Sive Morten
Special Consultant to the FPA
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Fundamentals
This week market was following to routine factors - some statistics as from EU as from US and Fed minutes. Long-term sentiment mostly stands intact, as overall trading range was relatively tight. Despite nice upward action on Friday, EUR was not able to break major tendency by far.
Market overview
The dollar dipped against a basket of major currencies on Monday, after hitting a speed bump when last week's mixed bag of U.S. labour data allayed investor fears about a faster end to monetary stimulus. While the headline June job creation figure beat forecasts, unemployment ticked higher and workforce participation didn't budge - suggesting positive progress, but space for the Federal Reserve to wait before tapering asset buying or hiking rates.
Data from the Institute of Supply Management showed that U.S. services industry activity moderated in June, likely restrained by labor and raw material shortages, resulting in unfinished work continuing to pile up. The ISM survey's measure of service employment fell to a reading of 49.3 in June from 55.3 in May
Disappointing data out of Europe sent the euro towards a three-month low against the dollar. Investor sentiment in Germany, the euro zone's biggest economy, remains at a high level but fell sharply in July, the ZEW economic research institute reported, while data showed orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020.
The ZEW economic research institute said its survey of sentiment among investors fell to 63.3 points from 79.8 in the previous month. A Reuters poll had forecast a fall to 75.2. But a separate ZEW gauge of current conditions surged to 21.9 from -9.1 points in June, moving into positive territory for the first time in two years and easily beating a consensus forecast for 5.0 points.
Separate data on Tuesday from the Federal Statistics Office showed that orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020. That reflected weaker demand from countries outside the euro zone and fewer contracts for machinery and intermediate goods.
Orders for industrial goods fell 3.7% on the month in seasonally adjusted terms -- the first drop in new business this year.
European Central Bank policymakers are in the middle of debating a new strategy, with many now backing the notion of letting inflation surpass 2% for a while after it lagged below that level for most of the past decade.
The dollar traded near its highest in three months versus major peers on Thursday after minutes of the Federal Reserve's June policy meeting confirmed the world's biggest central bank is moving toward tapering its asset purchases as soon as this year.
Fed officials said substantial further progress on economic recovery "was generally seen as not having yet been met," although participants expected progress to continue and agreed they must be ready to act if inflation or other risks materialize, according to the minutes of the Federal Open Market Committee (FOMC)'s June policy meeting.
"Various participants" at the session still felt conditions for curbing the bond-buying that is supplying markets with cash would be "met somewhat earlier than they had anticipated," while others saw a less clear signal from incoming data, the minutes showed.
Still, "a substantial majority" of the officials saw inflation risks "tilted to the upside," and the Fed as a whole felt it needed to be prepared to act if those risks materialized.
The minutes did little to clarify when the Fed will begin to change the monthly bond purchases and near-zero interest rates it put in place in the spring of 2020 to support the economy through the coronavirus pandemic and associated recession.
But it did show debate over those policies beginning in earnest, with Fed officials laying out a broadly divergent set of views about the risks the economy faces, the level of uncertainty, and even delving into details like whether to curb the purchase of mortgage-backed securities faster than that of U.S. Treasury bonds.
TAPERING TIMELINE
At its meeting last month, the FOMC shifted towards a post-pandemic view of the world, dropping a longstanding reference to the coronavirus as a constraint on the economy and, in the words of Fed Chair Jerome Powell, "talking about talking about" when to shift monetary policy as well.
The start of that discussion, along with interest rate projections showing higher borrowing costs as soon as 2023, caused investors to anticipate the Fed will move faster than expected to end its support for the economy.
Long-term Treasury yields are near five-month lows, and the gap between those and shorter-term yields has been narrowing, a development often associated with skepticism about the outlook for longer-term economic growth.
In this case, Cornerstone Macro analyst Roberto Perli wrote recently, "the market views the perceived Fed shift as harmful to the long-term prospects for the U.S. economy," with the Fed's stated commitment to getting back to full employment seen as weakening in the face of higher-than-anticipated inflation
What investors are wondering is how fast the discussion will spool out and when the actual "taper" may begin. Several regional Fed policymakers have since said they felt the economy was near the point where the central bank should pull back. However, even some of them have indicated it will take several meetings to develop and announce a plan for reducing the bond purchases.
