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Overview of the Market Minutes:
The US Dollar (as measured by the DXY Index) is approaching its July highs once more, although a clearly defined range has emerged in the first two weeks of the month.
The greenback has benefited from a non-parallel change in the US Treasury yield curve, as well as a resurgence in Fed rate hike expectations.
Through the end of the week, the economic calendar stays active.
Data Flood
Chinese GDP came in lower than predicted overnight, at +7.9% vs. +8.1% expected, but it remains considerably over the CCP’s target rate of +6%. However, with China’s credit impulse diminishing swiftly – the amount of new loans extended as a percentage of GDP – it appears that the world’s second largest economy is sending out some warning signs about where global growth might be headed in the second half of the year. The Australian Dollar, which has been under near-constant pressure over the past month, will be disappointed. Weekly initial unemployment claims in the United States came in at 360K, as expected, and the four-week average of 382.5K is now the lowest since the pandemic began. There are tailwinds in the near-future that should keep the US labor market well-supported heading into the fall – delta variant or not – with public schools resuming next month, vaccination rates continuing to grow (although slowly), and unemployment insurance payments rolling off in September. Eurodollar Futures Contract Spread versus US 2s5s10s (July 2021-December 2023) Daily Rate Chart: Butterfly (March to July 15, 2021) (Graph 1) While recognizing that inflation may continue to rise for a few months longer, the Fed Chair maintains that pricing pressures are primarily temporary. And it’s possible that he’s right: when you analyze the most recent inflation data to correct for pandemic-sensitive inputs, it’s clear that the statistical base impact and supply chain concerns are distorting headline results, neither of which can be fixed by the Fed hiking rates. Furthermore, the Fed’s attention on its labor mission has never been stronger, which should not be overlooked. There were 107 basis points worth of rate hikes discounted by December 2023 at their peak this month, following the June US nonfarm payrolls report; presently, there are 92 basis points priced in. However, the greenback has seen some recent support after rebounding from monthly lows (82-bps discounted). The Calendar Packs a Punch While the month’s most critical week has not disappointed thus far, there are still a number of major data releases scheduled before the week ends. While the Bank of Japan rate decision is usually uninteresting, there have been requests for changes to the central bank’s inflation mandate. In a similar spirit, tomorrow is the deadline for the final June Eurozone inflation report. The most important remaining event is the June retail sales data in the United States. The US retail sales data, which is perhaps the finest monthly indicator we have into the major component of US GDP, consumption, is expected to indicate some small deterioration. However, the projected core reading, which excludes some pandemic-sensitive and supply-chain-hampered spending (e.g. vehicles), implies that the US economy is still humming along. ‘High’ Rate Events, Next 48 Hours, DailyFX Economic Calendar (Table 1) —- Christopher Vecchio, CFA, Senior Currency Strategist wrote this article./n
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