Sive Morten
Special Consultant to the FPA
- Messages
- 18,708
Fundamentals
This week market society mostly was watching for NFP data as it should have to clarify what to expect from the Fed on September meeting. And data has given the answer. But the one thing was mostly missed and passed unsigned that is also important - spike of inflation in EU. This topic now is taking the first place as we're coming to ECB meeting on September, 9.
Market overview
The euro inched back towards the previous session's one-month high on Wednesday as a higher-than-expected inflation reading pumped up bond yields, forcing investors to cover their bearish bets on the single currency. Strong institutional demand at bond auctions from Greece and Germany also underpinned the euro's gains.
Euro zone inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank's benign view on price growth and its commitment to look past what it deems a temporary increase.
Data on Tuesday showed that consumer inflation in the 19 countries sharing the single currency accelerated to 3% year-on-year in August, the highest in a decade, above the European Central Bank's 2% target and a 2.7% forecast in a Reuters poll.
The reading sent yields on German benchmark debt to their highest levels since late July. The increase was fuelled by energy costs, but food prices also surged, while there were unusually large increases in the prices of industrial goods too, according to Eurostat, the EU's statistics agency.
The jump in bond yields forced traders to halt their multi-month streak of U.S. dollar purchases versus the euro. Net short bets against the greenback versus the single currency have fallen to their lowest levels since March 2020, according to the latest positioning data.
Implied volatility gauges on the single currency also flickered to life, with one-month maturities rising to their highest levels since early July as expectations grew that the ECB might signal a policy shift at a meeting next week.
Markets mostly shrugged off the data, with stocks rising and yields increasing just a basis point or two, suggesting the narrative of temporary inflation and ultra-easy central bank policy for years to come remains the central one. Still, the numbers are likely to make for uncomfortable reading at the ECB.
The central bank has repeatedly raised its inflation projection this year only for the actual numbers to beat its forecasts, and price growth now seems likely to peak only in November. With inflation in Germany, the euro zone's largest economy and the ECB's biggest critic, expected to approach 5% in coming months, the bank is likely to come under increasing public pressure to address price developments that are reviving long-dormant memories of runaway prices.
Robert Holzmann, governor of Austria's central bank, said the ECB was in a situation where it could think about reducing emergency bond purchases, and that he expected the issue to be discussed at the meeting.
Analysts believe the lack of sustained euro strength is based on current ECB forward guidance that suggests asset purchases will continue until rate hikes are necessary, indicating the stimulus program might be expanded next year.
The ECB argues that a slew of one-off factors including production bottlenecks related to the economy's reopening after the COVID-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year.
Longer-term market based inflation expectations are also holding well below 2%, even if they have moved steadily higher this year. ECB policymakers agree and predict that inflation will languish well below the bank's target for years to come, so they even reinforced their commitment last month to keeping monetary policy exceptionally loose to generate price pressures.
Speaking to Reuters last week, ECB chief economist Philip Lane argued that these inflation surprises still did not challenge his views about the temporary nature of price pressures as wage growth, a necessary component of durable inflation, remained muted.
While ECB policymakers are acknowledging that they underestimated price pressures in the near term, they continue to point to weak underlying inflation readings as supporting evidence for loose policy.
Core inflation, however, also surged in August with inflation excluding volatile food and fuel prices accelerating to 1.6% from 0.9%, while an even narrower measure that also excludes alcohol and tobacco, rose to 1.6% from 0.7%.
The ECB will next meet on Sept. 9 and must decide on the pace of its bond purchases over the coming quarter. While some adjustment is possible, Lane argued that it would be at the margins as the ECB is committed to maintaining "favourable financing conditions". After Tuesday's reading, not all observers are quite so sanguine.
German Bundesbank President Jens Weidmann said euro zone inflation risks overshooting ECB projections and the central bank should prepare for the end of its 1.85 trillion euro Pandemic Emergency Purchase Program (PEPP).
Euro zone business activity remained strong last month, IHS Markit’s survey showed, suggesting the bloc’s economy could be back to pre-COVID-19 levels by year-end despite fears about the Delta variant of the coronavirus and widespread supply chain issue.
