Post date: 28/06/2021 10:41
Financial assets worldwide rallied, as US stocks broke to all new highs and commodity prices rebounded from their post-Fed sell-off. Currencies behaved much as they had before that Fed meeting. The dollar resumed its downward trend, safe-havens like the Japanese yen and the Swiss franc suffered and commodity-dependent currencies outperformed, particularly Latin American ones.
Markets seem to think that Federal Reserve communications since the June meeting have walked back at least some of the perceived hawkish tone. We tend to agree, on the basis that talk is cheap and political resistance will make it difficult to change the strongly inflationary policy mix in the short- and medium-term. This week the focus returns to macroeconomic indicators, particularly the June flash inflation print out of the Eurozone on Thursday and the employment report out of the US on Friday.
The UK PMIs of business activity came in somewhat below expectations last week, albeit remaining at very strong and near record high levels indicating growing economic activity across most sectors. For its part, the Bank of England essentially punted to August and September any serious discussion of policy tightening. It’s understandable; by then the picture on whether inflationary pressures are transitory should be clearer. With these major macroeconomic and policy news out of the way, the UK calendar looks thin and sterling should trade mostly off of events elsewhere.
In contrast to the UK, the Eurozone PMIs came out even stronger-than-expected, and in fact reached 15-year highs as pent up demand is finally released by the lifting of the pandemic restrictions. It looks increasingly likely that our call for a stronger and faster than expected rebound, following on the heels of the US experience, will be borne out. Inflation reports everywhere have taken increased importance, and the flash inflation report for June in the Eurozone will be no exception. We see scope for yet another upward surprise, which could add fuel to the euro’s rebound from its post-Fed lows.
The slate of speeches from Federal Reserve officials last week added nuance to the hawkishness apparent in the June meeting communications. It appears that the institution is split over Chair Powell’s position that inflation will come back down without any need for policy tightening. This is likely to remain a rhetorical exercise for now, since even the most hawkish members do not envision hikes until late-2022. Mere jawboning is unlikely to have any significant effect on markets, and we expect that the trends toward higher asset prices and stronger inflationary pressures will be with us for a while yet, an environment that is particularly supportive of emerging market currencies.
The labour report on Friday will provide more insight on the tension between strong demand and a supply side that is struggling to rehire and rebuild capacity in the service sector after the pandemic disruption. We think we’ll see significant job creation, another downtick in unemployment, but perhaps stronger wage hikes than the market is expecting.