Forex markets reacted in the usual fashion to a dovish speech from Jay Powell Friday night. US Dollar Index was flattened and EUR/USD bounced:
The Australian dollar went nuts:
All commodities, miners and EMs took off:
The dash for trash ripped:
As the curve flattened again:
Growth stocks launched:
Westpac has the wrap:
Event Wrap
Fed Chair Powell did not deliver an announcement on QE tapering, but left the door open to such. His eagerly awaited opening keynote speech to the virtual Jackson Hole Symposium had followed a series of hawkish Fed official media interviews which indicated that the Fed was ready to start tapering late in 2021 and for it to end around mid-2022. However, Powell delivered a far more cautious appraisal of the US economy, acknowledging improvements and that “substantial further progress” may have been met for inflation, but this had yet to be achieved for employment, with “substantial slack remaining in the labour market”. He referred to the risks of an “ill-timed policy move” and the longer term risks of disinflation in the global economy beyond the temporary impacts of the pandemic on inflation. All that said, he did say that “it could be appropriate to start reducing the pace of asset purchases this year”, noting that “history also teaches…that central banks cannot take for granted that inflation due to transitory factors will fade.” Regarding a rate hike, he said “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
US personal income in July was firmer than expected at +1.1%m/m (est. +0.3%m/m), although spending at +0.3%m/m slightly disappointed expectations at +0.4%m/m. The core PCE deflator was in line with consensus at +0.3%m/m and 3.6%y/y. The final reading of the University of Michigan’s August consumer sentiment survey was only slightly revised. There was a minor gain in current conditions (to 78.5 from 77.9), expectations were even lower at 65.1 (initially 65.2), and so the headline was barely altered at 70.3 (initially 70.2). The 1-year ahead inflation expectation was maintained at 4.6%, while the 5 year ahead slipped to 2.9% (from 3.0%).
Event Outlook
Australia: Westpac expects a -1.5% decline in Q2 company profits as tapering of subsidies continues to dent earnings. Q2 inventories are forecasted by Westpac to be up 1.4% as inventories rebuild following a sharp rundown and subsequent consolidation over 2020. Finally, June business indicators will offer a timely read on business conditions for Q2.
Euro Area: The August economic confidence release will provide an early gauge on business and consumer sentiment.
UK: England, Wales and Northern Ireland willhold their Summer bank holiday.
US: The July pending home sales should show the continuing constraints of supply on sales (market f/c: 0.4%). Further, the August Dallas Fed index will offer an indication of the regional impact of the delta strain.
As expected, the Fed offered something for everyone. I have material doubts that it will even get to taper now. China is slowing fast and is NOT stimulating. The US economy is slowing as well.
By year-end, the global economy is going to be sliding into a funk despite reopenings in Europe and some EMs.
For the Australian dollar, it is now financialised commodity inflation versus real commodity demand deflation. For the time being, the injection of the former has been enough to trigger a counter-trend rally.
I am also doubtful that it can continue as Chinese demand for metals evaporates and the RBA warms up its own printing press.