workforce participation, and the threat that some say the latest surge in coronavirus cases poses to future job gains all may raise questions for some.
Fed Governor Lael Brainard last week said she would be more confident about labor market progress once she has September data in hand, because it won't be until then that reopened schools and the lapsing of pandemic unemployment benefits will propel more people back to the labor market. The first Fed policy meeting after the September jobs report is in November.
San Francisco Fed President Mary Daly, for her part, has said she could support tapering of the bond purchases later this year or early in 2022, a later time frame than Waller and a few other policymakers like Dallas Fed President Robert Kaplan, who wants the taper to come soon.
For Daly, particularly telling are trends for people aged 25 to 54, the so-called prime-age worker bracket. Their employment-to-population ratio - a measure of their likelihood to work - rose sharply to 77.8% in July, up from 76.3%. But it's still well down from the 80%-plus range it had reached before the pandemic.
UBS Global Wealth Management is betting on a reflation trade in the United States and globally linked to economic reopening as the world emerges from the COVID-19 Delta variant, Mark Haefele, chief investment officer at the world's largest wealth manager, said.
Haefele, whose firm manages $3.2 trillion in assets, concerning about the Delta variant have set back the timeline for recovery by a little bit, he said, adding that the Fed won't start on a path to normalisation until its employment targets are achieved.
"We're not there yet ... I think the Fed has left itself a lot more room to be lenient, because they've moved to this average inflation targeting (AIT)," Haefele said.
He did not see the markets reacting in a 2013-style taper tantrum as he expects the Fed will have flexibility due to its transition to AIT and a broader definition of employment.
"I think Chair Powell ... wants to avoid that situation ... The Fed will run hotter before they start talking about things like raising rates," he said, which should cushion a blow around any taper tantrum.
Hefele expected the U.S. 10-year Treasury yields to move closer to 2% in the second half of 2021, and said he was "underweight" on high-grade bonds due to the risk around them.
"Historically, the rates are so low that we just don't see them (high-grade bonds) able to perform the same role in portfolios in terms of providing that stability during crisis."
COT Report
The numbers that we have this week do not include yet NFP effect, so net position barely has changed and open interest dropped just for puny 4K contracts. It is interesting to see what number we get on next week...
Next week to watch
U.S. consumer price data out on Wednesday will provide some answers to one of the most pressing questions in world markets at the moment: how sustainable is the current surge in U.S. inflation?
Last month's jump of 0.9% was the strongest gain since June 2008. May was pretty punchy too at 0.6% and economists polled by Reuters think July's figure won't be far behind, at 0.5%. The Federal Reserve's hawks are watching these figures, well, like hawks. Another hot number will bolster their case for the central bank reeling in stimulus sooner rather than later.
So, sentiment now is like a boiling pot. Some analysts and banks tell about faster Fed reaction on positive data, others stand on previous terms that Fed should close the gap in employment before changing the policy. As a result market stands in fever, and too sensitive to rumors and any kind of events to this topic, when investors stand nervous don't knowing what to expect on next turn. It seems that majority of investors follow the first group, because market shows the reaction. Otherwise, we wouldn't have this if investors sure to get more 5.8-6 Mln. jobs before Fed action. It seems it is too much emotions on the market right now, but few common sense. Previously as TD Securities said also - we saw sharp reversal of NFP effect... maybe this time we get it as well, we'll see. But as we come closer to "X" point of tapering announcement - the less chances exist for that. Thus, by looking at market performance this week we could say definitely only one thing - we get volatility. But if even market keeps some direction, hardly it helps us too much as huge swings could make extremely difficult to trade with this direction.
Speaking on long term view - current events match it perfectly. We were expecting rising inflation, employment, data improving in other spheres - we're getting it. Suggesting interest rates around 2% by the end of the year from big banks - this combination gives no room for dollar weakness. Now we see no reasons to adjust long-term suggestion that we're coming to major upside reversal on Dollar Index. In fact, we could say that it is started already, but doesn't turn yet to active stage, which should happen a bit later.
Technicals
Monthly
So, it seems that miracle has not happened. We saw bearish context on weekly and daily chart, but as market stubbornly was standing flat and made attempt to go higher - it was seemed that maybe something could happen. But it seems its not.
