Sive Morten
Special Consultant to the FPA
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Fundamentals
This week EUR shows quiet action, we even have turned to some other currencies to fill the emptiness, as nothing new was to talk about EUR. Later in the week some activity returns, mostly because US statistics release. Sentiment mostly remains the same with no big shifts in the mood as all investors watch for the end of the month and September Fed meeting. This is the reason why so big attention pays now to multiple speculation around Fed policy and tapering.
Market overview
The U.S. dollar touched a its highest level in more than four months against the euro on Tuesday, as investors speculated further over whether recent strong jobs data could be enough to push the Federal Reserve to soon start tapering its bond-buying program. The U.S. dollar index , which measures the greenback against a basket of currencies, was up for a third straight session, at its highest level in about three weeks.
U.S. job openings hit a record high in June while hiring also increased, the Labor Department said in a monthly survey on Monday.
Atlanta Federal Reserve Bank President Raphael Bostic said on Monday the U.S. economy is improving faster than expected, with the time when the Fed could start slowing its bond purchases nearing quickly.
Investors are looking for signals from the Federal Reserve at the annual Jackson Hole conference of central bankers this month.
Germany's ZEW survey found investor sentiment deteriorated for a third month in a row in August, due to fears that rising COVID-19 infections could hold back the recovery in Europe's largest economy.
U.S. worker productivity growth slowed in the second quarter and labor costs were far weaker than previously estimated in the first quarter, the Labor Department said on Tuesday.
Nonfarm productivity, which measures hourly output per worker, increased at a 2.3% annualized rate last quarter. Data for the first quarter was revised lower to show productivity rising at a 4.3% rate instead of the previously reported 5.4% pace.
Economists polled by Reuters had expected productivity to rise at a 3.5% rate. Productivity jumped early in the pandemic before slumping in the final three months of 2020, and has since rebounded. The see-sawing has been partly attributed to the cratering of lower-wage industries, like leisure and hospitality, which have been reopening over the past few months at an increasingly brisk pace.
Compared to the second quarter of 2020, productivity rose at a 1.9% pace. Hours worked increased at a 5.5% rate last quarter, accelerating from a revised 4.0% growth pace in the January-March period. Overall output is now 1.2% above pre-pandemic levels but hours worked remain 2.8% below it, the report also showed.
U.S. consumer prices increases slowed in July even as they remained at a 13-year high on a yearly basis and there were tentative signs inflation has peaked as supply-chain disruptions caused by the pandemic work their way through the economy. The consumer price index increased 0.5% last month after climbing 0.9% in June, the Labor Department said on Wednesday. In the 12 months through July, the CPI advanced 5.4%. The drop in the month-to-month inflation rate was the largest in 15 months. The core CPI rose 4.3% on a year-on-year basis after advancing 4.5% in June.
The Fed's preferred inflation measure, the core personal consumption expenditures price index, jumped 3.5% in June, the largest gain since December 1991.
Economists polled by Reuters had forecast overall CPI would rise 0.5% and core CPI 0.4%.
While prices are still rising, the Fed has said it expects inflationary pressures to moderate over time as supply catches up with demand following months of COVID-19 lockdowns.
The greenback had enjoyed a lift from last week's better-than-expected U.S. jobs data, as well as from remarks by Fed officials about tapering bond purchases and, eventually, raising rates, sooner than policymakers elsewhere.
Looking forward, the Fed will depend on data when it comes to the timing of the dialing back of its asset purchases, said Edward Moya, senior market analyst at OANDA.
In Europe, investor sentiment has declined, with a survey showing a third straight month of deterioration in Germany as rising global COVID-19 cases keep markets on edge.
The U.S. dollar advanced against a basket of currencies on Thursday, after data showed producer prices posted their largest annual increase in more than a decade in the 12 months through July, suggesting inflation pressures remain strong. U.S. producer prices increased more than expected in July, a Labor Department report showed on Thursday, suggesting inflation could remain high as strong demand fuelled by the recovery continues to hurt supply chains.
The producer price index (PPI) for final demand increased 1.0% last month after rising 1.0% in June. In the 12 months through July, the PPI jumped 7.8%, a record high since the measure was introduced just over a decade ago.