The European Central Bank will meet next week amid calls from several hawkish members to slow down its pandemic-era purchases programme. A Reuters poll sees the bank announcing a cut to its asset purchases, given a recent spike in inflation.
The dollar fell against a basket of major currencies on Wednesday after a report on the U.S. labor market missed expectations by a wide margin, while the euro climbed to a one-month high on inflation worries.
The greenback fell after the ADP National Employment Report showed private payrolls rose by 374,000 in August, up from 326,000 in July but well short of the 613,000 forecast.
"Certainly the recovery has been uneven but if nonfarm payrolls should also disappoint, that would seemingly close the door to an imminent taper and keep the dollar in a bit of a funk," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.
The dollar has been under pressure since Friday, when Fed Chair Jerome Powell said at the Jackson Hole conference that while tapering could begin this year, the central bank was in no hurry to raise interest rates.
Concerns about rising COVID-19 cases denting the economic rebound could also serve to keep the central bank from scaling back stimulus.
Other data showed U.S. manufacturing activity increased more than anticipated in August, but a measure of employment in factories fell to a nine-month low, likely due to a shortage of workers.
The euro held near a one-month high versus the dollar on Thursday and a six-week peak against the pound, supported by hawkish comments from ECB policymakers after data showed inflation at a decade high and on signs the Fed is not hurrying to tighten policy.
The dollar has been on the defensive over the past couple of weeks as doubts have crept in about when the Federal Reserve will start unwinding its stimulus. Fed chair Jerome Powell said last Friday the jobs recovery would determine the timing of asset purchase tapering. Dovish comments from Powell and other Fed policymakers in addition to data misses have seen the greenback index lose around 1.4% versus a basket of currencies since hitting nine-month highs on Aug. 20.
The euro has in contrast witnessed supportive data flow, including strong manufacturing growth and inflationary pressure from supply-chain snarls. Fresh figures on Thursday showed factory gate prices in the 19-country euro bloc rose 2.3% month-on-month for a 12.1% year-on-year surge, well above what was forecast.
Investors say EUR could struggle to make headway, possibly because ECB guidance has suggested asset purchases will continue until rate hikes are necessary.
The dollar fell for a fourth straight day against a basket of other major currencies on Friday after a much weaker than expected U.S. payrolls report that is likely to keep the Federal Reserve at bay in scaling back its massive stimulus measures.
Nonfarm payrolls increased by 235,000 in August, well short of the 728,000 forecast by economists in a Reuters poll, while the unemployment rate dipped to 5.2% from 5.4% in the prior month
Rising COVID-19 cases in recent weeks have brought on concerns the economic recovery could stall. The jobs data will likely keep the Fed on hold.
Separately, data from the Institute for Supply Management showed activity in the services sector grew at a moderate pace in August, with signs that rising prices and supply constraints were beginning to ease.
Economists have been sharply marking down their gross domestic product estimates for the third quarter. Reasons cited include the resurgence in infections, driven by the Delta variant of the coronavirus, and relentless shortages of raw materials, which are depressing automobile sales and restocking.
Surging COVID-19 cases could also have kept some unemployed people home, frustrating efforts by employers to boost hiring.
Jim O'Sullivan, chief U.S. Macro Strategist at TD Securities in New York, who was forecasting a 400,000 rise in payrolls in August, does not believe this would be weak enough for the Fed to back away from their "this year" signal.
Analysts at Morgan Stanley in the past week cut their view on third-quarter U.S. gross domestic product to a gain of 2.9%, from a 6.5% increase.
The pandemic has upended labor market dynamics, creating worker shortages even as 8.7 million people are officially unemployed. There were a record 10.1 million job openings at the end of June. Lack of affordable childcare, fears of contracting the coronavirus, generous unemployment benefits funded by the federal government as well as pandemic-related retirements and career changes have been blamed.
There is cautious optimism the labor pool will increase because of schools reopening and government-funded benefits expiring on Monday. But the Delta variant likely delayed the return to the labor force for some.
