- The FOMC delivered a hawkish hold, as we expected; Chair Powell gave an upbeat outlook at the press conference; June Fed manufacturing surveys will continue to roll out; weekly jobless claims data should show continued healing of the labor market; Brazil delivered a 75 bp hike to 4.25% and signaled another one August 4, both as expected but added a hawkish tilt
- ECB Chief Economist Lane sounded dovish; SNB kept rates steady at -0.75%, as expected; Norge Bank delivered a hawkish hold
- RBA Governor Lowe maintained his dovish stance; Australia reported strong May jobs data; New Zealand reported strong Q1 GDP data; Taiwan kept rates steady at 1.125%, as expected; Indonesia kept rates on hold at 3.5%, as expected
The dollar continues to power higher in the wake of the Fed’s hawkish hold. DXY is trading at the highest since April 13 near 91.813 after easily breaking above the 200-day moving average near 91.538. A break above 91.946 would set up a test of the March 31 high near 93.437. Likewise, the euro needs to break below $1.1920 to set up a test of the March 31 low near $1.1705 and sterling needs to break below $1.3890 to set up a test of the April 12 low near $1.3670. Lastly, USD/JPY is trading at the highest level since early April and on track to test the March 31 high near 111.
EM FX wasn’t spared from the Fed-driven dollar rally, despite many of them being ahead of the curve in tightening. As one would expect, the higher-beta currencies such as the rand, Mexican peso and South Korean won have underperformed. As usual, we emphasize that it’s growth differentials that matter for a sustainable currency performance. That said, we think that countries such as Brazil and Russia will reap the benefits of a front-loaded tightening cycle, as well as countries with central banks that have already turned more hawkish, such as South Korea, Hungary, China, and Mexico. Central banks in Poland, Czech Republic, and perhaps South Africa may find themselves in a more challenging position soon
The FOMC delivered a hawkish hold, as we expected. The biggest surprise was that the median Dot Plot now sees two hikes in 2023 vs. none before. We also got a shift for 2022 but not enough to change the median, with 7 now seeing a hike next year vs. 4 in March. By our count, 3 more need to see a hike in 2022 to move the median forward to next year. Is the Fed close to hiking? No, but it is moving closer. Of note, there was no language in the official statement about tapering. In terms of updated forecasts, Fed sees core PCE at 3.0% this year vs. 2.2% back in March, 2.1% in 2022 vs. 2.0% in March, and 2.1% in 2023 vs. 2.1% in March. Lastly, the Fed raised the IOER by 5 bp to 0.15% but this was a purely technical move to help move effective Fed Funds off the zero bound in the face of ultra-abundant liquidity.
Chair Powell gave an upbeat outlook at the press conference. He said economic indicators continue to strengthen and that inflation has increased “notably” and could be higher and more persistent than expected. Powell said that the labor market continues to improve. Regarding tapering, he said this was a “talking about talking about” meeting, which means that the debate seems to be intensifying. We would not be surprised to see tapering mentioned in the statement at the next meeting July 27-28 if the data remain firm. On the other hand, Powell noted that the Fed will continue to assess progress towards its dual mandate in coming meetings but that it’s “still a ways off.” If his outlook is to be believe, that time is not as far off as the market thought.
After spiking to 1.58% yesterday, the 10-year yield has settled down at 1.56% today. If this hawkish hold only moved the 10-year yield up 7 bp, we think the Fed will feel even more confident about tapering soon. If we get a solid June jobs number, then actual tapering gets even closer. After a mention in the July FOMC statement, tapering may be signaled at the late August Jackson Hole Symposium. Elsewhere, the big story is that 10-year breakeven inflation rates are down 6 bp on the hawkish hold. That is, the market has even more confidence that the Fed won't let inflation get out of hand. With the 10-year yield up 7 bp, the real yield has risen 14 bp to -0.76%, the highest since April 19. This is dollar-positive and we think there's room to go even higher.
June Fed manufacturing surveys will continue to roll out. Philly Fed is expected at 31.0 vs. 31.5 in May. The Empire survey kicked things off Tuesday and came in at 17.4 vs. 22.7 expected and 24.3 in May. The U.S. manufacturing sector remains strong, though it appears to be growing at a slightly slower pace.
Weekly jobless claims data should show continued healing of the labor market. This week’s initial claims data will be for the BLS survey week containing the 12th of the month. Initial claims are expected to fall to 360k from 376k the previous week, while continuing claims are expected to fall to 3.425 mln vs. 3.499 mln the previous week. Both are at post-pandemic lows as claims data continue to edge lower each week. If claims continue to fall, then another solid NFP number is likely. Consensus is currently at 750k vs. 559k in May. Of note, continuing claims are reported with a one week lag and so it will be next week’s reading that will be for the survey week. May leading index (1.3% m/m expected) will also be reported today.