Separately, data showed the number of Americans filing claims for unemployment benefits fell again last week as the economic recovery from the COVID-19 pandemic continued.
Investors remain vigilant for any signs of inflation running too hot since it could potentially spur the Federal Reserve to pull forward its timing on tapering of asset purchases as well as interest rate hikes.
Thursday's data helped the greenback shake off some of the weakness from the prior session when data showed U.S. consumer price increases slowed in July, easing concerns the Federal Reserve will imminently signal a scaling back of bond purchases.
While the data comes a day after consumer price data that indicated inflation may be peaking, analysts said producer price data helps the case for removing some of the Fed’s stimulus.
The Fed will announce a plan to taper its asset purchases in September, according to a solid majority of economists polled by Reuters.
Several Fed officials this week came out in support of tapering bond buying in coming months, setting themselves apart from other, more dovish major central banks such as the European Central Bank and the Bank of Japan.
U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade, in a worrying sign for the economy as Americans gave faltering outlooks on everything from personal finances to inflation and employment, a survey showed on Friday.
The unexpected reading could give Federal Reserve policymakers pause if it translates in the months ahead to a dent in economic activity. The central bank has been getting closer to a decision on when to begin pulling back the extraordinary stimulus it put in place to shield the economy from the COVID-19 pandemic.
The University of Michigan said its preliminary consumer sentiment index fell to 70.2 in the first half of this month from a final reading of 81.2 in July. That was the lowest level since 2011, and there have been only two larger declines in the index over the past 50 years. Those were at the depths of the 2007-2009 recession and during the first wave of shutdowns in April 2020 at the beginning of the pandemic.
The losses were widespread across income, age, and education subgroups and spanned all regions. Economists polled by Reuters had forecast the index would remain unchanged at 81.2.
U.S. stock market indexes slipped immediately after the report was released, while the price of gold gained ground. U.S. Treasury bond yields hit session lows.
Economic growth is still expected to grow this year at its fastest pace in four decades after falling into a brief recession in 2020 caused by the coronavirus pandemic. But the recovery is showing some indication of cooling off.
COVID-19 cases have doubled in the past two weeks to reach a six-month peak as the more transmissible Delta variant spreads rapidly across the country. Labor shortages across the service sector also persist while supply chain disruptions have continued.
The survey's gauge of current economic conditions also declined to a reading of 77.9 from 84.5 in July while its measure of consumer expectations slid to 65.2 from 79.0 in July.
The survey also showed consumers raising their expectations for medium term inflation, another measure the central bank is closely monitoring to ensure that inflation expectations remain anchored.
The survey's one-year inflation expectation edged lower to 4.6%, down from 4.7%, but its five-year inflation outlook ticked up to 3.0% from 2.8% in July.
Data on Wednesday hinted that U.S. inflation may have peaked, reassuring investors that the Federal Reserve will not feel obligated to hasten plans to rein in emergency-level support of the economy, but they remained worried that rising prices could continue to weigh on everything from bond prices to corporate margins.
Some investors said the data bolstered the Fed's assertion that jumps in inflation will be relatively fleeting, partly reflecting supply chain bottlenecks that will ease with time. But they added that inflation remains elevated, which can sap profit margins and erode the value of bonds.
Other concerns: corporate earnings growth appeared to be hitting a peak; rising coronavirus cases could threaten the economy; and stocks are generally trading at historically high valuations.
The question of when and at what pace it expects to taper those purchases looms large over markets.
In a research note, Morgan Stanley economists said Wednesday’s CPI data “supports the view that the last few months likely marked the peak rates of inflation.”
Ark Invest’s Cathie Wood, whose Ark Innovation ETF was the top performing U.S. equity fund last year, made the case in a webinar Tuesday that falling lumber and oil prices signal that inflation has peaked.
The inflation discussion is especially complex and it has come on fast. As Evans noted, officials expected they'd be fighting to nurse inflation higher, and were prepared to leave policy loose for a long time to do so - all the while allowing job gains to accumulate and press the boundaries of "maximum employment" in a way that benefits workers. He acknowledged the discussion has gotten more complex.