The FOMC meets eight times a year, with the next two meetings scheduled for July 27-28 and Sept. 21-22. In the interim, the central bank will hold its annual research conference in Jackson Hole, Wyoming, a setting that Fed chiefs have often used to signal policy changes.
Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September, with the first cut to its bond-buying program beginning early next year.
While the dollar initially rose in early London trading, the euro jumped across the board as the selloff gathered pace as some hedge funds unwound some of their large bets against the single currency versus some other majors.
While minutes of the U.S. Federal Reserve's June policy meeting confirming it was moving towards tapering its asset purchases as soon as this year were widely blamed for the selloff, some traders saw an extension of the unwinding of the reflation theme seen in the global bond markets this week.
The euro held on to earlier gains after the European Central Bank set a new inflation target and claimed a role in fighting climate change after a strategy review.
With inflation having undershot its target for nearly a decade, ECB President Christine Lagarde has driven an 18-month deep dive into the inner workings of the bank, challenging even core principles of central banking in the hopes of resetting strategy and bolstering credibility.
In the key conclusion of the review, the central bank of the 19 countries that share the euro set its inflation target at 2% in the medium term, ditching a previous formulation of "below but close to 2%", which had created the impression it worried more about price growth above the target than below it.
The widely expected changes left markets unfazed but analysts said the sum of the measures pointed to an even longer period of central bank stimulus, even after emergency measures adopted to fight the COVID-19 pandemic are phased out.
More importantly, few economists appeared to conclude that the new strategy would have a fundamental impact on policy in the near term, and the ECB's 1.85 trillion euro Pandemic Emergency Purchase Programme is still likely to be wound down early next year.
Inflation in the euro zone is unlikely to overshoot and the current increase in price growth driven by the coronavirus pandemic will be temporary, European Central Bank board member Isabel Schnabel was quoted on Saturday as saying.
Schnabel’s comments come a day after the accounts of the ECB’s June policy meeting revealed growing concerns among conservative policymakers that the rise in inflation may be more durable than now predicted.
Commenting on the ECB’s new, symmetric goal for inflation of 2%, Schnabel said: “On the one hand, the increase in the inflation target is minimal. On the other, the goal of 2% has an important function: It creates additional room for our monetary policy to have a stabilising effect.”
She added that interest rates would not remain low for ever and it was vital for European governments to ensure that the large amounts of stimulus spending they have deployed paves the way for a return to a sustainable growth path.
The global spread of COVID variants has added to fears that there could be some disappointment in terms of economic growth in the coming months, said Mazen Issa, senior FX strategist at TD Securities.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose unexpectedly last week, an indication that the labor market recovery from the COVID-19 pandemic continues to be choppy.
Some recent soft U.S. data, along with a surge in COVID-19 cases in many parts of the world, has fueled concerns that the global economic recovery was running out of steam, leading to an eight-day streak of declines for the 10-year Treasury yield that ended on Friday.
A stocktake on the global recovery
(By Fathom Consulting)
As we enter the second half of the year, here is a stocktake on the state of the virus and the path of the global recovery.
The worst of the spike in COVID-19 cases in Asia appears to be over. The new and more transmissible delta variant of the virus which was first reported in India had spread rapidly. Case numbers in Asia have since fallen, which, given low vaccination rates, is likely to be due to non-pharmaceutical interventions such as lockdowns and voluntary social distancing, offering the virus fewer susceptible hosts. However, the variant is now spreading more widely round the globe, with the World Health Organisation tracking cases in 96 countries.
At current vaccination rates, Fathom expects most major economies to have offered at least one dose of a COVID-19 vaccine to all adults by the end of the year. Anti-vaccine sentiment remains a problem in some countries, however, with survey data suggesting that only 72% of Americans and 71% of the French are willing to be vaccinated.
