Post date: 13/09/2021 11:59
The stagflation concerns from the August payroll report in the US were confirmed by another labour market report (JOLTS), which showed unfilled job openings soaring to another all-time high in July. Yields continued to march higher worldwide, risk assets wobbled, and major currencies did not do much of anything, staying within 1% of each other for the most part. The US dollar outperformed all of its G10 peers and most EM currencies. The ECB announced a cut in its monthly PEPP bond purchases, but President Lagarde insisted it was not a taper but ‘recalibration’, while euro traders shrugged off the event for the most part. This week major macro data will be focused on inflation. US inflation data for August is out Tuesday, UK print is out on Wednesday, suggesting we might see some volatility around the middle of the week. Expectations are for continued evidence of inflation pressures in both countries. Aside from that, traders will be cautious ahead of the critical Federal Reserve and Bank of England meeting the week after this one, as well as the upcoming German elections.
Johnson's plan to pay for additional social care through an increase in taxes had a muted impact on sterling, though the idea that social expenditure should be matched by taxation certainly goes against the recent grain in international macroeconomic policy. Labour data on Tuesday will be closely watched, but we think the inflation data on Wednesday will be more important for the outcome of the Bank of England meeting the following week. The MPC was already evenly split on whether conditions for a hike had been met. Wednesday expected inflation surge may solidify a hawkish majority there, which should be positive for the pound.
The outcome of the September ECB meeting was in line with market expectations. A cut of unspecified size was announced to the monthly PEPP purchases of Eurozone sovereign bonds. However, President Lagarde somewhat bizarrely went out of her way to assure markets that this taper was not, in fact, a taper. Less noticed were the ECB inflation projections, which foresee a return to below target 1.5% inflation in 2023. This could be interpreted as a dovish signal and therefore negative for the euro, but the dismal track record of ECB inflation projections argues against taking it too seriously.
The JOLTS labour data report showing yet another surge in unfilled job openings in the US sets up rather nicely for the inflation report on Tuesday. Yet another upward surprise here may seriously dampen the mood for the following week's Federal Reserve meeting. However, the effect on the US dollar of recent stagflationary news and the consequent rise in yields has been notoriously hard to predict. Aside from that, traders will be looking to second-tier data releases for confirmation that the softening trend in growth data is maintained.