The Federal Reserve will announce a plan to taper its asset purchases in September, according to a solid majority of economists polled by Reuters who also said the U.S. jobless rate would remain above its pre-pandemic level for at least a year.
Nearly two-thirds of respondents, 28 of 43, said the Fed is likely to announce a taper of its asset purchases - currently set at $80 billion of Treasuries and $40 billion of MBS per month - at its September meeting. But while that timing has become more likely in the minds of many Fed watchers over the past month, it is by no means a done deal for all of them.
More than one-third of respondents in the poll said the FOMC will wait until November or December. None of the respondents said it would be announced at the Fed's central banking conference in Jackson Hole, Wyoming, this month, compared with the more than one-quarter who said in a June poll that it would.
Nearly 60% of respondents, 26 of 43, said they expected the Fed to start the reductions of its asset purchases in the first quarter of next year. Nearly all the rest said it would happen in the fourth quarter of 2021.
The poll concluded the Fed will start with monthly reductions of $10 billion in its purchases of Treasuries and $5 billion in those of MBS. Some responses were as high as $20 billion for both Treasuries and MBS. More than 80% of respondents, 24 of 29, said they expect the Fed to stop purchasing assets by the end of next year.
U.S. inflation data for July, which was released this week, suggested to many that price pressures may have already peaked in the world's biggest economy.
Still, the core personal consumption expenditure price index was predicted to average 3.1%, 2.5% and 2.1% in 2021, 2022 and 2023, respectively, above the central bank's target of 2%. But the unemployment rate is likely to remain above its pre-pandemic level of 3.5% for at least a year, according to 32 of 37 economists who replied to a separate question.
Still, the Fed was expected to keep its key interest rate unchanged at near zero at least until 2023.
Buoyed by around a trillion dollars of fiscal stimulus, ultra-easy monetary policy and a rapid COVID-19 vaccination drive, the U.S. economy surpassed its pre-pandemic level with an annualized 6.5% expansion in gross domestic product last quarter - the fastest recovery in the nation's history. But economic growth is expected to average 6.2% in 2021, a significant downgrade from the 6.6% predicted a month ago, according to the poll, as the rapidly spreading Delta variant has pushed the number of new coronavirus cases to more than a six-month high.
The poll showed GDP growth slowing to 4.2% in 2022 and 2.4% in 2023 despite the Senate's passage of a $1 trillion infrastructure bill on Tuesday and the start of a debate on a separate $3.5 trillion spending blueprint.
US GDP surpassed its pre-COVID-19 level in Q2 and with policy extraordinarily easy and inflation currently very elevated. Fathom believes the FOMC is at risk of being increasingly behind the curve in its policy tightening.
COT Report
This week again we miss important reaction on sentiment data on Friday, but we get NFP impact. On EUR CFTC data shows rising interest to the market as Open interest jumped 23K contracts, but speculators have added approximately equal amount of positions and it leads to minor changes in the net one. At the same time, take a look that hedgers increase position against EUR drop. This view is supportive to US Dollar and bearish to the EUR.
Source: cftc.gov
Charting by Investing.com
Next week to watch
China Economy statistics on Monday
The Delta variant is close to breaching Asia's COVID-zero fortresses, with outbreaks and lockdowns looming over what once appeared the world's most promising regional rebound. Save for Taiwan and New Zealand, where strict border controls appear to have kept the variant at bay, cities from Sydney to Seoul are finding it hard to contain infections.
In China, Delta has been detected in over a dozen cities, bearing down on a faltering economy, forcing economists to cut growth forecasts. We will get a snapshot of how the economy fared in July as local activity and flight curbs bit - retail sales, industrial output and house price numbers are all due on Monday.
US Retail Sales release
The U.S. economy is growing robustly and the labour market is rebounding. However, COVID-19 remains a headwind and coming days should bring a fresh perspective on how consumers are faring. U.S. retail sales likely fell 0.2% in July, after an unexpected rise in June, data on Tuesday is expected to show. Fed policymakers, assessing when to start unwinding stimulus, will be watching.
NZD Central Bank meeting
New Zealand's central bank meets on Wednesday and looks set to become the first major economy to lift interest rates since COVID-19 hit.