As of 2021 Q1, world GDP has returned to its pre-crisis level — largely thanks to strong growth in China. Across the board, however, only 22 per cent of countries have fully recovered to pre-crisis levels of output. The US is within a whisker of reaching this mark, after easing restrictions. During the worst of the pandemic households accrued vast savings. How quickly those savings are spent is likely to be key in determining the future path of output for those countries that are yet to fully recover.
In Fathom’s view, a large proportion of those savings is likely to be spent as restrictions ease. Survey evidence from the Bank of England and New York Fed supports this view, suggesting that around a quarter of savings in the UK and US may be spent. Timely monthly indicators, such as retail sales related to activities restricted during lockdown, vehicle sales and the number of domestic airline passengers, have already risen sharply as confidence has returned to normal levels. However, other sectors are yet to show signs of recovery. International travel restrictions remain in place, impacting the level of bookings for tourism destinations. As the vaccine rollout continues and countries establish cross-border travel agreements, Fathom expects a further boost in economic confidence and global output.
Overall, as expected the global ‘V’ shaped recovery is complete. But what will happen next as economies continue to reopen? Fathom expects that — unless there is a resurgence in the virus — economic growth will surge over the rest of this year as the money built up in savings is spent by households. This would drive inflation above central bank targets, and would pose central bankers the dilemma of how best to respond. The orthodox approach would see monetary policy tightened in the short term to bring inflation back under control. Alternately, higher inflation might be accommodated, even welcomed; and then embedded, by
setting a higher inflation target down the line. As Fathom has long noted, there are strong theoretical grounds for adopting the second approach.
COT Report
Despite upward action on EUR this week, CFTC data shows that bearish sentiment stands intact by far. Recent data shows opening large amount of new short positions, as open interest has increased as well:
As a result, net long position is decreasing for 5 consecutive weeks.
Source: cftc.gov
Charting by Investing.com
Next week to watch
Looking forward, U.S. retail sales numbers for June are also due next week, along with U.S. bank earnings.
Adding to the busy week ahead, U.S. Federal Reserve Chair Jerome Powell is scheduled to appear before Congress, and rate decisions by central banks in Japan, Canada and New Zealand are on tap.
On Wednesday and Thursday, Federal Reserve chief Jerome Powell has one of his twice yearly get-togethers with U.S. Congress and it couldn't be more timely.
His view on why bond markets seem to have suddenly given up on the reflation trade is what every global investor is currently trying to work out, so tune in.
Elsewhere the Bank of Japan is unlikely to shift away from ultra supportive policies when it meets Friday.
Though the Bank of Canada is expected to trim its $3 billion Canadian dollar a month bond buying programme to $2 billion CAD. In emerging markets, the focus will be on Turkey on Wednesday, with searing inflation making it tough for its central bank governor to deliver the rate cuts President Tayyip Erdogan hired him for.
As a bottom line
So, as Fathom tells - "The US economy has nearly recovered to pre-crisis levels of GDP as the easing of COVID-19 restrictions has led to a pickup in the consumption of goods. During the pandemic, higher incomes and lower spending caused households to build up excess savings worth close to 10% of US GDP by the end of 2021 Q1. In Fathom’s view, around 25% of these forced savings will be spent within the next twelve months. If this happens then we are likely to see a boom in the service sector and ultimately higher inflation."
Based on global economy statistics and analysis, we see no doubts in our long-term view. Performance in different industrial and social spheres shows recovery that statistics confirming. It means that no doubts but we will get higher inflation, which Fathom Consulting confirms either. New virus variants have limited impact as on economy performance as on sentiment by far and currently we do not see any reasons why this impact could exacerbate and become vital later. Modern vaccines have no total protection from Delta and other variants but they smooth the way of disease, making it softer.
The new factor that gradually becomes evident is competition among central banks. This is what was standing under cover previously. Now, as RBA as RBNZ have better situation with pandemic, they are also aimed on stimulus reducing and tapering, which makes kiwi and aussie especially attractive currency for carry. Recent price action and unwinding of hedge fund positions that triggered dollar drop tells, that investors seriously consider this investing opportunity. It is difficult to say how far it goes right now, but faster action from RBA, for example could keep pressure on USD, especially if US rates remain flat. Maybe this factor becomes the major one that let dollar index to complete its long term downside target around 87.4.
