Major US equity index futures are mostly higher this morning, with E-mini S&P 500 futures up about 0.5% though unable to reclaim the 4400 handles. After hitting fresh record levels earlier in the session, US stocks took a minor knock yesterday, with the S&P 500 index dropping 0.2% amid 1) an underwhelming US ISM Manufacturing PMI survey (which has worsened “peak growth” fears in wake of last week’s underwhelming Q2 GDP result), 2) growing concerns about the worsening delta variant driven Covid-19 wave in the US (hospitalisations in low vaccination rate states such as Florida and Texas are back to pandemic record levels) and 3) hawkish commentary from FOMC member Waller (who said if the next two jobs reports were strong, the Fed could start tapering its QE programme in October and the taper should be quick in case the Fed needs to hike rates to address inflation, which he said risks remaining at elevated levels, though this isn’t his base case). European equities have been performing well this morning aided by good earnings from big banking and oil names and the Stoxx 600 (+0.3%) is at fresh record highs again. The positive impulse from Europe appears to be outweighing any negative impulse from a much ropier Asia Pacific session, where major equity bourses in the region were mostly lower amid further concerns about regulatory crackdown in China following negative state-run media commentary on the video gaming sector (Chinese tech heavyweight Tencent was battered) and continued fears about the Covid-19 outbreak in China, Japan and Australia.
The lack of any meaningful market reaction to remarks from Waller implies that market participants might think his hawkish view on tapering may be an outlier on the FOMC. Indeed, more influential FOMC member Brainard had a more cautious tone on tapering over the weekend, saying she wanted to see the entirety of Q3 jobs data (which won’t all be out until October) before judging whether the US economy is ready for QE tapering. It seems likely that key FOMC members Powell (the Chairman) and Clarida (the Vice Chairman) would favour Brainard’s stance over Waller’s. Meanwhile, the reopening experience in the UK (where delta variant infections are now falling given the country’s high vaccination rates despite nearly all pandemic restrictions being lifted) may be easing any concerns in the US about the outlook for the pandemic there. The more states which are more vulnerable to the virus (judged by lower vaccination rates) are typically red states, whose mostly republican governors have a much higher tolerance for hospitalisations and deaths before ordering any lockdowns. It seems likely that US Chief Health Advisor Fauci’s prediction that there will be no return to the strict lockdown’s of old will be accurate, though that doesn’t mean that when we start to hear of record death rates in low vaccination parts of the US (driven by deaths among the unvaccinated), which might perhaps be accompanied by the reimposition of some modest economic restrictions, that US equities won’t take a hit.
Turning to bond markets; yields were pushed a little higher by the hawkish Waller remarks, but US 10-year yields continue to trade below 1.20% and the trend of yields broadly moving lower remains intact for now. There was a fair amount of focus on the fact that the entire German yield curve (including the 30-year yield) went negative today. The debate as to why yields have continued to push lower over recent weeks continues to rage; some argue the downside reflects fading optimism in the outlook for global growth and inflation in the years ahead, with global growth having arguably now peaked (hence Chinese and US PMIs moving lower). The question here is whether growth and inflation will revert back to the sluggish, sub-historical trend levels seen throughout much of the last decade (1-2% YoY GDP growth and inflation sub-2.0% in the US) in developed market economies, or whether growth will revert to historical trend levels and inflation remain at more elevated levels (i.e. 2-3% YoY GDP growth and above 2.0% inflation in the US). In the former case, bond yields at current levels are justified as the Fed likely won’t be able to tighten monetary policy that much, but in the latter case, yields are arguably overly pessimistic, as the Fed might be able to hike rates back above 2.0%. Alternatively, some argue that bond yields being so low is more a reflection of overly accommodative central bank policy, with the Fed still purchasing $80B in treasuries per month, which exerts downwards pressure on yields.
A quick look at commodity and FX markets; crude oil prices took a meaningful knock yesterday, with WTI dropping more than 3.0% in the end to fall into the low $71.00s. Prices have stabilised a bit this morning and WTI is back to just under $71.50. Market commentators are citing 1) delta Covid-19 variant concerns, as infections continue to rise in the US and Japan and China remains vulnerable, 2) weakness in recent US and Chinese data and 3) evidence of increasing output (as expected) from OPEC+ members in July. Meanwhile, the US dollar is a little bit weaker, with FX markets (unlike bond markets) not paying attention to hawkish remarks from FOMC’s Waller, as participants instead sell dollars in wake of the recent string of negative data surprises (last week’s GDP and yesterday’s ISM manufacturing). But the DYX is down about 0.1% and remains close to 92.00, as strong an ISM Services survey (Weds) and Labour Market Report (Friday) could quickly turn this narrative of pessimism about the US economy on its head. Despite modest weakness in the dollar, gold has not been able to advance, perhaps given slight upside in bond yields, but perhaps more due to caution ahead of this week’s key US data, that analysts are touting has the potential to be gold’s next big catalyst. Spot prices currently trade just above $1810, down about 0.5% on the session.
Back to FX markets; NZD is the best performing G10 currency, up 0.7% on the day versus the buck and sending NZDUSD back above 0.7000 and towards the top of its recent three-week range, after the RBNZ announced last night that it plans to tighten restrictions on the ability of home-buyers to access mortgages/banks to grant mortgages in a bid too cool the red-hot NZ housing market, news which has increased market confidence that a 25bps rate hike is coming later this month (money markets assign an 80% chance of a 25bps hike versus 60% at the start of the week). NZD traders will be keenly watching tonight’s Q2 jobs report, which could “seal the deal” on a rate hike later this month if sufficiently strong. AUD is also benefitting from hawkish central bank vibes, with the Aussie up about 0.5% of the session after the RBA confounded expectations for a U-turn in its QE tapering plans at its monetary policy meeting announcement last night; markets had been expecting the bank to signal it would not be tapering the pace of monthly purchases from September from current AUD 5B in government bonds per month, but the bank instead opted to go ahead with plans to reduce this rate to AUD 4B per month. Its outlook on the economy was also more upbeat for next year and it played down fears about how badly the current spate of lockdowns might damage to the economy in the long-term. AUDUSD has, however, failed to break above 0.7400, given perhaps the fact that the RBA’s policy outlook continues to look more dovish than other major G10 central banks and the Aussies exposure to economic woes/Covid-19 fears in China. GBP is up about 0.3% against the buck with GBPUSD remaining above 1.3900 ahead of Thursday’s BoE meeting and EUR and JPY are both up between 0.1% to 0.2% versus the buck, primarily as a result of dollar weakness.
The Day Ahead
The main event of today will be further FOMC speak from Vice Chairman Clarida and Bowman, both speaking at 1900BST. US Factory Orders for the month of June at 1500BST won’t get much attention. Otherwise, oil traders should keep an eye on the latest weekly Private API inventory data at 2130BST, ahead of key NZ jobs data at 2345BST.