A Summer Lull

A Summer Lull

Macro

Summary:  US equities were mixed overnight whilst the dollar fell, and treasuries held steady. Markets continue to range trade with low energy, and low volumes. Its a waiting game ahead of China PPI data, US inflation data on Thursday and beyond that a lasting test on whether the market can continue to buy the transitory narrative.


US equities were mixed overnight whilst the dollar fell, and treasuries held steady. Markets continue to range trade with low energy, and low volumes – it’s a waiting game ahead of China PPI data, US inflation data on Thursday and beyond that a lasting test on whether the market can continue to buy the transitory narrative. Potentially setting up for a NH summer lull and grind higher ahead of a Fed pivot looming large in August. Liquidity remains easy come and set to remain in play until the end of NH summer.

The Fed continue to spruik in a coordinated fashion the transitory nature of current price pressures, however the evidence is stacking up that transitory may be an extended period and may not be so transitory after all.  It is difficult to believe the market will be so patient if inflation continues to print to the upside. We remain sceptical not only of the assertion that price pressures are transitory but also of the Fed’s commitment to stay the course. A Fed pivot looms and the probability the Fed may signal a shift toward tapering of its asset purchases is rising. For now, our money is still coalescing around Jackson Hole as a potential signalling forum for the impending policy pivot surrounding the pace of liquidity provision. Yellen’s commentary earlier this week clearly an attempt to prepare the ground for this shift.

Last weeks miss on the US jobs data has been viewed as a “goldilocks” print, allowing markets to run high on the cool aid that the labour market is recovering, but not to a degree that the punchbowl of liquidity will soon removed. Large caps loved the softer data, but we sense complacency as the balance of probabilities continue to point to further price pressures, a recovery in the labour market that is gathering pace (additional UI rolling off from June in 24 States) and a Fed who will find their position increasingly difficult to justify. And not inconsequentially, the irony is the longer the punchbowl remains in play, the further inflation expectations can climb.

In the US renormalisation continues and the path to more persistent inflation remains open as supply remains constrained with demand rebounding, pandemic fatigued consumers flush with “stimmy” cheques and savings are ready to spend (in the US the poorest quintile of households - the cohort most likely to spend - have seen ~20% boost to annual incomes). The combination of the two a melting pot for price pressures and visible across the goods and services economies as reopening’s continue. Wage and price expectations could well shift higher during this upcoming period of price pressures. Even if the initial kicker is transitory – the lasting impact may be less so. And in terms of read throughs for asset pricing the definition of transitory comes into question.

The latest readings on inflation expectations are sitting in the upper spectrum of the range seen in recent decades, and with pent up demand in play price hikes could be relatively sticky, embedding inflationary psychology. The University of Michigan's survey of inflation expectations surged in May. The measure that gauges near-term inflation expectations pushed to 4.6% from 3.4%. Expectations in many ways are a self-reinforcing feedback loop for future inflation - if business and consumers expect price increases in the future, they will be more willing to pay up today. Both market and consumer expectations of inflation have picked up and soon the Fed will have to take note, monetary policy remains in crisis mode – a stance that will be increasingly hard to justify. Particularly if the labour market continues to recover through the summer as some 24 States end the additional $300/week enhanced unemployment benefits and school reopening’s continue, promoting increased return to work. In short with further price pressures filtering through as the macro recovery continues, the reflation trade should have room to run, supporting  positioning for higher inflation, commodities and value/cyclicality/economic sensitivity/reflation orientated sub sectors of risk assets. With US yields eventually pushing higher in tandem with the aforementioned dynamic, post this period of consolidation.

That said, there remains a lot of noise and unknowns when it comes the interactions of the COVID-19 crisis and stimulus response with the global economy and mass human behaviour. Although we think it is probable to see higher and more persistent inflation, we do not have all the answers and it is perhaps still too soon to draw decisive conclusions. However, from a portfolio standpoint the risk of higher inflation must be accounted for – its no longer a one-way bet. Longer term structural shifts toward fiscal dominance and climate change mitigation could well counter the disinflationary spiral of debt, demographics and disruption that has shaped the last decade.

   

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.