That's being said, we make no changes by far to our long term view, while in shorter term volatility could rise and upward pullbacks against USD could become stronger because of combination weaker US statistics, flat interest rates and hawkish statement from the rivals. Although major tendency should not be broken.
Technical analysis stands in next post below.
This week market was following to routine factors - some statistics as from EU as from US and Fed minutes. Long-term sentiment mostly stands intact, as overall trading range was relatively tight. Despite nice upward action on Friday, EUR was not able to break major tendency by far.
Market overview
The dollar dipped against a basket of major currencies on Monday, after hitting a speed bump when last week's mixed bag of U.S. labour data allayed investor fears about a faster end to monetary stimulus. While the headline June job creation figure beat forecasts, unemployment ticked higher and workforce participation didn't budge - suggesting positive progress, but space for the Federal Reserve to wait before tapering asset buying or hiking rates.
"Friday's NFP jobs report gave something for everyone in terms of an above-consensus NFP gain, but also an above-consensus unemployment rate," strategists at ING said in a note to clients.
Data from the Institute of Supply Management showed that U.S. services industry activity moderated in June, likely restrained by labor and raw material shortages, resulting in unfinished work continuing to pile up. The ISM survey's measure of service employment fell to a reading of 49.3 in June from 55.3 in May
Disappointing data out of Europe sent the euro towards a three-month low against the dollar. Investor sentiment in Germany, the euro zone's biggest economy, remains at a high level but fell sharply in July, the ZEW economic research institute reported, while data showed orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020.
The ZEW economic research institute said its survey of sentiment among investors fell to 63.3 points from 79.8 in the previous month. A Reuters poll had forecast a fall to 75.2. But a separate ZEW gauge of current conditions surged to 21.9 from -9.1 points in June, moving into positive territory for the first time in two years and easily beating a consensus forecast for 5.0 points.
"The economic development continues to normalise," ZEW President Achim Wambach said in a statement. "In the meantime, the situation indicator for Germany has clearly overcome the coronavirus-related decline. The financial market experts therefore expect the overall economic situation to be extraordinarily positive in the coming six months."
Separate data on Tuesday from the Federal Statistics Office showed that orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020. That reflected weaker demand from countries outside the euro zone and fewer contracts for machinery and intermediate goods.
Orders for industrial goods fell 3.7% on the month in seasonally adjusted terms -- the first drop in new business this year.
Carsten Brzeski of ING said the decline largely reflected supply chain disruptions, delivery delays and lack of materials and intermediate goods. Today's disappointing industrial orders are no reason to be concerned," he wrote in a note. "Order books are more than richly filled and reducing backlogs is a bigger problem for German companies than acquiring new orders."
European Central Bank policymakers are in the middle of debating a new strategy, with many now backing the notion of letting inflation surpass 2% for a while after it lagged below that level for most of the past decade.
The dollar traded near its highest in three months versus major peers on Thursday after minutes of the Federal Reserve's June policy meeting confirmed the world's biggest central bank is moving toward tapering its asset purchases as soon as this year.
Fed officials said substantial further progress on economic recovery "was generally seen as not having yet been met," although participants expected progress to continue and agreed they must be ready to act if inflation or other risks materialize, according to the minutes of the Federal Open Market Committee (FOMC)'s June policy meeting.
"Various participants" at the session still felt conditions for curbing the bond-buying that is supplying markets with cash would be "met somewhat earlier than they had anticipated," while others saw a less clear signal from incoming data, the minutes showed.
Still, "a substantial majority" of the officials saw inflation risks "tilted to the upside," and the Fed as a whole felt it needed to be prepared to act if those risks materialized.
"Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals," the minutes stated, referring to the policy-setting Federal Open Market Committee (FOMC).
The minutes did little to clarify when the Fed will begin to change the monthly bond purchases and near-zero interest rates it put in place in the spring of 2020 to support the economy through the coronavirus pandemic and associated recession.