Other details of the Labor Department's closely watched employment report on Friday were fairly strong, with the unemployment rate falling to a 17-month low of 5.2% and July job growth revised sharply higher. Wages increased a solid 0.6% and fewer people were experiencing long spells of unemployment.
This points to underlying strength in the economy even as growth appears to be slowing significantly in the third quarter because of the soaring infections, driven by the Delta variant of the coronavirus, and relentless shortages of raw materials, which are depressing automobile sales and restocking.
The initial August payrolls print has undershot expectations over the last several years, including in 2020. Payrolls have been subsequently revised higher in 11 of the last 12 years.
That, together with raw materials shortages, which are making it harder for businesses to replenish inventories, prompted economists at Goldman Sachs and JPMorgan to slash third-quarter GDP growth estimates to as low as a 3.5% annualized rate from as high as a 8.25% pace. The economy grew at a 6.6% pace in the second quarter.
Economists did not believe the pullback in hiring was enough for the Federal Reserve to back away from its "this year" signal for the announcement of the scaling back of its massive monthly bond buying program, given strong wage growth.
How Delta has darkened the economic outlook
(By Fathom consulting)
At the beginning of the year there was widespread optimism for the outlook for 2021. Vaccine rollouts were starting to accelerate across most western economies. However, the combination of a more transmissible variant of the COVID-19 virus (Delta), and the fact that the vaccines, while efficacious against illness, do not entirely prevent infection or halt transmission, mean that even highly vaccinated countries such as the UK continue to face elevated infection and fatality rates for the time of year. Meanwhile, countries in the Asia-Pacific region which had previously succeeded in near-eliminating COVID have now imposed tight restrictions and are struggling to contain cases. Risks to the economic outlook thus remain higher than was hoped.
As the vaccines have weakened the link between cases and severe illness, we continue to assume that countries with high vaccination rates will not return to lockdowns, despite Delta. Countries like the US and the UK do however continue to face downside risks due to the potential for voluntary changes to behaviour. Indeed, the recent increase in cases stateside appears to have had this effect, with consumer confidence slumping in August and high-frequency data pointing to reduced spending on high-contact activities such as dining. However, it is too early to draw firm conclusions.
If Delta poses danger to highly vaccinated countries, it risks much worse in countries with large susceptible populations. Indeed, some star performers during the first part of the pandemic have struggled this year. Successful strategies in 2020 tended to involve imposing non-pharmaceutical interventions early in order to drive cases to zero or near zero, coupled with border restrictions in order to ensure new waves were not seeded. Many countries in the Asia-Pacific regions followed this playbook, with positive results: in Australia, China, New Zealand, Korea and Taiwan, early intervention prevented sustained negative health outcomes, which in turn allowed economies to reopen earlier and for longer.
But things have changed. The Delta variant has proved capable of piercing previously formidable defenses. So far, China is the only country that has been able to successfully contain a Delta outbreak back to zero. By contrast, Australia and Vietnam are both facing sustained case increases despite stringent restrictions. The presence of large susceptible populations, due to slow vaccine rollouts and low natural immunity, means that these countries are ripe breeding grounds. Meanwhile, both have calibrated their response to be highly sensitive to rising cases, meeting relatively low caseloads (by international standards) with extremely stringent restrictions. The direct effects of these policies risk being exacerbated by indirect effects from continued pressure on supply chains, that cause global shortages in key components and put upward pressure on prices.
As a result of the Delta variant, there are downside risks to both demand and supply, raising the specter of slightly weaker growth but relatively firm prices — an unfortunate and unwelcome trade-off for policymakers. However, these risks are likely to prove temporary. Public health experts continue to believe that COVID-19 will eventually reach a point of endemicity, with some winter waves larger than others, but most likely to be small enough for us to cope with without significant disruption. Until that point arrives, the virus will continue to influence demand and supply, making the jobs of investors and policymakers trickier than usual.