Super-strong jobs data have cemented expectations of a hike, which would be New Zealand's first since mid-2014. What a contrast with 2020, when rates were slashed 75 bps to 0.25% and a move below zero became a real possibility.
Norway's central bank, meeting on Thursday meanwhile, could reiterate it will increase rates in September.
Investors, focused on prospects for Fed tapering as labour conditions improve, have boosted the dollar. New Zealand and Norway are a reminder that the greenback is not the only currency standing to benefit from the monetary policy shift under way in the G10.
Sometimes it happens that anemic week from trading point of view provides reach fundamental background and now we have a lot of things to think about. The major practical issue that we've got now is market stands aimed on coming employment report in September that will shed the light on Fed activity. This report stands for August numbers, the summer month that potentially could be weaker than the others. This week we've got decrease in consumers activity and some ceiling in price level.
Reuters poll is also very informative, suggesting that sentiment becomes less dollar supportive and investors do not expect rush from the Fed. Nobody waits already tapering announcement in Wyoming and focus turns on November-December. Inflation forecasts stand around Fed target for 2022-2023 - 2.5 and 2.1% respectively. But as FOMC member, Evans said - it's (Fed policy) not a question of current inflation spike but what inflation will be in 2022-2023 years.
At the same time there is no big optimism as in employment as in GDP which was revised down. From this standpoint, we see some sense in BofA and TD Securities suggestions of later action from the Fed than it is widely anticipated by markets.
Finally, take a look at suggested tapering volume - 15 Bln per month sounds kidding for 23 Trn. 10 year US treasuries market excluding huge MBS market. It's like a pie for elephant. Effect here will be mostly psychological, because financially, it makes no difference for the market.
All these thoughts, recent comments from big banks, statistics lead to better understanding of current situation and explains why sentiment on the market is changing. Maybe this was the reason of big rally recently on Gold and EUR, although Michigan data not as important. Anyway, for our long-term scenario, this new turn in fundamental background could give a clue to old riddle - how DXY completes 87.8 major monthly target. Combination of minor negative effects could lead to big Fed shifts and if we suggest slightly worse August NFP ceiling in Inflation data and other statistics, consumer performance - tapering could be postponed to the end of the year and this open door for bullish performance of dollar rivals, including EUR. Especially if others - NZ and Norway to name some, appear to be ahead of Fed in rate tightening process.
So, this is a big topic and long journey ahead. But right now, for coming week and nearest time we could say that sentiment becomes softer, releasing pressure on EUR. Now our primary object to watch for is August NFP in the beginning of September and Fed meeting later in the month. These two events should set the background till the end of the year.
Technical analysis in the post below.
This week EUR shows quiet action, we even have turned to some other currencies to fill the emptiness, as nothing new was to talk about EUR. Later in the week some activity returns, mostly because US statistics release. Sentiment mostly remains the same with no big shifts in the mood as all investors watch for the end of the month and September Fed meeting. This is the reason why so big attention pays now to multiple speculation around Fed policy and tapering.
Market overview
The U.S. dollar touched a its highest level in more than four months against the euro on Tuesday, as investors speculated further over whether recent strong jobs data could be enough to push the Federal Reserve to soon start tapering its bond-buying program. The U.S. dollar index , which measures the greenback against a basket of currencies, was up for a third straight session, at its highest level in about three weeks.
"A combination of hawkish comments from several Federal Reserve officials and the second monthly increase of more than 900,000 jobs has reaffirmed what the market has suspected, and that is for a tapering decision to be made shortly."
U.S. job openings hit a record high in June while hiring also increased, the Labor Department said in a monthly survey on Monday.
Atlanta Federal Reserve Bank President Raphael Bostic said on Monday the U.S. economy is improving faster than expected, with the time when the Fed could start slowing its bond purchases nearing quickly.
Investors are looking for signals from the Federal Reserve at the annual Jackson Hole conference of central bankers this month.
Germany's ZEW survey found investor sentiment deteriorated for a third month in a row in August, due to fears that rising COVID-19 infections could hold back the recovery in Europe's largest economy.