But it did show debate over those policies beginning in earnest, with Fed officials laying out a broadly divergent set of views about the risks the economy faces, the level of uncertainty, and even delving into details like whether to curb the purchase of mortgage-backed securities faster than that of U.S. Treasury bonds.
"Monetary policy recalibration is now on the table," wrote Bob Miller, BlackRock's head of fixed income for the Americas, noting the "substantial dispersion of opinions" at the central bank.
TAPERING TIMELINE
At its meeting last month, the FOMC shifted towards a post-pandemic view of the world, dropping a longstanding reference to the coronavirus as a constraint on the economy and, in the words of Fed Chair Jerome Powell, "talking about talking about" when to shift monetary policy as well.
The start of that discussion, along with interest rate projections showing higher borrowing costs as soon as 2023, caused investors to anticipate the Fed will move faster than expected to end its support for the economy.
Long-term Treasury yields are near five-month lows, and the gap between those and shorter-term yields has been narrowing, a development often associated with skepticism about the outlook for longer-term economic growth.
In this case, Cornerstone Macro analyst Roberto Perli wrote recently, "the market views the perceived Fed shift as harmful to the long-term prospects for the U.S. economy," with the Fed's stated commitment to getting back to full employment seen as weakening in the face of higher-than-anticipated inflation
What investors are wondering is how fast the discussion will spool out and when the actual "taper" may begin. Several regional Fed policymakers have since said they felt the economy was near the point where the central bank should pull back. However, even some of them have indicated it will take several meetings to develop and announce a plan for reducing the bond purchases.
The FOMC meets eight times a year, with the next two meetings scheduled for July 27-28 and Sept. 21-22. In the interim, the central bank will hold its annual research conference in Jackson Hole, Wyoming, a setting that Fed chiefs have often used to signal policy changes.
Economists polled by Reuters expect the Fed to announce a strategy for tapering its asset purchases in August or September, with the first cut to its bond-buying program beginning early next year.
"The FOMC remains one of the more hawkish central banks under our coverage," and will begin to discuss a taper at the policy meeting at the end of this month, Commonwealth Bank of Australia strategist Carol Kong wrote in a client note. We therefore expect the USD to trade with an upward bias."
While the dollar initially rose in early London trading, the euro jumped across the board as the selloff gathered pace as some hedge funds unwound some of their large bets against the single currency versus some other majors.
"This is a classic unwind of risky positions in currency markets with yield chasing trades reversing and flows reversing from current account deficit countries to surplus nations," said a trader at a U.S. bank in London.
While minutes of the U.S. Federal Reserve's June policy meeting confirming it was moving towards tapering its asset purchases as soon as this year were widely blamed for the selloff, some traders saw an extension of the unwinding of the reflation theme seen in the global bond markets this week.
"The risk off theme is clear across all markets, especially in currencies with the strongest risk DNAs including the Aussie, Canadian dollar and the Kiwi," said John Marley, CEO of forexxtra, a London-based FX consultancy. This feels very much as though this is a washout of positions which could have some real potential in a market which has already felt very thin this week," he said.
The euro held on to earlier gains after the European Central Bank set a new inflation target and claimed a role in fighting climate change after a strategy review.
With inflation having undershot its target for nearly a decade, ECB President Christine Lagarde has driven an 18-month deep dive into the inner workings of the bank, challenging even core principles of central banking in the hopes of resetting strategy and bolstering credibility.
In the key conclusion of the review, the central bank of the 19 countries that share the euro set its inflation target at 2% in the medium term, ditching a previous formulation of "below but close to 2%", which had created the impression it worried more about price growth above the target than below it.
"We believe the 2% target is clearer, simpler to communicate and a good balance," Lagarde told a news conference. "We know that 2% is not going to be constantly on target, there might be some moderate, temporary deviation in either direction of that 2%. And that is OK."
The widely expected changes left markets unfazed but analysts said the sum of the measures pointed to an even longer period of central bank stimulus, even after emergency measures adopted to fight the COVID-19 pandemic are phased out.
