Video

#SaxoStrats
Sterling has been dented by the risk of a no-confidence vote in Prime Minister Theresa May. Meanwhile, oil remains bid on persistent Saudi Arabian tensions, and the "old correlation" is back between yields and equities.
Article / 08 August 2017 at 12:20 GMT

What will wake us from the summer lull?

Head of Trading / The ECU Group plc
United Kingdom
  • USD remains on the back foot
  • Fed speakers tilt dovish
  • Inflation the key focus in US, EU

Summer lull
The waters may be still, but there are plenty of currents under the surface. Photo: Shutterstock 

By Neil Staines

“I’ve been the lull, and I’ve been the storm and also somewhere in between” — Karan Johar

Last week we discussed the dominance of political developments over financial market interactions. This week, with the summer lull in full swing and a very light data calendar, we may find this theme extended. 

The one data point of note since our last piece was the US employment report for June, and it is important to note that the main pillar of strength in the US economy – the labour market – put in another impressive month. July marked the second consecutive payrolls gain above 200,000 and another incremental reduction in the unemployment rate to just 4.3%. What continues to fall absent, however, is inflation in both wages and, more broadly, in prices.

From a financial market perspective, while inflation remains absent, monetary policy normalisation in the US likely remains a glacial iterative process. Against this backdrop, and in conjunction with a modest recovery in global economic activity (one where downside risks have diminished), the resultant hunt for yield has driven demand for bonds, equities and emerging markets. In turn this has pushed yield curves lower and flatter (arguably further denting inflation expectations), boosting the attractiveness of equities.

In FX terms, given the low volatility, risk positive, low inflation, low (but positive) growth backdrop it is likely that the USD remains on the back foot. In fact, in order for this to change or for the USD to make gains in FX, it would likely require a negative exogenous risk event, a sharp pickup in US growth or a notable pickup in US inflation.

“Recent data question if inflation returning to target” — James Bullard

In that regard, it is interesting to note the testimony of Messrs Bullard and Kashkari last night, neither of whom hold much hope for a resurgence of inflationary pressure anytime soon. Indeed, James Bullard, while advocating the activation of the balance sheet unwind process, provided little explanation or hope for a reversal of ingrained low inflation in the US, concluding that the “best policy would be to leave rates where they are”.

Federal Open Market Committee voting member (and dissenter to the June rate rise) Neel Kashkari reiterated his view that “it matters that inflation has been coming up short”, a sentiment that contributed to keeping US yields subdued and yield curves flat.

“...but some animals are more equal than others” — George Orwell, Animal Farm

In the Eurozone, however, there have been some interesting monetary policy developments. We have noted on a number of occasions that one of the motivating factors for the ECB in considering its path towards monetary normalisation is the increasing scarcity of German debt to purchase (in line with the policy equality of the capital key, accounting for the relative sizes of economies, and thus capital markets, within the eurozone). 

The most recent data clearly show that the ECB purchases of German bonds were for amounts below that implied by the capital key for the fourth consecutive month. Furthermore, the German shortfall appears to be increasingly utilised to buy Italian debt.

This process of favouring one member state over another (if sustained) raises significant questions about the Eurozone construct and the equality of the transmission mechanism for monetary policy. We would expect to expand further on this topic over coming months; suffice it to say that if this is a conscious policy target, then its connotations are (perhaps much) less positive for the EUR.

In the near term, and despite the summer lull in data, activity and participation, we would expect the USD's decline to remain the dominant force. With US CPI the next significant macro data point, eyes will be focused on that. Until then, the IAAF Athletics World Championships perhaps offers a welcome distraction?

— Edited by Michael McKenna

Neil Staines is head of trading at The ECU Group
08 August
usxau usxau
Let's hope the markets come back alive very soon! ;)
Relevant articles for you

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer
- 沪ICP备13028953号-1

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail