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Powell Remains In Transit

Published 2021/07/15, 10:23
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The Federal Reserve Chairman steadied the post-US-inflation ship yesterday, reiterating that virus-disrupted price increases among the CPI components would ease in the coming months. Regarding the labour market, Mr Powell felt that when holidays finished, schools reopened, and federal unemployment benefits rolled off, labour market pressures would alleviate. In other words, the Federal Reserve remains with its tent firmly pitched in the transitory inflation camp, and that the FOMC were still far away from meeting the conditions to begin tapering monetary stimulus.

US yields, dollar edge lower

Bond yields, which had only grudgingly moved higher post the US inflation data, quickly retraced those rises overnight, precious metals rose, and the US dollar retraced some of its previous days’ gains. The biggest sigh of relief was probably heard around Asia, where the threat of a divergence in the direction of monetary policy would have weighed heavily.

US stock markets had a mixed day, giving back intraday gains, with the main indexes finishing each side off unchanged. The no news is good news from Mr Powell, perhaps offset by the Fed Beige Book, which showed many businesses expected to see rising input and selling prices in the months ahead. Additionally, after a decent run higher, the US earnings season may well have elements of buying the rumour, selling the fact with lots of good news priced into upcoming results. Still, equities remain near record highs, so despite the sideways shuffle last night, it really is business as usual.

The US releases another plethora of data today, including Industrial Production, Initial Jobless Claims, the NY Empire State Manufacturing Index and Import and Export Prices. The impact on markets will be minimal now that Mr Powell has held fast on the transitory mantra and steadied the ship. As I stated earlier in the week, respect the momentum, and follow the momentum until it changes as many intelligent people worldwide are as divided as a US Congress on whether we are sticky or transitory.

The data calendar has been busy today in Asia. South Korea held rates unchanged this morning at 0.50%, although the decision was not unanimous. The Bank of Japan will meet tomorrow amid speculation in Tokyo that they will downgrade the GDP outlook for 2021. I am expecting no change in policy, however.

China released a solid, if unspectacular by their standards set of data this morning. Retail Sales rose by 12.1% YoY for June, slightly better than expected. In June, Fixed Asset Investment (YTD) rose 12.40%, less than May but better than forecast. Industrial Production rose by 8.30%, while GDP YoY for Q2 rose 7.90%, and QoQ by 1.30%. The data mostly showed an easing from the high baseline effects but was modestly above expectations.

On releasing the data, China’s National Bureau of Statistics (NBS) noted still faces external uncertainties and an unbalanced recovery between the export-facing and domestic sides of the economy. After setting a slightly weaker USD/CNY fix today (in yuan terms), the PBOC also rolled over a maturing 100 billion yuan one-year MLF facility today, injecting funding at the one-year Loan Prime Rate. That is very much a similar mantra of many a central bank at the moment. Coming after the RRR cut last Friday, it seems the monetary policy is quietly moving to the side of caution in China, especially with the World Bank downgrading Asian GDP, ex-China, overnight.

Australia may be in various stages of lockdown, but it continues to push out data that supports its “lucky country” nickname. Employment data was impressive, with a fall in part-time jobs by 22,500 handsomely offset by a rise in full-time employment by 51,600, while the unemployment rate eased to 4.90%. That won’t budge the RBA from its dovish perch, which wants to see even lower unemployment pushing up wages before it moves. It does, however, show that Australia’s economy continues to power through the rolling lockdowns. The currency didn’t react, though, as local markets are cautious about the whack-a-mole spread of the delta-variant to Melbourne, South Australia and the extension of the Sydney lockdown.

India dodged a stagflationary bullet last night, as WPI Inflation stays elevated about the RBI target but eased slightly from the month before. That has taken some temporary pressure on the Indian rupee for now. Sentiment in Asia, ex-China, remains fragile, though. Covid-19 is the reason, and here in Indonesia and Malaysia, the situation is dire indeed. But the rest of the region is also playing a catchup game, and this will continue to mute sentiment, with the World Bank growth downgrade likely to be the first of many.

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