U.S. worker productivity growth slowed in the second quarter and labor costs were far weaker than previously estimated in the first quarter, the Labor Department said on Tuesday.
Nonfarm productivity, which measures hourly output per worker, increased at a 2.3% annualized rate last quarter. Data for the first quarter was revised lower to show productivity rising at a 4.3% rate instead of the previously reported 5.4% pace.
Economists polled by Reuters had expected productivity to rise at a 3.5% rate. Productivity jumped early in the pandemic before slumping in the final three months of 2020, and has since rebounded. The see-sawing has been partly attributed to the cratering of lower-wage industries, like leisure and hospitality, which have been reopening over the past few months at an increasingly brisk pace.
Compared to the second quarter of 2020, productivity rose at a 1.9% pace. Hours worked increased at a 5.5% rate last quarter, accelerating from a revised 4.0% growth pace in the January-March period. Overall output is now 1.2% above pre-pandemic levels but hours worked remain 2.8% below it, the report also showed.
U.S. consumer prices increases slowed in July even as they remained at a 13-year high on a yearly basis and there were tentative signs inflation has peaked as supply-chain disruptions caused by the pandemic work their way through the economy. The consumer price index increased 0.5% last month after climbing 0.9% in June, the Labor Department said on Wednesday. In the 12 months through July, the CPI advanced 5.4%. The drop in the month-to-month inflation rate was the largest in 15 months. The core CPI rose 4.3% on a year-on-year basis after advancing 4.5% in June.
The Fed's preferred inflation measure, the core personal consumption expenditures price index, jumped 3.5% in June, the largest gain since December 1991.
Economists polled by Reuters had forecast overall CPI would rise 0.5% and core CPI 0.4%.
While prices are still rising, the Fed has said it expects inflationary pressures to moderate over time as supply catches up with demand following months of COVID-19 lockdowns.
"The CPI report was enough to cause a bit of profit taking for the U.S. dollar, but at the end of the day, it's not a game changer for the Fed," said Kathy Lien, managing director at BK Asset Management. "They're still going to be announcing taper,” likely within the next six weeks.
The greenback had enjoyed a lift from last week's better-than-expected U.S. jobs data, as well as from remarks by Fed officials about tapering bond purchases and, eventually, raising rates, sooner than policymakers elsewhere.
Looking forward, the Fed will depend on data when it comes to the timing of the dialing back of its asset purchases, said Edward Moya, senior market analyst at OANDA.
"It's all going to be all about next month's employment report and if that does not impress, tapering, as far September goes, might even get pushed out towards the end of the year," he said.
In Europe, investor sentiment has declined, with a survey showing a third straight month of deterioration in Germany as rising global COVID-19 cases keep markets on edge.
"Investors have to take on board the possibility of news on Fed tapering at a time when COVID is still very apparent in various parts of the world," said Rabobank analyst Jane Foley. The consequence of this is likely to be a firmer dollar," she added, especially if the euro breaches its 2021 low.
The U.S. dollar advanced against a basket of currencies on Thursday, after data showed producer prices posted their largest annual increase in more than a decade in the 12 months through July, suggesting inflation pressures remain strong. U.S. producer prices increased more than expected in July, a Labor Department report showed on Thursday, suggesting inflation could remain high as strong demand fuelled by the recovery continues to hurt supply chains.
The producer price index (PPI) for final demand increased 1.0% last month after rising 1.0% in June. In the 12 months through July, the PPI jumped 7.8%, a record high since the measure was introduced just over a decade ago.
Separately, data showed the number of Americans filing claims for unemployment benefits fell again last week as the economic recovery from the COVID-19 pandemic continued.
Investors remain vigilant for any signs of inflation running too hot since it could potentially spur the Federal Reserve to pull forward its timing on tapering of asset purchases as well as interest rate hikes.
Thursday's data helped the greenback shake off some of the weakness from the prior session when data showed U.S. consumer price increases slowed in July, easing concerns the Federal Reserve will imminently signal a scaling back of bond purchases.
"Today's huge upside PPI surprise follows yesterday's solid but moderating CPI gains, leaving a mix that will keep inflation concerns alive even as economists will continue to expect a slowing in monthly price gains into year-end," Action Economics' Mike Englund and Kim Rupert said in a note.