On weekly chart we do not have anything awful yet. Price tries to stay inside the June range, but it seems its not for too long. Downside breakout could start as soon as next week and touching of YPP could become a reality. Bearish trend on monthly chart is confirmed now. Long-term fundamental background stands not in favor of the EUR, but as we've said above - it is a question when this background turns to active stage.
We already talked about pennant here, and now it seems that it could be broken down which is not good for EUR. Still, while market stands above 1.06 low it keeps chances for bullish action. Drop below 1.09 YPS1 will be the strong sign, but right now, a bit deeper retracement doesn't mean yet that everything is over.
Weekly
Trend here also stands bearish, market is not at oversold. With recently formed bearish engulfing here and negative sentiment - the butterfly pattern stands at the edge. And as we said previously the best scenario to consider here, if you want to buy EUR - is to focus on K-support of 1.1620-1.17 that also includes YPP and weekly oversold area.
Daily
So daily trend has turned bearish, the setup that we would like to consider this week is not actual anymore as price has dropped through all supports on intraday charts. Now we turn to our major scenario here - watching for 1.1625 OP, completion of AB-CD pattern. Once target will be completed - we could consider long entry as price will be at weekly K-area and Agreement, near the weekly Oversold.
Right now EUR is not at oversold even on daily chart. Upward retracement was able to reach only nearest Fib resistance level, and now it has no barriers to go lower.
Intraday
As we do not have any reasons to go long, we could keep an eye for bearish setup. Market is coming to the XOP target around 1.1740. Overall thrusting action looks good and it might become a background for B&B "Sell" setup if any bounce follows. Primary level for selling is 1.18 K-area.
It was really the big drama this week on the markets. Everything was natural until Wed, when ADP report has triggered expected upward action, but Fed stepped in right after that and crushed short-term sentiment. Next hit market has got from NFP release, that was totally different from ADP. NFP was good in all aspects - employment, hiring, wage etc. This has led to explosion of speculations around Fed tightening. Besides, the strong effect also could be explained by big difference between Fed behavior this week and July statement last week. It is drastic change in a very short-term period. Once investors were calmed down and it seems that markets have got some time to spend with environment of low rates - Fed statement and NFP crushed the mood.
Market overview
On Wednesday, Fed Vice Chair Richard Clarida said conditions for an interest rate hike could be met in late 2022, setting the stage for a move in early 2023. He and three other Fed members also signalled a move to taper bond buying later this year or early next depending on the labour market over the next few months. Clarida's comments led investors to price in slightly higher chances of a hike in late 2022/early 2023 and to a flattening of the Treasury yield curve as short-term yields rose. Fed officials have said that improving employment is critical to when they begin to pull back further on extra support they provided for the economy during the pandemic.
The dollar rose sharply on Friday, boosted by a strong U.S. jobs report toward its biggest weekly gain in seven weeks. The report showed jobs grew more than expected in July, pushing bond yields higher on the view that the Federal Reserve may act more quickly to tighten U.S. monetary policy. The report on U.S. nonfarm payrolls showed jobs increased by 943,000 in July compared with the 870,000 forecast by economists polled by Reuters.
Analysts have cautioned it will take more evidence than one jobs report to push U.S. yields significantly higher again. Friday’s yield remained nearly one-half a percentage point lower than at the end of March. Reactions to monthly jobs reports have changed often this year in days following release of the data, strategists at Wells Fargo Securities found when they looked at the 10-year Treasury yield.
Markets will next be watching for comments from Fed policymakers at the symposium of central bankers in Jackson Hole, Wyoming late this month.
Big moves across exchange rates are unlikely until Fed officials signal readiness to lead other central banks in pulling back economic support, said Joseph Trevisani, senior analyst at fxstreet.com The Fed is pumping far more money into the U.S. economy and, by diffusion, to the rest of the world than anybody else,” Trevisani said.
When Fed policy makers are confident in U.S. employment gains to raise interest rates, the global economy could be strong enough to bolster riskier currencies instead of the dollar. A recent Reuters poll of strategists showed most predicting a dollar fall over the next year.
“We’re in the phase in the business cycle where growth and global trade are going to remain relatively solid, and that’s going to provide some downside bias for the dollar,” said Vasilieos Gkionakis, global head of FX strategy at Lombard Odier Group.