"The new framework is largely in line with expectations, but with a dovish tilt," Berenberg economist Holger Schmieding said. "It enshrines the flexibility which the ECB had granted itself anyway."
More importantly, few economists appeared to conclude that the new strategy would have a fundamental impact on policy in the near term, and the ECB's 1.85 trillion euro Pandemic Emergency Purchase Programme is still likely to be wound down early next year.
Inflation in the euro zone is unlikely to overshoot and the current increase in price growth driven by the coronavirus pandemic will be temporary, European Central Bank board member Isabel Schnabel was quoted on Saturday as saying.
“I am sure that we will not experience any excessively high inflation,” Schnabel told the Frankfurter Allgemeine Sonntagszeitung in extracts from an interview released ahead of publication.
Schnabel’s comments come a day after the accounts of the ECB’s June policy meeting revealed growing concerns among conservative policymakers that the rise in inflation may be more durable than now predicted.
Commenting on the ECB’s new, symmetric goal for inflation of 2%, Schnabel said: “On the one hand, the increase in the inflation target is minimal. On the other, the goal of 2% has an important function: It creates additional room for our monetary policy to have a stabilising effect.”
She added that interest rates would not remain low for ever and it was vital for European governments to ensure that the large amounts of stimulus spending they have deployed paves the way for a return to a sustainable growth path.
The global spread of COVID variants has added to fears that there could be some disappointment in terms of economic growth in the coming months, said Mazen Issa, senior FX strategist at TD Securities.
"While we are cautious in interpreting price action at a time of the year when liquidity is not as plentiful, we think markets are contemplating a potential growth scare as the Delta variant spreads and infections rise," he said.
Data on Thursday showed the number of Americans filing new claims for unemployment benefits rose unexpectedly last week, an indication that the labor market recovery from the COVID-19 pandemic continues to be choppy.
"It's an indication that if these numbers continue not to be anything stellar, or that we're not moving towards full employment, that leaves the Fed room to just take it
easy and not necessarily think about a tapering timeline," Juan Perez, senior currency trader at Tempus Inc, said of the data.
Some recent soft U.S. data, along with a surge in COVID-19 cases in many parts of the world, has fueled concerns that the global economic recovery was running out of steam, leading to an eight-day streak of declines for the 10-year Treasury yield that ended on Friday.
"This week was all about the bond market and the collapse in treasury yields," said Edward Moya, senior market analyst for the Americas at OANDA. "Some of that move was probably overdone."
The greenback's decline was likely due in part to profit-taking ahead of key U.S. inflation data for June due next week, said Joe Manimbo, senior market analyst at Western Union Business Solutions. "Dollar bulls are just pulling some chips off the table," he said.
A stocktake on the global recovery
(By Fathom Consulting)
As we enter the second half of the year, here is a stocktake on the state of the virus and the path of the global recovery.
The worst of the spike in COVID-19 cases in Asia appears to be over. The new and more transmissible delta variant of the virus which was first reported in India had spread rapidly. Case numbers in Asia have since fallen, which, given low vaccination rates, is likely to be due to non-pharmaceutical interventions such as lockdowns and voluntary social distancing, offering the virus fewer susceptible hosts. However, the variant is now spreading more widely round the globe, with the World Health Organisation tracking cases in 96 countries.
At current vaccination rates, Fathom expects most major economies to have offered at least one dose of a COVID-19 vaccine to all adults by the end of the year. Anti-vaccine sentiment remains a problem in some countries, however, with survey data suggesting that only 72% of Americans and 71% of the French are willing to be vaccinated.
As of 2021 Q1, world GDP has returned to its pre-crisis level — largely thanks to strong growth in China. Across the board, however, only 22 per cent of countries have fully recovered to pre-crisis levels of output. The US is within a whisker of reaching this mark, after easing restrictions. During the worst of the pandemic households accrued vast savings. How quickly those savings are spent is likely to be key in determining the future path of output for those countries that are yet to fully recover.