While the data comes a day after consumer price data that indicated inflation may be peaking, analysts said producer price data helps the case for removing some of the Fed’s stimulus.
“With producer prices feeding into consumer prices, this suggests that the CPIs may have not hit a ceiling yet, and may have increased again bets on a potential tapering announcement by the Fed in September,” said Charalambos Pissouros, head of research at JFD Group.
The Fed will announce a plan to taper its asset purchases in September, according to a solid majority of economists polled by Reuters.
Several Fed officials this week came out in support of tapering bond buying in coming months, setting themselves apart from other, more dovish major central banks such as the European Central Bank and the Bank of Japan.
U.S. consumer sentiment dropped sharply in early August to its lowest level in a decade, in a worrying sign for the economy as Americans gave faltering outlooks on everything from personal finances to inflation and employment, a survey showed on Friday.
The unexpected reading could give Federal Reserve policymakers pause if it translates in the months ahead to a dent in economic activity. The central bank has been getting closer to a decision on when to begin pulling back the extraordinary stimulus it put in place to shield the economy from the COVID-19 pandemic.
The University of Michigan said its preliminary consumer sentiment index fell to 70.2 in the first half of this month from a final reading of 81.2 in July. That was the lowest level since 2011, and there have been only two larger declines in the index over the past 50 years. Those were at the depths of the 2007-2009 recession and during the first wave of shutdowns in April 2020 at the beginning of the pandemic.
The losses were widespread across income, age, and education subgroups and spanned all regions. Economists polled by Reuters had forecast the index would remain unchanged at 81.2.
U.S. stock market indexes slipped immediately after the report was released, while the price of gold gained ground. U.S. Treasury bond yields hit session lows.
Economic growth is still expected to grow this year at its fastest pace in four decades after falling into a brief recession in 2020 caused by the coronavirus pandemic. But the recovery is showing some indication of cooling off.
COVID-19 cases have doubled in the past two weeks to reach a six-month peak as the more transmissible Delta variant spreads rapidly across the country. Labor shortages across the service sector also persist while supply chain disruptions have continued.
"The pandemic's resurgence due to the Delta variant has been met with a mixture of reason and emotion...mainly from dashed hopes that the pandemic would soon end," Richard Curtin, the survey director, said in a statement.
The survey's gauge of current economic conditions also declined to a reading of 77.9 from 84.5 in July while its measure of consumer expectations slid to 65.2 from 79.0 in July.
The survey also showed consumers raising their expectations for medium term inflation, another measure the central bank is closely monitoring to ensure that inflation expectations remain anchored.
The survey's one-year inflation expectation edged lower to 4.6%, down from 4.7%, but its five-year inflation outlook ticked up to 3.0% from 2.8% in July.
Data on Wednesday hinted that U.S. inflation may have peaked, reassuring investors that the Federal Reserve will not feel obligated to hasten plans to rein in emergency-level support of the economy, but they remained worried that rising prices could continue to weigh on everything from bond prices to corporate margins.
Some investors said the data bolstered the Fed's assertion that jumps in inflation will be relatively fleeting, partly reflecting supply chain bottlenecks that will ease with time. But they added that inflation remains elevated, which can sap profit margins and erode the value of bonds.
Other concerns: corporate earnings growth appeared to be hitting a peak; rising coronavirus cases could threaten the economy; and stocks are generally trading at historically high valuations.
The inflation data would help the Fed feel a "a little bit more confident that they can let inflation run a little bit hotter in the near term without having to worry about overshooting," said Gennadiy Goldberg, senior U.S. rate strategist at TD Securities. "Markets are reacting with a bit of relief, which I think makes a lot of sense," Goldberg added.
The question of when and at what pace it expects to taper those purchases looms large over markets.
"The concern has been how soon and how quickly will the Fed begin to taper its bond purchases and this lends some credence to the argument that the inflation pressures we are seeing are transitory,” Jim Baird, chief investment officer at Plante Moran Financial Advisors, said after the inflation data.
In a research note, Morgan Stanley economists said Wednesday’s CPI data “supports the view that the last few months likely marked the peak rates of inflation.”
