Rate Decisions Galore, solid US Data, Oil pares losses, Gold dips
A simple tweet from a CNN reporter reminded us that the most powerful man in Washington DC remains Senator Joe Manchin. Chief Congressional Correspondent Manu Raju tweeted, “Manchin just told me he has NOT decided on whether to vote to proceed to the Build Back Better bill. If he voted NO, it would stall the effort.”
US stocks dropped on the possibility that Senator Manchin would derail Biden’s social spending agenda and over some hawkish comments on inflation from Fed’s Williams. Wall Street only wants to focus on inflationary themes, the strength of the US consumer, possible shifts on pricing pressure views at the Fed, and whether Biden will get anything else passed before midterm elections. Fed’s Williams said he doesn’t want to see long-run price expectations up significantly.
The US economy is still looking pretty good after weekly jobless claims showed the labor market recovery continues and the Philly Fed posted a significant rebound, along with constant inflationary pressures. The overall trend with jobless claims is heading in the right direction but still above pre-pandemic levels. Weekly initial jobless claims dropped from 268,000 from an upwardly revised 269,000. Continuing Claims fell from 2.21 million to 2.08 million.
The Philly Fed Business Outlook showed manufacturing activity popped from 23.8 to 39.0, a strong beat of the consensus estimate of 24.0. The Philly report screamed inflation as price indexes remain near long-term highs and as firms expect their own price increases to exceed the inflation rate. Demand looks robust and employment is struggling, which continues to support the pressure for further wage gains.
Diverging monetary policy themes remains the theme globally as central banks grapple with runaway inflation. The Fed and ECB appear to be stubbornly dovish and they probably can afford to do so given how before COVID they saw inflation easily run below their target.
In Asia, the focus was on emerging markets after the Indonesia and Philippine central banks kept interest rates steady at record lows.
The Indonesia central bank kept the 7-day reverse repo rate at 3.50%, which will continue to provide support to the economy as it exits the pandemic. The decision was widely expected as was the upbeat outlook for the rest of the year. Governor Warjiyo expects faster economic growth this quarter as the country reopens and all that pent-up demand is released.
The Philippine central bank kept the overnight borrowing rate at 2.00%, maintaining their patient stance on providing support for the economic recovery. Inflation will get uglier next year, but over the next several months that should not make the bank deviate their accommodative stance.
Deputy Governor Dakila anticipates the nation can achieve a pre-pandemic level of economic activity by the second half of next year.
Both the Philippine peso and Indonesia rupiah are slightly firmer on the day.
The Turkish lira is a reminder to FX traders that you can’t just trade technically. The Turkish central bank’s disregard for traditional monetary policy is sending the lira into freefall. Despite runaway inflation, a third consecutive rate cut was delivered and FX traders aren’t convinced the central bank is done listening to President Erdogan. The lira remains a punching bag and further weakness has no end in sight.
The South African central bank raised interest rates by 25 basis points to 3.75%. This was a close vote as three supported lifting rates from record low levels and two wanted to keep rates steady. The rand remained heavy after the rate hike as inflation risks remain elevated and the growth outlook is shaky at best.
Crude prices dropped after the China National Food and Strategic Reserves Admin (SRB) stated they are working on release of crude reserves. WTI crude has dropped almost $9 since the recent highs as energy traders appear to have mostly priced in the impact of a coordinated SPR release between the US and China.
The oil market deficit will still remain despite the tapping of reserves and the next big move for prices will most likely depend on the weather. Natural gas prices may be the key short-term driver as Russia plays hardball with Europe. Any natural gas shortages will lead to additional crude demand as the scramble for alternative energy sources intensifies.
Gold prices need a fresh catalyst after a wave of monetary policy decisions showed a diverging view of how central banks are battling inflation. Gold is stuck in wait-and-see Fed mode and that could remain the case till the end of the year. Rising concerns of growing restrictive measures in Europe could lead to short-term growth concerns that have yet to boost bullion.
Gold may consolidate between the $1850 and $1880 level until Wall Street gets a better handle on where risk appetite is going next.
This commentary is provided by Edward Moya Senior Market Analyst, The Americas, OANDA