Mixed Dollar as Central Bank Heavy Week Ends

July 16, 2021
  • Powell stuck to the same tone on the second day of his testimony, while Bullard said it was time to end emergency measures
  • Treasury Secretary Yellen’s did not commit to extending Powell’s term next year
  • More hawkish comments out of the BoE yesterday, pressured short-end rates higher
  • Cases in the UK rose to the highest in six months, and Merkel is pressuring Biden to lift travel restrictions
  • In Hong Kong, Biden administration intends to warn about firms doing business there while China is exempting listing companies from cybersecurity checks 
  • The BoJ policy meeting was uneventful, with no policy change and some headlines around the “green lending plan”
  • Higher CPI numbers validate the RBNZ’s hawkish stance

The dollar is mostly weaker on the day but in limited ranges. The best performer has been the New Zealand dollar (+0.5%) after stronger CPI numbers and the South African rand (+1%) in what seems to be more of a technical rather than fundamental move given the tense domestic situation. Majors are mostly flat, with small gains for GBP and slight declines for JPY and CHF. Stock indices are recovering some of yesterday’s losses, with the EuroStoxx index up 0.3% and U.S. futures a touch higher. However, shares were mostly lower in Asia, with major indices down about 1% in Japan and China. Yields are little changed in Europe, but 10-year U.S. Treasuries are up 3 bps to 1.33%, but still 3 bps on the week.


In Fed speak, Powell stuck to the same tone on the second day of his testimony, while Bullard said it was time to end emergency measures. In Bullard’s view, the current inflation and growth outlook warrant tapering, and the Fed will still be able to keep inflation expectations in check. In contrast to Powell’s assessment, he thinks the goal of “substantial further progress” has been met. Lastly, Evans said we could get a policy adjustment towards the end of the year but will have to wait until early 2024 for a rate hike. U.S. 10-year yields were slightly higher yesterday and today, while the yield curve steepened a touch.

Two mildly interesting nuggets came out of Treasury Secretary Yellen’s CNBC interview yesterday. First, she stuck to the Fed script saying, “we will have several more months of rapid inflation,” though expectations for price gains still look well contained. Second, she did not committed or provided any signal about whether the administration intends to extend Powell’s term next year. She limited herself to say, “That’s a discussion I’m going to have with the president.” Nothing market-moving here, but important threads to follow.

U.S. surveys released yesterday were mixed. Empire Manufacturing came in at a record high of 43.0, blowing out expectations for an 18.0 reading. On the other hand, the Philly Fed survey dropped to 21.9, well below the 28.0 forecast, but came with stronger pricing readings. Initial jobless claims declined to 360K, reflecting the gradual improvement of the labor market as more states end their benefit programs. We don’t think either number is too consequential for the U.S. outlook.

June retail sales for the U.S. are up next. Headline sales are expected -0.4% m/m vs. -1.3% in May, while sales ex-autos are expected to rise 0.4% m/m vs. -0.7% in May. The so-called control group used for GDP calculations Is expected to rise 0.4% m/m vs. -0.7% in May. Let’s take a look back at the May retail sales data. While the m/m drops were larger than expected, the large upward revisions to April largely offset the downside misses. Sales fell in May from record levels well above trend, and so while one could say that May sales softened a bit, the readings were by no means weak. The same may go for June, it seems. With the labor market expected to continue improving and credit growth remaining robust, consumption should be well-supported as we move into H2. 


We got more hawkish comments out of the BoE yesterday, pressuring short-end rates higher.  After Deputy Governor Ramsden said policy may have to react sooner to higher inflation, MPC member Saunders said they should consider tapering QE “in the next month or two.” So the hawks are getting louder, and rightfully so in our view. But all this is just groundwork; we doubt we will get any decisive shift in guidance until there is more clarity on the labor market with the end of the furlough program. Gilt yields bucked the global trend yesterday, rising 6 to 3 bps across the curve. Implied rates now show the first BoE hike in mid-2022.

On the virus front, cases in the UK rose to the highest in six months, and Merkel is pressuring Biden to lift travel restrictions. There has been much coverage about the UK’s national NHS COVID app forcing about half a million people to quarantine last week, a tenfold increase and a potentially disruptive force for the economy. The government is already talking about placing further restrictions if the situation worsens, but for now, more stages of reopening are going ahead. The good news is that the death count remains very low.

In Europe, German Chancellor Merkel is using her final official visit to DC to get President Biden to revise its pandemic travel restrictions. Biden sounded non-committal but should have an answer in the next few days. It’s all about the Delta variant now, and the U.S. administration will be very cautious about taking any additional risk – and rightfully so, in our view. It will be a political disaster if the U.S. goes ahead with a quicker travel reopening only to see a simultaneous spike in Delta variant cases.


Hong Kong is back in focus, with the Biden administration intending to warn about firms doing business there. The idea is that the historically favorable legal backdrop no longer applies given Beijing’s increasing clout over the territory. Separately (we assume), China said it would exempt companies going public in Hong Kong from seeking approval under the cybersecurity regulations. This seems to be an attempt to offset some of the negative sentiment from the recent tightening of rules for Chinese companies listing abroad.

New Zealand’s Q2 CPI figures validated the RBNZ’s hawkish stance. Prices rose 3.3% y/y, over double the previous reading and well above the 2.7% expected. The q/q figure came in at 1.3% compared to 0.7% expected, the fastest increase in 10 years. As usual, the increase was primarily driven by energy costs and supply disruptions but also by housing construction. This last item could prove stickier and also a recurrent source of concerns for the country. NZD is one of the best performing major currencies this month, up 0.5% against the dollar, only falling behind safe haven plays JPY and CHP.

The BoJ policy meeting was uneventful, with no policy change and some headlines around the “green lending plan.” The policy rate and the 10-year yield target remain unchanged at -0.1% and 0.0%, respectively. Its 2021 GDP forecast was trimmed by 0.2 ppts to 3.8% but raised by 3 ppts for the next fiscal year. It also adjusted its CPI forecast upwards to 0.6% and 0.9% for this year and the next, accounting for higher energy costs. On the green lending program, the program’s rollout will be gradual with zero-rate loans and exempting banks that lend to the sector from negative rate reserves.

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