In Fathom’s view, a large proportion of those savings is likely to be spent as restrictions ease. Survey evidence from the Bank of England and New York Fed supports this view, suggesting that around a quarter of savings in the UK and US may be spent. Timely monthly indicators, such as retail sales related to activities restricted during lockdown, vehicle sales and the number of domestic airline passengers, have already risen sharply as confidence has returned to normal levels. However, other sectors are yet to show signs of recovery. International travel restrictions remain in place, impacting the level of bookings for tourism destinations. As the vaccine rollout continues and countries establish cross-border travel agreements, Fathom expects a further boost in economic confidence and global output.
Overall, as expected the global ‘V’ shaped recovery is complete. But what will happen next as economies continue to reopen? Fathom expects that — unless there is a resurgence in the virus — economic growth will surge over the rest of this year as the money built up in savings is spent by households. This would drive inflation above central bank targets, and would pose central bankers the dilemma of how best to respond. The orthodox approach would see monetary policy tightened in the short term to bring inflation back under control. Alternately, higher inflation might be accommodated, even welcomed; and then embedded, by
setting a higher inflation target down the line. As Fathom has long noted, there are strong theoretical grounds for adopting the second approach.
COT Report
Despite upward action on EUR this week, CFTC data shows that bearish sentiment stands intact by far. Recent data shows opening large amount of new short positions, as open interest has increased as well:
As a result, net long position is decreasing for 5 consecutive weeks.
Source: cftc.gov
Charting by Investing.com
Next week to watch
Looking forward, U.S. retail sales numbers for June are also due next week, along with U.S. bank earnings.
Adding to the busy week ahead, U.S. Federal Reserve Chair Jerome Powell is scheduled to appear before Congress, and rate decisions by central banks in Japan, Canada and New Zealand are on tap.
On Wednesday and Thursday, Federal Reserve chief Jerome Powell has one of his twice yearly get-togethers with U.S. Congress and it couldn't be more timely.
His view on why bond markets seem to have suddenly given up on the reflation trade is what every global investor is currently trying to work out, so tune in.
Elsewhere the Bank of Japan is unlikely to shift away from ultra supportive policies when it meets Friday.
Though the Bank of Canada is expected to trim its $3 billion Canadian dollar a month bond buying programme to $2 billion CAD. In emerging markets, the focus will be on Turkey on Wednesday, with searing inflation making it tough for its central bank governor to deliver the rate cuts President Tayyip Erdogan hired him for.
As a bottom line
So, as Fathom tells - "The US economy has nearly recovered to pre-crisis levels of GDP as the easing of COVID-19 restrictions has led to a pickup in the consumption of goods. During the pandemic, higher incomes and lower spending caused households to build up excess savings worth close to 10% of US GDP by the end of 2021 Q1. In Fathom’s view, around 25% of these forced savings will be spent within the next twelve months. If this happens then we are likely to see a boom in the service sector and ultimately higher inflation."
Based on global economy statistics and analysis, we see no doubts in our long-term view. Performance in different industrial and social spheres shows recovery that statistics confirming. It means that no doubts but we will get higher inflation, which Fathom Consulting confirms either. New virus variants have limited impact as on economy performance as on sentiment by far and currently we do not see any reasons why this impact could exacerbate and become vital later. Modern vaccines have no total protection from Delta and other variants but they smooth the way of disease, making it softer.
The new factor that gradually becomes evident is competition among central banks. This is what was standing under cover previously. Now, as RBA as RBNZ have better situation with pandemic, they are also aimed on stimulus reducing and tapering, which makes kiwi and aussie especially attractive currency for carry. Recent price action and unwinding of hedge fund positions that triggered dollar drop tells, that investors seriously consider this investing opportunity. It is difficult to say how far it goes right now, but faster action from RBA, for example could keep pressure on USD, especially if US rates remain flat. Maybe this factor becomes the major one that let dollar index to complete its long term downside target around 87.4.
That's being said, we make no changes by far to our long term view, while in shorter term volatility could rise and upward pullbacks against USD could become stronger because of combination weaker US statistics, flat interest rates and hawkish statement from the rivals. Although major tendency should not be broken.
Technical analysis stands in next post below.