Ark Invest’s Cathie Wood, whose Ark Innovation ETF was the top performing U.S. equity fund last year, made the case in a webinar Tuesday that falling lumber and oil prices signal that inflation has peaked.
The inflation discussion is especially complex and it has come on fast. As Evans noted, officials expected they'd be fighting to nurse inflation higher, and were prepared to leave policy loose for a long time to do so - all the while allowing job gains to accumulate and press the boundaries of "maximum employment" in a way that benefits workers. He acknowledged the discussion has gotten more complex.
"There is no sugar-coating the pain" of the price increases, Evans said. "The question is more what the inflation outlook is going to be into 2022 and 2023. Some of these prices will turn around."
The Federal Reserve will announce a plan to taper its asset purchases in September, according to a solid majority of economists polled by Reuters who also said the U.S. jobless rate would remain above its pre-pandemic level for at least a year.
Nearly two-thirds of respondents, 28 of 43, said the Fed is likely to announce a taper of its asset purchases - currently set at $80 billion of Treasuries and $40 billion of MBS per month - at its September meeting. But while that timing has become more likely in the minds of many Fed watchers over the past month, it is by no means a done deal for all of them.
"I know some Fed officials are pushing for it to happen at the September meeting, but that is very unlikely," said Jim O'Sullivan, chief U.S. macro strategist at TD Securities. "November is possible if the next two employment reports are strong enough, but the odds favor December as the time of the formal announcement."
More than one-third of respondents in the poll said the FOMC will wait until November or December. None of the respondents said it would be announced at the Fed's central banking conference in Jackson Hole, Wyoming, this month, compared with the more than one-quarter who said in a June poll that it would.
Nearly 60% of respondents, 26 of 43, said they expected the Fed to start the reductions of its asset purchases in the first quarter of next year. Nearly all the rest said it would happen in the fourth quarter of 2021.
The poll concluded the Fed will start with monthly reductions of $10 billion in its purchases of Treasuries and $5 billion in those of MBS. Some responses were as high as $20 billion for both Treasuries and MBS. More than 80% of respondents, 24 of 29, said they expect the Fed to stop purchasing assets by the end of next year.
U.S. inflation data for July, which was released this week, suggested to many that price pressures may have already peaked in the world's biggest economy.
Still, the core personal consumption expenditure price index was predicted to average 3.1%, 2.5% and 2.1% in 2021, 2022 and 2023, respectively, above the central bank's target of 2%. But the unemployment rate is likely to remain above its pre-pandemic level of 3.5% for at least a year, according to 32 of 37 economists who replied to a separate question.
"We suspect recovering half of the job losses is sufficient for many on the FOMC to begin tapering, particularly in light of the Committee's view about upside risks to the inflation outlook," said Michael Gapen, chief U.S. economist at Barclays.
Still, the Fed was expected to keep its key interest rate unchanged at near zero at least until 2023.
"Relative to the performance of its economy, the U.S. central bank is the most dovish in the world and is likely to start its hiking cycle a year or so later than normal. Moreover, if growth falters the Fed will simply delay even longer," said Ethan Harris, global economist at Bank of America Securities.
Buoyed by around a trillion dollars of fiscal stimulus, ultra-easy monetary policy and a rapid COVID-19 vaccination drive, the U.S. economy surpassed its pre-pandemic level with an annualized 6.5% expansion in gross domestic product last quarter - the fastest recovery in the nation's history. But economic growth is expected to average 6.2% in 2021, a significant downgrade from the 6.6% predicted a month ago, according to the poll, as the rapidly spreading Delta variant has pushed the number of new coronavirus cases to more than a six-month high.
The poll showed GDP growth slowing to 4.2% in 2022 and 2.4% in 2023 despite the Senate's passage of a $1 trillion infrastructure bill on Tuesday and the start of a debate on a separate $3.5 trillion spending blueprint.
US GDP surpassed its pre-COVID-19 level in Q2 and with policy extraordinarily easy and inflation currently very elevated. Fathom believes the FOMC is at risk of being increasingly behind the curve in its policy tightening.
