Markets
After a more hesitant sentiment earlier this week, investors yesterday again saw the glass half full rather than half empty. Uncertainty on the spreading of the delta variant lingers. However, ongoing in progress in vaccinations, especially in the US and Europe, provides hope that the impact in the recovery should be manageable. Whatever the reason, reflationary spirits staged a comeback. European indices gained between 0.35% and 1.25%. US indices gained up to 0.52% (S&P 500) with the index again closing at a new record. US data were OK. Jobless claims declined faster than expected (363 000k). The Manufacturing ISM eased from 61.2 to 60.6, but still signals solid activity in the sector. Supply bottlenecks persist, input prices rose at the fastest pace on record and firms still struggle to attract workers. The direct impact of the release on FI and FX markets again was modest. The US yield curve again showed a modest flattening with the 2-y rising 0.4 bp while the 30-y dropped 2.5bp. The German yield curve performed in a similar way (2 y -0.5 bp, 30-y -1.6 bp). The dollar temporaril y eased on the risk-on, but returned near the post-Fed top levels later. EUR/USD closed at 1.1850. The DXY TW index finished at 92.59. Sterling came under mild pressure as BoE’s Bailey in a speech sounded cautious on post-corona growth and advocated not to overre act to what is most likely a temporary rise in inflation. EUR/GBP closed at EUR/GBP 0.8608 compared to an open near 0.857. Brent oil (temporaril y?) jumped north of $76 p/b as OPEC+ delayed a decision to raise daily production from August.
Asian equities are trading mixed, with China a distinct underperformer (CSI 300 -2.6%). The dollar remains in the driver’s seat. USD/CNY rebounds further to 6.4775 as does USD/JPY (111. 60). EUR/USD is testing the 1.1850 level.
Today’s focus evidently will be on the US payrolls. April and May figures disappointed, partially as employers failed to fill vacancies. The market again expects strong June job growth at 720k. The ADP job report earlier this week showed this is feasible even as the correlation between the two series wasn’t that tight of late. The unemployment rate is expected to decline from 5.8% to 5.6%. Of late, the market reaction function to data often was a bit diffuse. Investors apparently still are unsure on how strong data should be to push the majority in the Fed to accelerate policy normalization. A strong figure probably will support the post-Fed flattening trend, with shorter yields rising faster than longer ones. Given rising chances for tapering to start later this year, such a flattening shouldn’t lead to a further decline in LT yields. However, the downside (in US LT yields) looked fragile of late. Such a strong scenario also supports the dollar. A break below EUR/USD 1.1837 (76% retracement end March/May) opens the way for a full retracement to the 1.1704 area. In case of a soft figure, recent rather indecisive global trading dynamics might persist/resume. On Monday, US markets are closed for the 4th of July Independence Day Holiday.
News headlines
Concluding its assessment of countries’ economic and financial developments (article IV consultations), the IMF said the US will probably begin scaling back asset purchases in the first half of 2022. Rate hikes are seen in late 2022 or early 2023 as increased government spending will keep inflation above its long-run target. Earlier, Philly Fed president Harker cleared out he’s in “the camp of starting the tapering process”. He would like to see it happen sooner rather than later and suggested a $10bn/month scaling down.
The plan for a global minimum corporate tax rate and a new regime for sharing taxes on profits made by multinationals gained the backing of 130 countries at a round of talks hosted by the OECD yesterday. There are still nine countries that didn’t sign on to the new framework, of which three in the EU (Ireland, Hungary and Estonia). Since implementing the new tax rules would require an EU directive, European unanimity is necessary, giving the trio effectively a veto. Having the US participating in the new system could also prove to be tricky since it requires Congress’ approval and the Democrat’s majorities there are at risk in the mid-term elections next year.