The Brazilian Central Bank (BCB) delivered a 75 bp hike to 4.25% and signaled another one August 4, both as expected but added a hawkish tilt. The key here was the mention of a possible “quicker reduction of monetary stimulus” due to the deterioration of inflation expectations. Markets are starting to price in the risk of a 100 bp hike in August, but we still think they stick to the current pace of 75 bp. The strong BRL appreciation and the frontloaded nature of the cycle should be enough to remove the sense of urgency necessary to scale up the size of hikes. But it now looks like the terminal COPOM rate for the cycle will be 7.0% or something close to it, and the risk is now for a curve flattening, despite the significant fiscal uncertainty.
ECB Chief Economist Lane sounded dovish. Regarding its asset purchases, he said “We’re not necessarily going to have every piece of hard data you want to have going into the September meeting.” He added that “It’s unnecessary and premature to talk about these issues.” We think many are expecting the bank to slow its accelerated pace of purchases then but Lane’s comments suggest this is not set in stone. Lane is looking through the current spike in inflation, stressing that “We know we have to focus on the medium term.” The euro has been soft since the dovish ECB hold last week. With accelerated purchases to continue through Q3 (if not longer), we suspect the euro will continue to soften and we suspect most ECB officials are happy to see further weakness.
Swiss National Bank kept rates steady at -0.75%, as expected. It maintained its softer guidance from its last meeting on March 25, still characterizing the franc as “highly valued” and pledging to continue FX interventions “as necessary.” Inflation forecasts were tweaked modestly, higher, but the policy rate is likely to remain at -0.75% for the foreseeable future as SNB President Jordan noted that “Short-term inflation expectations have risen globally. However, these effects should have abated in a few quarters’ time.”
Norges Bank delivered a hawkish hold. It kept rates steady at 0%, as expected, but said that it would “most likely” hike rates in September. The previous rate path suggested hikes would start in Q4. Governor Olsen later suggested that the bank could hike rates 25 bp per quarter, which is much more hawkish than its previous guidance. We thought that Norges Bank was likely to keep the rate path unchanged after Norway last week reported soft inflation readings for May. USD/NOK plunged to an 8.4530 session low as the market starts to price in a rate increase for September or sooner. Next policy meetings are August 19 and September 23.
RBA Governor Lowe maintained his dovish stance. He said that the RBA has reviewed a range of possible scenarios for the cash rate, noting that in some lift-off conditions were met in 2024 while others were not. Left unsaid was that none of the scenarios see lift-off before 2024, which is consistent with the RBA’s forward guidance. Lowe also reiterated the range of options for QE that we outlined in the June minutes. It's very a close call for the July 6 meeting but we don't think they taper. One option from the minutes was for the RBA to review QE more frequently based on the flow of data. We think this is one way to kick the can down the road a bit. That is, the RBA announces at the July 6 meeting that it is extending QE whilst now reviewing the amounts more often, say quarterly. That would allow RBA maximum flexibility going forward without actually tapering just yet.
Australia reported strong May jobs data. Jobs rose a whopping 115.2k vs. 30k expected and a revised -30.7 (was -30.6k) drop in April. The breakdown was favorable, with 97.5k full-time jobs added along with 17.7k part-time ones. The unemployment fell sharply to 5.1% from 5.5% in April. While it remains far above the RBA’s perceived threshold when wage pressures are likely to begin, the progress is very positive. The data argue for moving to a more flexible approach to QE that is data-driven.
Elsewhere down under, New Zealand reported strong Q1 GDP data. Growth came in at 1.6% q/q, triple the expected 0.5% and more than reversing the -1.0% drop in Q4. Next RBNZ meeting is July 14 and no change is expected then after it delivered a hawkish hold at the last meeting May 26. The bank caught markets off guard then by projecting the first rate hike in H2 2022. The bank sees the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period. This meeting seems too soon to adjust the rate path again but if the data continue to run hot, we could see a shift at the August 18 meeting, when new macro forecasts will be seen.
Taiwan central bank kept rates steady at 1.125%, as expected. The bank raised its GDP growth forecast for this year to 5.08% vs. 4.53% previously and boosted its inflation forecast to 1.6% vs. 1.07% previously. CPI rose 2.48% y/y in May, the highest since February 2013 as the ongoing drought has led to higher food prices. The central bank does not have an explicit inflation target and so it has the leeway to keep policy on hold for now on the belief that it is a transitory spike that it sees peaking in Q2.
Bank Indonesia kept rates on hold at 3.5%, as expected. Officials seem comfortable with rates at this level and should stay on hold for most of the year as the country deals with a resurgence in Covid cases. Recall that the government has just announced new mobility restrictions after the new case count rose to 10,000 a day. BI will surely be behind many of its EM peers in entering the tightening cycle, and we think this is appropriate. The currency was down 0.8% against the dollar, but the move is in line with the broad EM currency weakness post-Fed. On the positive front, foreign investors seem to be regaining some appetite for local assets. Measures of portfolio inflows have been improving and the proportion of government bonds owned by foreigners has been stable over the last few months at about 23% (down from pre-pandemic level of 40%).