COT Report
Numbers of this week look a bit surprising as we were expecting to see rising of net long position on EUR due Wyoming statement. But, data shows the opposite picture - net long position has decreased more. Although open interest barely has changed and hedgers activity was low. The fact that dollar weakness doesn't support the rivals makes us think that we see market reaction on other global problems. It is reasonable to suggest overall slowdown and fears of Delta spreading that it could impact on economy:
Net long position is keep going down, despite J. Powell recent comments. It means that we high degree of certainty we get no changes in dynamic despite weak NFP report.
source: cftc.gov, charting by Investing.com
To be continued...
This week market society mostly was watching for NFP data as it should have to clarify what to expect from the Fed on September meeting. And data has given the answer. But the one thing was mostly missed and passed unsigned that is also important - spike of inflation in EU. This topic now is taking the first place as we're coming to ECB meeting on September, 9.
Market overview
The euro inched back towards the previous session's one-month high on Wednesday as a higher-than-expected inflation reading pumped up bond yields, forcing investors to cover their bearish bets on the single currency. Strong institutional demand at bond auctions from Greece and Germany also underpinned the euro's gains.
Euro zone inflation surged to a 10-year-high in August with further rises likely, challenging the European Central Bank's benign view on price growth and its commitment to look past what it deems a temporary increase.
Data on Tuesday showed that consumer inflation in the 19 countries sharing the single currency accelerated to 3% year-on-year in August, the highest in a decade, above the European Central Bank's 2% target and a 2.7% forecast in a Reuters poll.
The reading sent yields on German benchmark debt to their highest levels since late July. The increase was fuelled by energy costs, but food prices also surged, while there were unusually large increases in the prices of industrial goods too, according to Eurostat, the EU's statistics agency.
The jump in bond yields forced traders to halt their multi-month streak of U.S. dollar purchases versus the euro. Net short bets against the greenback versus the single currency have fallen to their lowest levels since March 2020, according to the latest positioning data.
Implied volatility gauges on the single currency also flickered to life, with one-month maturities rising to their highest levels since early July as expectations grew that the ECB might signal a policy shift at a meeting next week.
Markets mostly shrugged off the data, with stocks rising and yields increasing just a basis point or two, suggesting the narrative of temporary inflation and ultra-easy central bank policy for years to come remains the central one. Still, the numbers are likely to make for uncomfortable reading at the ECB.
The central bank has repeatedly raised its inflation projection this year only for the actual numbers to beat its forecasts, and price growth now seems likely to peak only in November. With inflation in Germany, the euro zone's largest economy and the ECB's biggest critic, expected to approach 5% in coming months, the bank is likely to come under increasing public pressure to address price developments that are reviving long-dormant memories of runaway prices.
Robert Holzmann, governor of Austria's central bank, said the ECB was in a situation where it could think about reducing emergency bond purchases, and that he expected the issue to be discussed at the meeting.
Analysts believe the lack of sustained euro strength is based on current ECB forward guidance that suggests asset purchases will continue until rate hikes are necessary, indicating the stimulus program might be expanded next year.
The ECB argues that a slew of one-off factors including production bottlenecks related to the economy's reopening after the COVID-19 pandemic account for the bulk of the inflation surge, and that price growth will quickly moderate early next year.
"The effects of re-opening and supply problems could intensify in the next few months. But we suspect that they will begin to fade next year as global consumption and trade patterns return to something like their pre-pandemic norms," Capital Economics said in a note. We think the headline rate will drop to about 2% in January and trend down throughout 2022 to end next year at around 1%," it added.
"Unless euro area economic data post consistent upside surprises in coming months, it is hard to get excited about the idea of persistently rising euro area rates, and by extension a strong upward trend in euro/dollar," Credit Suisse strategists said in a daily note, sticking to their year-end forecast of $1.16.
Longer-term market based inflation expectations are also holding well below 2%, even if they have moved steadily higher this year. ECB policymakers agree and predict that inflation will languish well below the bank's target for years to come, so they even reinforced their commitment last month to keeping monetary policy exceptionally loose to generate price pressures.
