Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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FX Update: US data and central bank calendars heat up next week
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar is on its back foot after a weaker than expected GDP number yesterday, while currencies have largely ignored a new stumble in risk sentiment since late yesterday. Later today we get the PCE inflation data, the preferred inflation measure of the US Fed and Fed speaker Bullard, with the US data calendar a busy one next week, together with an interesting global central bank calendar.
FX Trading focus: US data in focus through next Friday
In the wake of the FOMC (see my wrap below which I was unable to upload yesterday for technical reasons), the USD has softened, particularly against the euro and sterling, where there is considerable further leeway for EURUSD to consolidate without threatening a fully bullish reversal (at least 1.2000), while GBPUSD is already bumping up against key resistance in the 1.4000 area. Note that today is month-end, with some price action today smacking of end-of-month flows. Later today we get US PCE inflation data, where the bar is perhaps high for upside surprises to move the needle after the Fed looked through the blistering June CPI print before the FOMC meeting this week. Still, the PCE data series is the Fed’s preferred inflation measure. St. Louis Fed president Bullard, a non-voter this year, will be out speaking later today and is a known hawk in favour of tapering now rather than later – if he hints in any way that other Fed members share his views, this may move the market today.
Please have a listen of this morning’s Saxo Market Call podcast, featuring our Chief Investment Officer Steen Jakobsen, who expresses a considerable sense of foreboding on the market backdrop here. We also have a look at the US Q2 GDP estimate and the implications from the internals of that report. If we are set to see a more significant equity market correction, the Japanese yen could find itself strongly back at the lead of the pack as was the case during the volatility episode mid-month, in particular if safe haven sovereign bond yields continue to drop.
On the macro calendar, note that Vice Fed Chair Clarida is set to speak next Wednesday. And the week also brings the usual blitz of first week of the month US data, including the ISM’s on Monday and Wednesday and the July jobs data on Friday, where we’ll have a look at whether Powell’s prediction of a strong comeback in payrolls is in play yet (if the extended benefits issue is the one holding back labor supply amidst the signs of enormous demand, the risk is that a more significant surge in payrolls won’t arrive until the September and even October data cycles.
Outside of the US, Australia sees an RBA meeting on Tuesday of next week and Governor Lowe is set to testify next Friday before a parliamentary committee and the Bank of England meeting looks important for the latest signaling on its intentions as Covid is now clearly retreating in the UK despite the recent opening up. Note the anticipation of further hikes from EM central banks that are moving against inflationary risks rather than waiting, including an expected 100-bps hike from Brazil next Wednesday and the second 25 bp hike for the cycle from the Czech central bank.
Interesting to see the lack of interest in hotter than expected German and EU inflation prints yesterday and today (3.8% year-on-year for the German July headline figure out yesterday and 2.2% for the EU print today, although the core EU CPI estimate for July was as expected at +0.7% year-on-year.
Chart: GBPUSD
GBPUSD has pulled back sharply from its near-death experience below the prior major lows around 1.3670 and is now pushing up close to . Given its tight correlation with the risk-off, risk-back-on episode starting around mid-month in July, the 1.4000 level could prove a tough nut to crack if the sense of foreboding we discussed in today’s podcast turns into a significant rout in risk sentiment, although there are other supports for this move, including the generally widening spread in short rates in the UK’s favour in recent months, which has the spread near the cycle highs and the highest level since….2015. Note that the 1.4000 level is not only a big round level and pivotal in a prior episode but is also right near the 61.8% retracement of the entire sell-off sequence from the June 1 top near 1.4250 to the July 20 low below 1.3600.
(Note: I wrote the below FOMC wrap yesterday but was unable to publish due to technical issues)
The FOMC statement was a minor upgrade to the hawkish side as the Fed injected the word “progress” into the changes in the statement, while the language around the Fed’s QE was repositioned slightly: rather than suggesting that the Fed “will continue to increase its holdings…” the language was shifted to the somewhat less committal “Last December, the Committee indicated that it would continue to increase its holdings.” The focus on the virus was weakened in the statement and quite explicitly in the press conference as well. The market tried to cobble together a rise in US yields and the US dollar in the knee-jerk reaction to the initial release of the statement, but not long after Powell’s press conference, the move was effectively erased and then some, suggesting the market got as much, or even less than it was anticipating in terms of the bringing forward of the eventual taper of asset purchases.
In the press conference, Fed Chair Powell was quite emphatic that the “substantial further progress” toward the employment goals has not yet been met, while his dodging of expressing a view on inflation questions on a couple of occasions, deferring the posture on inflation to “the committee”, indirectly suggested that there are rather starkly diverging opinions on inflation among the FOMC members. Powell did take considerable pains to express the belief that labor market numbers should come roaring back and soon, given the very strong demand for labor and possibly quick fade of factors linked to the virus in coming months. But it will take some huge payrolls numbers for the July and August data cycles to bring the September FOMC meeting into play for the announcement of a tapering of asset purchases starting perhaps already in October.
Another interesting development to watch is the US treasury market in coming weeks as US treasury issuance will have to pick up again soon after the Treasury should effectively be finished winding down its general account at the Fed this week (or said that it would be some months ago) and issuance will exceed Fed QE again.
At the same time, we are potentially barreling toward a new partisan stand-off over the debt ceiling issue, which was suspended last year due to the pandemic. On the fiscal side, the modestly scaled multi-year $550 billion infrastructure deal has made a first step in moving ahead by avoiding a Republican filibuster in the Senate, but may not have much of an effect as it is stretched over multiple years and is tiny relative to prior rounds of pandemic stimulus. The key focus is the Democrats’ possible go-it-alone multi-trillion social spending programme, without which the US faces a considerable fiscal cliff next year.
Table: FX Board of G10 and CNH trend evolution and strength
The US dollar has lost ground badly on this FOMC week, so how it sets up heading into next week’s data blitz looks important for next week and whether support comes in or a down-trend can be established. Elsewhere, the dovish ECB and low yields have the Swiss franc at the top of the pile as the USDCHF 200-day moving average failed yesterday. Disappointing for gold bugs that gold has failed to capitalize on the sharply weaker US dollar this week and record low US real yields – makes one wonder what it would take to get a rally out of the precious metal.
Table: FX Board Trend Scoreboard for individual pairs
EURSEK and USDSEK are trying to get something going to the downside after crossovers into negative territory yesterday, although a bout of weak risk sentiment as discussed above is usually the wrong backdrop for a SEK rally. EURUSD has flipped positive as well and USDCNH is looking to flip back to negative after a brief tease on the positive side recently.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – Canada May GDP
- 1230 – US Jun. PCE Inflation
- 1300 – US Fed’s Bullard to Speak on the US economy
- 1400 – US Jul. Final University of Michigan Sentiment
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