Whoa! Big action last night in forex markets. DXY was strong and EUR weak:
The Australian dollar was slaughtered on all crosses. Against the US dollar we are now in free fall with no supports down to 70 cents as markets puke on RBA easing and Fed taper:
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Gold eased. I still think oil is fooked:
As are base metals. Lot’s of downside here:
Big miners were hammered:
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EM stocks gapped into madness:
Junk rolled but so far is less dire:
The yield curve flattened as Fed moves to taper even as growth fades away:
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Stocks didn’t like that at all:
Westpac with the data:
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Event Wrap
US retail sales in July fell 1.1% (vs -0.3% expected, 0.7% prior). The core control group measure fell 1.0% (vs -0.2% expected, +1.4% prior (revised from +1.1%)). One possible explanation for the weakness is the waning impact of stimulus payments. Industrial production in July rose 0.9% (vs +0.5% expected, +0.2% prior (revised from +0.2%)). Industrial production is poised to reach all-time highs by early 2022. Homebuilder confidence (NAHB) fell from 80 to 75 – the weakest reading since July 2020. Rising costs and the limited availability of materials and labour remain major headwinds for homebuilders.
Fed Chair Powell spoke to an educators forum, and did not discuss monetary policy. He said it is not clear what impact the Delta variant will have on the economy, adding that some parts of the pre-pandemic economy will not return. The workforce is changing and there will likely be more work-from-home opportunities. The recovery could be slower for service sector jobs and those that interact with the public.
Event Outlook
Australia: The July Westpac–MI Leading Index is likely to show a further slowing although components have been somewhat mixed over the last month. On the plus side, commodity prices continued to surge in July, up 8.5% in AUD terms and equities put on more gains (ASX200 +1.1%). However, virus disruptions are starting to impact locally: the Westpac-MI Consumer Expectations Index down -4% and the Westpac-MI Unemployment Expectations Index posting an even sharper deterioration (13.7%).
Westpac is forecasting a gain of 0.7% in the Q2 wage price index, reflecting recovery from covid wage freezes but otherwise well contained. We are looking for a 0.5% rise in seasonally unadjusted terms, with contributions as follows: from awards, 0.01ppt; enterprise agreements, 0.22ppt; and individual arrangements, 0.22ppt.
The AUD rot started after RBA minutes which, honestly, offered nothing new:
Recognising that fiscal policy is a more appropriate instrument than monetary policy for providing support in response to a temporary, localised reduction in incomes, members welcomed the substantial fiscal measures that had been announced. Given these considerations, the Board reaffirmed the previously announced change in the rate of bond purchases. That said, the bond purchase program will continue to be reviewed in light of economic conditions and the health situation, and their implications for the expected progress towards full employment and the inflation target. The Board would be prepared to act in response to further bad news on the health front should that lead to a more significant setback for the economic recovery. In any event, the Board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024. Meeting this condition will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.
That was all in the statement. So what this is really about is markets recognising that lockdowns are going longer and doing more harm than the RBA thought.
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As for the Fed, here’s MUFG:
This backdrop makes for an interesting time for the Fed as we approach the key moment of confirming a QE tapering plan. Fed Chair Powell will speak at 1830 BST this evening in a Town Hall discussion that was postponed from 2nd August. This will be followed by the FOMC meeting minutes tomorrow and Jackson Hole next week. Today’s event seems a less likely platform for any major communication and we may have to wait at least until next week for any meaningful update on taper timing. However, the dollar has benefitted from most G10currencies in part on the WallStreet Journal article yesterday that reported that the FOMC was “nearing agreement” on commencing tapering by around year-end. That is pretty close to the consensus but the additional point in the article that “some” FOMC members were pushing to end QE by mid-2022 is not the consensus. A taper program that lasts barely 6mths would certainly be a faster timeframe than currently expected and would harden the expectations of a sooner than expected start to rate hikes. In some way though this would merely be a corroboration of the current DOTS profile given seven FOMC members expect a rate hike by the end of 2022. Presidents Evans, Rosengren, Kaplan, Daly and Bullard were all quoted in the article but most quotes appear to have been from before rather than exclusive for the WSJ.
The article does help reinforce the comments made by a more senior Fed officials–Vice Chair Clarida who mentioned in a speech on 4th August that conditions for a rate hike could be in place by the end of 2022. The fed funds futures market indicates an expected rate of 0.25% by end-2022 underlining the scope for implied rates to move further higher. Fed Governor Waller favours “going early and going fast” so the case for a faster QE taper as reported in the WSJ is consistent with recent Fed comments.
So while there is nothing substantially new for the markets in this article, if corroborated by Fed Chair Powell this evening or more likely next week at JacksonHole it would certainly paint the impression of a concerted effort to move the dial more toward preparing the market for a faster taper which will we believe provide further near-term positive momentum for the dollar.
Powell did more or less corroborate, saying the Fed was busy withdrawing its emergency measures.
Hold onto your hats. China has killed the global reflation with credit clamps and the Fed is cremating the body with taper. Markets are not yet long DXY.
Add Australia’s Delta agony and we have an Australian dollar (and commodity bust) perfect storm.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