Speaking to Reuters last week, ECB chief economist Philip Lane argued that these inflation surprises still did not challenge his views about the temporary nature of price pressures as wage growth, a necessary component of durable inflation, remained muted.
While ECB policymakers are acknowledging that they underestimated price pressures in the near term, they continue to point to weak underlying inflation readings as supporting evidence for loose policy.
Core inflation, however, also surged in August with inflation excluding volatile food and fuel prices accelerating to 1.6% from 0.9%, while an even narrower measure that also excludes alcohol and tobacco, rose to 1.6% from 0.7%.
The ECB will next meet on Sept. 9 and must decide on the pace of its bond purchases over the coming quarter. While some adjustment is possible, Lane argued that it would be at the margins as the ECB is committed to maintaining "favourable financing conditions". After Tuesday's reading, not all observers are quite so sanguine.
"This is not to say that there is no upside risk to the inflation outlook," ING economist Bert Colijn said. "So hold tight: inflation has the potential to go higher from here."
"We have seen numbers that argue against keeping policy so low for so long and that has been helping the euro... it is certainly going to heighten the focus on the QE debates next week when we hear from the ECB," said Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.
German Bundesbank President Jens Weidmann said euro zone inflation risks overshooting ECB projections and the central bank should prepare for the end of its 1.85 trillion euro Pandemic Emergency Purchase Program (PEPP).
Euro zone business activity remained strong last month, IHS Markit’s survey showed, suggesting the bloc’s economy could be back to pre-COVID-19 levels by year-end despite fears about the Delta variant of the coronavirus and widespread supply chain issue.
The European Central Bank will meet next week amid calls from several hawkish members to slow down its pandemic-era purchases programme. A Reuters poll sees the bank announcing a cut to its asset purchases, given a recent spike in inflation.
The dollar fell against a basket of major currencies on Wednesday after a report on the U.S. labor market missed expectations by a wide margin, while the euro climbed to a one-month high on inflation worries.
The greenback fell after the ADP National Employment Report showed private payrolls rose by 374,000 in August, up from 326,000 in July but well short of the 613,000 forecast.
"Certainly the recovery has been uneven but if nonfarm payrolls should also disappoint, that would seemingly close the door to an imminent taper and keep the dollar in a bit of a funk," said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington DC.
The dollar has been under pressure since Friday, when Fed Chair Jerome Powell said at the Jackson Hole conference that while tapering could begin this year, the central bank was in no hurry to raise interest rates.
Concerns about rising COVID-19 cases denting the economic rebound could also serve to keep the central bank from scaling back stimulus.
Other data showed U.S. manufacturing activity increased more than anticipated in August, but a measure of employment in factories fell to a nine-month low, likely due to a shortage of workers.
The euro held near a one-month high versus the dollar on Thursday and a six-week peak against the pound, supported by hawkish comments from ECB policymakers after data showed inflation at a decade high and on signs the Fed is not hurrying to tighten policy.
The dollar has been on the defensive over the past couple of weeks as doubts have crept in about when the Federal Reserve will start unwinding its stimulus. Fed chair Jerome Powell said last Friday the jobs recovery would determine the timing of asset purchase tapering. Dovish comments from Powell and other Fed policymakers in addition to data misses have seen the greenback index lose around 1.4% versus a basket of currencies since hitting nine-month highs on Aug. 20.
The euro has in contrast witnessed supportive data flow, including strong manufacturing growth and inflationary pressure from supply-chain snarls. Fresh figures on Thursday showed factory gate prices in the 19-country euro bloc rose 2.3% month-on-month for a 12.1% year-on-year surge, well above what was forecast.
Investors say EUR could struggle to make headway, possibly because ECB guidance has suggested asset purchases will continue until rate hikes are necessary.
"Leveraged funds were short euro-dollar so since Jackson Hole we have seen some of those shorts being covered, but the move doesn't look violent and there are still decent numbers of people looking to go short again," said Stephen Gallo, European Head of FX strategy for BMO Capital Markets. As long as the dollar doesn't have a reason to weaken, I don't think the euro on its own will break out significantly to the top side."