An unexpectedly strong jobs number for July has bolstered the case for investors who believe Treasury yields will head higher over the rest of the year, potentially weighing on an equity rally that has taken stocks to record highs.
Some investors believe the robust jobs numbers could support the view that the Federal Reserve, faced with rising inflation and strong growth, may need to unwind its ultra-easy monetary policies sooner than expected. Such an outcome could push yields higher while denting growth stocks and other areas of the market.
That view, however, is complicated by worries over rising COVID-19 cases across the United States that threaten to weigh on growth and the Fed’s insistence that the current surge in inflation is transitory.
In any event, the data will likely ramp up investor focus on this month’s central bank symposium in Jackson Hole, Wyoming. And if August's job growth proves equally as torrid, the summer hiring spree would raise the stakes for next month’s Fed meeting, at which the central bank may outline its plans for rolling back monthly asset purchases
Goldman Sachs, BofA Global Research and BlackRock are among firms that have said yields will rise to near 2% by year-end -- an outcome that could be hastened if a strong economy pushes the Federal Reserve to begin unwinding its ultra-easy monetary policies sooner than expected. Others, like HSBC, have called for yields below current levels.
“We think the recovery in long-dated Treasury yields that has taken place over the past week or so is a sign of things to come,” analysts at Capital Economics said in a note published Friday. We suspect that growth in the US will be quite strong in the coming quarters, and that the recent surge in inflation there will prove far more persistent than most anticipate,” the firm said.
"Today's bumper payrolls report highlights a roaring recovery in the labour market and increases the chances of the Fed tapering their asset purchases sooner rather than later," said Mike Bell, global market strategist at JP Morgan Asset Management.
The better-than-expected labor market report card, however, won't put an end to the debate among Fed policymakers about the exact timing or pace of a reduction in the asset purchases, or of the eventual interest rate increases that some feel should start next year but others not until 2023 or even later.
That's in large part because the bar the Fed set for reducing its bond-buying program - "substantial further progress" toward the Fed's 2% inflation and full employment goals - has never been precisely defined.
It's fairly clear the benchmark has been met on the inflation front, where a surge in post-pandemic spending and bottlenecks in supply chains have helped push the rate of price increases at least temporarily well above that goal. But the interpretation of progress toward full employment varies by policymaker.
A still-large 5.7 million jobs hole versus the pre-pandemic level, a surprising drop in Black workforce participation, and the threat that some say the latest surge in coronavirus cases poses to future job gains all may raise questions for some.
"The progress will likely still not be viewed as 'substantial' enough for tapering and we don't expect the data for August to be as strong as the data for July," TD Securities economists wrote in a note earlier this week in which they forecast a million jobs would be added last month.
Fed Governor Lael Brainard last week said she would be more confident about labor market progress once she has September data in hand, because it won't be until then that reopened schools and the lapsing of pandemic unemployment benefits will propel more people back to the labor market. The first Fed policy meeting after the September jobs report is in November.
San Francisco Fed President Mary Daly, for her part, has said she could support tapering of the bond purchases later this year or early in 2022, a later time frame than Waller and a few other policymakers like Dallas Fed President Robert Kaplan, who wants the taper to come soon.
For Daly, particularly telling are trends for people aged 25 to 54, the so-called prime-age worker bracket. Their employment-to-population ratio - a measure of their likelihood to work - rose sharply to 77.8% in July, up from 76.3%. But it's still well down from the 80%-plus range it had reached before the pandemic.
UBS Global Wealth Management is betting on a reflation trade in the United States and globally linked to economic reopening as the world emerges from the COVID-19 Delta variant, Mark Haefele, chief investment officer at the world's largest wealth manager, said.
Haefele, whose firm manages $3.2 trillion in assets, concerning about the Delta variant have set back the timeline for recovery by a little bit, he said, adding that the Fed won't start on a path to normalisation until its employment targets are achieved.
"We're not there yet ... I think the Fed has left itself a lot more room to be lenient, because they've moved to this average inflation targeting (AIT)," Haefele said.
He did not see the markets reacting in a 2013-style taper tantrum as he expects the Fed will have flexibility due to its transition to AIT and a broader definition of employment.
