Below trend growth to continue
Ahead of a speech by President Biden later today on the economy and inflation, we got news that Jay Powell is to be re-appointed to a second term as Fed chair.
News of the re-appointment of Jay Powell to a second term as Fed chair has seen a fairly level shift up in the US Treasury yield curve, by 6-7bps, and the USD rise almost 0.5% to its highest since July 2020. The S&P 500 (+0.4%) has taken the news in its stride in contrast to the NASDAQ (-0.4%) where higher rates look to have taken a bigger toll on the sector than the support drawn for ‘stay-at-home stocks’ from last Fridays’ lockdown news in Austria and the prospect this will extend to more European economies before much longer – quite possibly including Germany where the hospital system is being overwhelmed.
Ahead of a speech by President Biden later today on the economy and inflation, we got news that Jay Powell is to be re-appointed to a second term as Fed chair and that the only other candidate for the job, Fed Governor Lael Brainard, is to be elevated to the role of Fed vice chair – a position currently held by Richard Clarida (and who recently came under fire for stock trading activity, albeit not deemed to have done anything wrong). Clarida of late has sounded more hawkish than other FOMC heavy hitters, so arguably this a ‘dovish tilt’ of sorts in terms of the Fed make-up, while there will now be three vacancies on the Fed Board which Biden says he will move to quickly fill (he mentions December for nominations) with diversity to be one key consideration.
That the US government bond market has reacted the way it has, with 2 and 10-year yields both up a little over 7 basis points, reveals that market rightly or wrongly (most likely wrongly) had applied a bit of a discount to yields against the risk of Brainard getting the nod for the Fed chair. Our view has been that whether Powell or Brainard, it wouldn’t make a heap of difference for a mandate-constrained Fed. The fact is though that the front end of the US curve is now closer to pricing three quarter-point rate rises next year, from two a week or so ago. In this respect though, the comments last Friday from Fed Governors Waller and Clarida suggesting the need to accelerate the pace of QE tapering – which would only makes sense if the Fed wanted the option of lifting rates as early as Q2 2022 – has continued to reverberate (e.g. some of Monday’s lift in 2-year yields occurred during the Tokyo session yesterday, ahead of the Powell re-appointment news)..
Playing to the grain of higher yields (and a stronger S&P) overnight has been better-than-expected US economic news, in the form of Existing Home Sales rising to a 9-month high of 6.34mn in October, above the 6.2mn expected and 6.29mn last time. In contrast, Eurozone November consumer confidence fell by more than expected, to -6.8 from -4.8 previously and -5.5 expected.
The contrasting fortunes of incoming US and Eurozone economic news is expected to be further exemplified in tonight’s ‘flash’ PMI data (see ‘Coming Up’ below) and is currently a key driver of the (EUR-led) strengthening in the USD. The DXY index (57.6% weighted to EUR/USD) is up by exactly 0.5% on last Friday’s New York close to 96.5, its highest since July 13 2020. NAB’s FX strategists back in early September suggested that DXY could now trade within a broad 92-97 range, and there looks to be every prospect of the top of that range being tested in coming days and weeks. It will likely some better news out of Europe to prevent it, and it is hard to see where that comes from just at the moment.
That said, one glimmer of hope comes from the PBoC’s late quarterly Monetary Policy Review, which appears to hint that some form of monetary policy easing is in the wings. Reading the PBoC’s runes is often about seeing what they don’t say than what they do, in which respect this latest report omits references to sticking with “normal monetary policy” to “control the valve on money supply” or vowing not to “flood the economy with stimulus.”
Quite what form earlier monetary policy will take is uncertain, though given that over the weekend the PBoC’s issued some directives in regards to FX trading suggesting they are getting uneasy about the strength of the Yuan, then lower interest rates (rather than further cut(s) to RRRs) might be a strong candidate, aimed at diminishing the attraction of long Yuan ‘carry trades’ (though of course, that could just lead to more capital inflows in the short term as foreign investors seek to take advantage of a rallying Chinese government bond market).
So, while EUR/USD is one of the poorest performing G10 currencies overnight (down 0.5% to a low of 1.1231) the Japanese Yen is weaker still, consist with its high beta to US Treasury yield, USD/JPY back testing Y115 (high of Y114.92, up 0.8% on the day). AUD in contrast was the top performer yesterday during our local session and while it has given back 20-30 pips offshore, is currently little changed on Friday’s NY close.
Of some assistance to AUD was news yesterday that Au stralia will open its international border to fully vaccinated skilled workers and students from the start of December. The government has re-opened the country to a backlog of up to 235k overseas visa holders. The vast majority of the 235,000 of overseas visa holders who may be eligible to enter Australia after December 1 are 162,000 foreign students while another 57,400 are skilled workers. If they are fully vaccinated and test negative 72 hours before entry, the arrivals will not need a travel exemption to enter participating states. In addition to the above, vaccinated travellers from Japan and South Korea will join Singaporeans in being allowed to enter. We caution that the news is not necessarily all good, in so far as border restrictions will still be applicable in QLD, WA and SA, plus we might now expect to see more young Australian’s travelling abroad to work. So how this plays out in terms of easing upward pressure on wages as we go through next year (with implications for monetary policy) remains to be seen.
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