The dollar fell for a fourth straight day against a basket of other major currencies on Friday after a much weaker than expected U.S. payrolls report that is likely to keep the Federal Reserve at bay in scaling back its massive stimulus measures.
Nonfarm payrolls increased by 235,000 in August, well short of the 728,000 forecast by economists in a Reuters poll, while the unemployment rate dipped to 5.2% from 5.4% in the prior month
Rising COVID-19 cases in recent weeks have brought on concerns the economic recovery could stall. The jobs data will likely keep the Fed on hold.
"It adds more concern or focus on the October number, because now we want to see if there is a trend," said JB Mackenzie, managing director for futures and forex at TD Ameritrade in Chicago. (The Fed) is trying to telegraph that if the economy continues to heat up and they need to take action, they will, and that transparency is important to the markets and that is one of the main reasons you continue to see not a huge reaction to the downside here because the market feels as though they have been given that clear direction. Mackenzie said the 92 level was an important support level for the greenback after having bounced back from that level in early August.
Separately, data from the Institute for Supply Management showed activity in the services sector grew at a moderate pace in August, with signs that rising prices and supply constraints were beginning to ease.
Economists have been sharply marking down their gross domestic product estimates for the third quarter. Reasons cited include the resurgence in infections, driven by the Delta variant of the coronavirus, and relentless shortages of raw materials, which are depressing automobile sales and restocking.
Surging COVID-19 cases could also have kept some unemployed people home, frustrating efforts by employers to boost hiring.
"The Delta variant is like a sandstorm in an otherwise sunny economy," said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. "If it weren't for that, employment in August would have been even higher."
Jim O'Sullivan, chief U.S. Macro Strategist at TD Securities in New York, who was forecasting a 400,000 rise in payrolls in August, does not believe this would be weak enough for the Fed to back away from their "this year" signal.
"But it would probably increase the probability of a formal announcement coming at the December rather than the November meeting," said O'Sullivan. "We certainly don't expect an announcement at this month's meeting, even if the August data are stronger than expected."
"At some point production should pick up, allowing for the restocking of inventories and supporting sales, but it is unclear exactly when this will occur," said Daniel Silver, an economist at JPMorgan in New York. "The recent spread of the Delta variant and persistence of broader supply chain issues has generated some downside risk to the near-term outlook."
Analysts at Morgan Stanley in the past week cut their view on third-quarter U.S. gross domestic product to a gain of 2.9%, from a 6.5% increase.
The pandemic has upended labor market dynamics, creating worker shortages even as 8.7 million people are officially unemployed. There were a record 10.1 million job openings at the end of June. Lack of affordable childcare, fears of contracting the coronavirus, generous unemployment benefits funded by the federal government as well as pandemic-related retirements and career changes have been blamed.
There is cautious optimism the labor pool will increase because of schools reopening and government-funded benefits expiring on Monday. But the Delta variant likely delayed the return to the labor force for some.
"While we believe the trend in labor force participation is higher due to reopening and mass vaccination, we expect a pause in August due to concerns around the Delta variant," said Spencer Hill, an economist at Goldman Sachs in New York.
Other details of the Labor Department's closely watched employment report on Friday were fairly strong, with the unemployment rate falling to a 17-month low of 5.2% and July job growth revised sharply higher. Wages increased a solid 0.6% and fewer people were experiencing long spells of unemployment.
This points to underlying strength in the economy even as growth appears to be slowing significantly in the third quarter because of the soaring infections, driven by the Delta variant of the coronavirus, and relentless shortages of raw materials, which are depressing automobile sales and restocking.
"It is important to keep the right perspective," said Brian Bethune, professor of practice at Boston College. "Given the supply chain constraints and the ongoing battle to lasso COVID-19 to the ground, the economy is performing exceptionally well."
The initial August payrolls print has undershot expectations over the last several years, including in 2020. Payrolls have been subsequently revised higher in 11 of the last 12 years.
"The August payroll figures have historically been revised higher in the years since the Great Recession, sometimes significantly, and there's a good chance this effect will occur again this time," said David Berson, chief economist at Nationwide in Ohio.