"I think Chair Powell ... wants to avoid that situation ... The Fed will run hotter before they start talking about things like raising rates," he said, which should cushion a blow around any taper tantrum.
Hefele expected the U.S. 10-year Treasury yields to move closer to 2% in the second half of 2021, and said he was "underweight" on high-grade bonds due to the risk around them.
"Historically, the rates are so low that we just don't see them (high-grade bonds) able to perform the same role in portfolios in terms of providing that stability during crisis."
COT Report
The numbers that we have this week do not include yet NFP effect, so net position barely has changed and open interest dropped just for puny 4K contracts. It is interesting to see what number we get on next week...
Next week to watch
U.S. consumer price data out on Wednesday will provide some answers to one of the most pressing questions in world markets at the moment: how sustainable is the current surge in U.S. inflation?
Last month's jump of 0.9% was the strongest gain since June 2008. May was pretty punchy too at 0.6% and economists polled by Reuters think July's figure won't be far behind, at 0.5%. The Federal Reserve's hawks are watching these figures, well, like hawks. Another hot number will bolster their case for the central bank reeling in stimulus sooner rather than later.
So, sentiment now is like a boiling pot. Some analysts and banks tell about faster Fed reaction on positive data, others stand on previous terms that Fed should close the gap in employment before changing the policy. As a result market stands in fever, and too sensitive to rumors and any kind of events to this topic, when investors stand nervous don't knowing what to expect on next turn. It seems that majority of investors follow the first group, because market shows the reaction. Otherwise, we wouldn't have this if investors sure to get more 5.8-6 Mln. jobs before Fed action. It seems it is too much emotions on the market right now, but few common sense. Previously as TD Securities said also - we saw sharp reversal of NFP effect... maybe this time we get it as well, we'll see. But as we come closer to "X" point of tapering announcement - the less chances exist for that. Thus, by looking at market performance this week we could say definitely only one thing - we get volatility. But if even market keeps some direction, hardly it helps us too much as huge swings could make extremely difficult to trade with this direction.
Speaking on long term view - current events match it perfectly. We were expecting rising inflation, employment, data improving in other spheres - we're getting it. Suggesting interest rates around 2% by the end of the year from big banks - this combination gives no room for dollar weakness. Now we see no reasons to adjust long-term suggestion that we're coming to major upside reversal on Dollar Index. In fact, we could say that it is started already, but doesn't turn yet to active stage, which should happen a bit later.
Technicals
Monthly
So, it seems that miracle has not happened. We saw bearish context on weekly and daily chart, but as market stubbornly was standing flat and made attempt to go higher - it was seemed that maybe something could happen. But it seems its not.
On weekly chart we do not have anything awful yet. Price tries to stay inside the June range, but it seems its not for too long. Downside breakout could start as soon as next week and touching of YPP could become a reality. Bearish trend on monthly chart is confirmed now. Long-term fundamental background stands not in favor of the EUR, but as we've said above - it is a question when this background turns to active stage.
We already talked about pennant here, and now it seems that it could be broken down which is not good for EUR. Still, while market stands above 1.06 low it keeps chances for bullish action. Drop below 1.09 YPS1 will be the strong sign, but right now, a bit deeper retracement doesn't mean yet that everything is over.
Weekly
Trend here also stands bearish, market is not at oversold. With recently formed bearish engulfing here and negative sentiment - the butterfly pattern stands at the edge. And as we said previously the best scenario to consider here, if you want to buy EUR - is to focus on K-support of 1.1620-1.17 that also includes YPP and weekly oversold area.
Daily
So daily trend has turned bearish, the setup that we would like to consider this week is not actual anymore as price has dropped through all supports on intraday charts. Now we turn to our major scenario here - watching for 1.1625 OP, completion of AB-CD pattern. Once target will be completed - we could consider long entry as price will be at weekly K-area and Agreement, near the weekly Oversold.
Right now EUR is not at oversold even on daily chart. Upward retracement was able to reach only nearest Fib resistance level, and now it has no barriers to go lower.
Intraday
As we do not have any reasons to go long, we could keep an eye for bearish setup. Market is coming to the XOP target around 1.1740. Overall thrusting action looks good and it might become a background for B&B "Sell" setup if any bounce follows. Primary level for selling is 1.18 K-area.
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