COT Report
This week again we miss important reaction on sentiment data on Friday, but we get NFP impact. On EUR CFTC data shows rising interest to the market as Open interest jumped 23K contracts, but speculators have added approximately equal amount of positions and it leads to minor changes in the net one. At the same time, take a look that hedgers increase position against EUR drop. This view is supportive to US Dollar and bearish to the EUR.
Source: cftc.gov
Charting by Investing.com
Next week to watch
China Economy statistics on Monday
The Delta variant is close to breaching Asia's COVID-zero fortresses, with outbreaks and lockdowns looming over what once appeared the world's most promising regional rebound. Save for Taiwan and New Zealand, where strict border controls appear to have kept the variant at bay, cities from Sydney to Seoul are finding it hard to contain infections.
In China, Delta has been detected in over a dozen cities, bearing down on a faltering economy, forcing economists to cut growth forecasts. We will get a snapshot of how the economy fared in July as local activity and flight curbs bit - retail sales, industrial output and house price numbers are all due on Monday.
US Retail Sales release
The U.S. economy is growing robustly and the labour market is rebounding. However, COVID-19 remains a headwind and coming days should bring a fresh perspective on how consumers are faring. U.S. retail sales likely fell 0.2% in July, after an unexpected rise in June, data on Tuesday is expected to show. Fed policymakers, assessing when to start unwinding stimulus, will be watching.
NZD Central Bank meeting
New Zealand's central bank meets on Wednesday and looks set to become the first major economy to lift interest rates since COVID-19 hit.
Super-strong jobs data have cemented expectations of a hike, which would be New Zealand's first since mid-2014. What a contrast with 2020, when rates were slashed 75 bps to 0.25% and a move below zero became a real possibility.
Norway's central bank, meeting on Thursday meanwhile, could reiterate it will increase rates in September.
Investors, focused on prospects for Fed tapering as labour conditions improve, have boosted the dollar. New Zealand and Norway are a reminder that the greenback is not the only currency standing to benefit from the monetary policy shift under way in the G10.
Sometimes it happens that anemic week from trading point of view provides reach fundamental background and now we have a lot of things to think about. The major practical issue that we've got now is market stands aimed on coming employment report in September that will shed the light on Fed activity. This report stands for August numbers, the summer month that potentially could be weaker than the others. This week we've got decrease in consumers activity and some ceiling in price level.
Reuters poll is also very informative, suggesting that sentiment becomes less dollar supportive and investors do not expect rush from the Fed. Nobody waits already tapering announcement in Wyoming and focus turns on November-December. Inflation forecasts stand around Fed target for 2022-2023 - 2.5 and 2.1% respectively. But as FOMC member, Evans said - it's (Fed policy) not a question of current inflation spike but what inflation will be in 2022-2023 years.
At the same time there is no big optimism as in employment as in GDP which was revised down. From this standpoint, we see some sense in BofA and TD Securities suggestions of later action from the Fed than it is widely anticipated by markets.
Finally, take a look at suggested tapering volume - 15 Bln per month sounds kidding for 23 Trn. 10 year US treasuries market excluding huge MBS market. It's like a pie for elephant. Effect here will be mostly psychological, because financially, it makes no difference for the market.
All these thoughts, recent comments from big banks, statistics lead to better understanding of current situation and explains why sentiment on the market is changing. Maybe this was the reason of big rally recently on Gold and EUR, although Michigan data not as important. Anyway, for our long-term scenario, this new turn in fundamental background could give a clue to old riddle - how DXY completes 87.8 major monthly target. Combination of minor negative effects could lead to big Fed shifts and if we suggest slightly worse August NFP ceiling in Inflation data and other statistics, consumer performance - tapering could be postponed to the end of the year and this open door for bullish performance of dollar rivals, including EUR. Especially if others - NZ and Norway to name some, appear to be ahead of Fed in rate tightening process.
So, this is a big topic and long journey ahead. But right now, for coming week and nearest time we could say that sentiment becomes softer, releasing pressure on EUR. Now our primary object to watch for is August NFP in the beginning of September and Fed meeting later in the month. These two events should set the background till the end of the year.
Technical analysis in the post below.