That, together with raw materials shortages, which are making it harder for businesses to replenish inventories, prompted economists at Goldman Sachs and JPMorgan to slash third-quarter GDP growth estimates to as low as a 3.5% annualized rate from as high as a 8.25% pace. The economy grew at a 6.6% pace in the second quarter.
Economists did not believe the pullback in hiring was enough for the Federal Reserve to back away from its "this year" signal for the announcement of the scaling back of its massive monthly bond buying program, given strong wage growth.
"For the Fed a taper announcement is still likely coming in either November or December," said Michael Feroli, chief U.S. economist at JPMorgan in New York.
How Delta has darkened the economic outlook
(By Fathom consulting)
At the beginning of the year there was widespread optimism for the outlook for 2021. Vaccine rollouts were starting to accelerate across most western economies. However, the combination of a more transmissible variant of the COVID-19 virus (Delta), and the fact that the vaccines, while efficacious against illness, do not entirely prevent infection or halt transmission, mean that even highly vaccinated countries such as the UK continue to face elevated infection and fatality rates for the time of year. Meanwhile, countries in the Asia-Pacific region which had previously succeeded in near-eliminating COVID have now imposed tight restrictions and are struggling to contain cases. Risks to the economic outlook thus remain higher than was hoped.
As the vaccines have weakened the link between cases and severe illness, we continue to assume that countries with high vaccination rates will not return to lockdowns, despite Delta. Countries like the US and the UK do however continue to face downside risks due to the potential for voluntary changes to behaviour. Indeed, the recent increase in cases stateside appears to have had this effect, with consumer confidence slumping in August and high-frequency data pointing to reduced spending on high-contact activities such as dining. However, it is too early to draw firm conclusions.
If Delta poses danger to highly vaccinated countries, it risks much worse in countries with large susceptible populations. Indeed, some star performers during the first part of the pandemic have struggled this year. Successful strategies in 2020 tended to involve imposing non-pharmaceutical interventions early in order to drive cases to zero or near zero, coupled with border restrictions in order to ensure new waves were not seeded. Many countries in the Asia-Pacific regions followed this playbook, with positive results: in Australia, China, New Zealand, Korea and Taiwan, early intervention prevented sustained negative health outcomes, which in turn allowed economies to reopen earlier and for longer.
But things have changed. The Delta variant has proved capable of piercing previously formidable defenses. So far, China is the only country that has been able to successfully contain a Delta outbreak back to zero. By contrast, Australia and Vietnam are both facing sustained case increases despite stringent restrictions. The presence of large susceptible populations, due to slow vaccine rollouts and low natural immunity, means that these countries are ripe breeding grounds. Meanwhile, both have calibrated their response to be highly sensitive to rising cases, meeting relatively low caseloads (by international standards) with extremely stringent restrictions. The direct effects of these policies risk being exacerbated by indirect effects from continued pressure on supply chains, that cause global shortages in key components and put upward pressure on prices.
As a result of the Delta variant, there are downside risks to both demand and supply, raising the specter of slightly weaker growth but relatively firm prices — an unfortunate and unwelcome trade-off for policymakers. However, these risks are likely to prove temporary. Public health experts continue to believe that COVID-19 will eventually reach a point of endemicity, with some winter waves larger than others, but most likely to be small enough for us to cope with without significant disruption. Until that point arrives, the virus will continue to influence demand and supply, making the jobs of investors and policymakers trickier than usual.
COT Report
Numbers of this week look a bit surprising as we were expecting to see rising of net long position on EUR due Wyoming statement. But, data shows the opposite picture - net long position has decreased more. Although open interest barely has changed and hedgers activity was low. The fact that dollar weakness doesn't support the rivals makes us think that we see market reaction on other global problems. It is reasonable to suggest overall slowdown and fears of Delta spreading that it could impact on economy:
Net long position is keep going down, despite J. Powell recent comments. It means that we high degree of certainty we get no changes in dynamic despite weak NFP report.
source: cftc.gov, charting by Investing.com
To be continued...