Markets Today: Fed cools things down, words from the RBA later

The global reflation trade is not dead, says NAB’s Ray Attrill, as Fed speakers help markets further unwind their response to last week’s FOMC.

By Ray Attrill

Todays podcast

https://soundcloud.com/user-291029717/fed-cools-things-down-words-from-the-rba-later?in=user-291029717/sets/the-morning-call

Overview September

Powell, Mester, et al, suggest September is the time when ‘substantial progress’ might be seen on goals…
…supporting renewed – albeit very mild – US curve bull steepening, helping equities and depressing the USD
AUD back above 0.7550 from sub-0.75 last night, NZD back on a 0.70 handle
Luci Ellis today – first RBA speaker since the blow-out May jobs data – then ‘flash’ Markit PMIs globally to hold sway

Do you remember the 21st night of September? Love was changing the minds of pretenders, While chasing the clouds away – Earth Wind & Fire

Just checking my calendar to see that the September FOMC meeting begins, for us here, on the night of the 21st night of September, though I suspect Earth Wind and Fire weren’t in receipt of the Fed calendar when they penned this classic in 1978.

Latest smoke signals from the Fed, care of Jerome Powell in testimony just finished, NY Fed President John Williams and too the ‘normally hawkish’ Cleveland Fed President Loretta Mester, all point to September as the meeting when the Fed is, on current trends, most likely to declare that substantial further progress towards their goals has been achieved, or is being achieved, enabling them to give advance notice that the QE tapering process can begin in coming months. In our view, this is still most likely not until the start of 2022). Their comments have seen markets row back somewhat from their largely position-driven convulsions last week but where the fundamental catalyst was fear that the process of tapering and then tightening could be concertinaed into a significantly shorter time frame than the FOMC collectively signalled three months earlier.

After a non-market moving prepared testimony from Fed chair Powell overnight, the text of which was known during our morning yesterday, it has been subsequent Q&A comments that have proved market moving. Powell says that he ‘expect strong job creation should arrive by the fall’ (technically not until the 22^ndSeptember as it happens, the last day of the aforementioned FOMC meeting – how about that for a coincidence?). The Fed chair also opined that it is ‘very, very, unlikely’ we will see a repeat of the 1970s inflation experience and that high inflation is temporary and ‘will abate’.

Also of note given her traditionally hawkish credentials, the Cleveland Fed’s Mester says she expects more ‘clarity in September’ on progress towards the Fed’s goals and that we are ‘not at a point to dial back accommodation’. San Francisco Fed President Mary Daly (who to date has been characterised as dovish) said that substantial further progress ‘is within our line of sight’. And to round out Fed speakers, another of the ‘big three – along with Powell and Rich Clarida – NY Fed President John Williams said that we are ‘not close’ to substantial progress.

The market upshot of all this has been to see the US yield curve (very) mildly bull steepen after last week’s dramatic flattening as the proliferation of earlier curve steepening trades were subject to mass liquidations, doubtless in part forced by financial institutions’ risk managers. 2 and 5-year US notes are down 2.5-3bps, while 10s and 30s are down a slightly lesser 2bps.

US equity market have closed with the S&P500 up 0.5% and the NASDAQ +0.8%. All S&P sub-sectors bar real estate and utilities are in the green, headed by a 1% gain for consumer Discretionaries and 0.9% gains for IT.

On the real estate front, US may Existing Home Sales fell by a smaller than expected 0.9% though sales are now 13% of their peak. Prices though are 23.6% above their trough, a familiar figure (20%+) across much of the globe where banks have been doling out mortgages at 2% or less for the past year or so fixed for 2-3 years (and not much more than this for 30-years in the United States). The only other data points to note have been the Richmond Fed manufacturing index, up to 22 from the (unchanged) 18 expected, and in Europe, Eurozone consumer confidence which lifted to -3.3 from -5.1, much as expected.

In FX, the USD has eased back some more, the DXY index off 0.2% and broader BBDXY a lesser 0.13%. the ultra-high beta NOK has been the best performing G10 currency (+0.6%) hardly surprising given that Brent crude oil prices have held the break above $75 (post 2019 high) seen early in our day yesterday. After than NZD has fared best, +0.5% and now back on to a 0.70 handle (0.7021 now) with AUD lagging somewhat, up only 0.25% but above 0.7750 having fallen briefly back below 0.75 post Tuesday’s local close. Other commodity prices are also mostly firmer, including a 1.3% rise in copper and 1.7% for nickel, while after iron futures, which dropped by more than 4% on Monday, are up just under 1% now.

Coming Up

Reserve Bank of Australia Assistant Governor (Economic) Luci Ellis gives a speech at an Ai Group Business lunch in Adelaide at 12:45pm ACST (13:15 AEDT). This will be the first speech by an RBA official since the stellar labour market data earlier this month.
Markit preliminary PMI day. Australia and Japan in our time zone, but focus more on Europe where the anticipated story is one of small fall-backs in manufacturing but significant lifts to services as economies open up more. The Eurozone Composites reading is seen rising to 58.8 from 57.1, with Manufacturing 63.0 from 64.4 (so still very strong) and Services 58.0 from 55.2.
Not such good new expected out of the UK, given that the planned fuller reopening of the economy from June 21 was put back at least a month, with the Composite seen at 62.5 from 62.9.
For the US equivalents, ahead of ISMs next week, manufacturing and services readings are seen slipping by 0.6 and 0.4 of a point respectively. Also out, New Home Sales, expected +0.4% following the 5.9% April decline.