[Market Review].
Market expectations for the Fed to taper its bond purchases have strengthened. Last week, the U.S. released a larger-than-expected drop in initial claims, ADP and non-farm data show that the job market recovery remains strong. Investors are now more concerned than ever, the Fed’s next tapering plan, but the Fed officials have not reached a unified view within the hawkish and dovish officials each. But in general, the Fed’s hawkish stance is more obvious, and the market is strengthening expectations for tapering of bond purchases. The Fed needs to develop policy supported by actual data, but for the question of whether inflation is temporary officials have their own views, the market is now expected to the Fed will be announced in August at the Jackson Hole central bank meeting more information on tapering bond purchases, the specific implementation may have to wait until the end of this year or early next year.
Gold is shaking sideways. The U.S. June non-farm payrolls were better than expected, but the unemployment rate moved higher, allowing gold bulls to enter the market on a short term basis. Also the spread of the Delta virus and the continued decline in U.S. bond yields gave momentum to the bulls. However, the overall gold market is stuck in sideways volatility as Fed officials are divided on the next step of the Fed’s monetary policy.
ECB officials have divergent positions. Currently, there are also different expressions of expectations for future policy within the ECB. Weidmann, the governor of the Bundesbank, believes that the crisis will be over once the economy returns to the level before the outbreak. The economy is now expected to recover to that level by the first quarter of next year. But European Central Bank President Lagarde said the eurozone economy is starting to rebound from the recession triggered by the epidemic, but the recovery is still fragile. On the inflation front, inflation is likely to peak above 2.5% near the end of the year, according to the ECB’s forecast. However, the ECB has made it clear that this is not the kind of inflation that requires a policy response, so there is no tightening in mind. Also, the latest Delta strain has caused no small amount of trouble for European countries, causing the euro to hit a near three-month low this week.
Sterling weakness is unchanged. The UK outbreak continues to fester, with new confirmed cases of new crowns climbing again, weighing on the pound. However, the fall in the pound was slowed by the hawkish tone unleashed by the Bank of England’s chief economist, Haldane, who said that by the end of the year UK inflation is expected to be closer to 4% and suggested that central banks need to act on inflation sooner rather than later.
The UAE continues to oppose the deal to increase production. Oil prices were steady, with no agreement reached at Friday’s ministerial meeting, as the UAE still blocked a proposed supply increase from going through. Negotiations will continue on Monday, with OPEC+ talks inconclusive for a second straight day, raising the risk that the body’s failure to act could lead to a spike in oil prices and spur inflation. Delegates at the meeting said that while most OPEC + members support the proposed 400,000 barrels per day per month increase in production between August and December, along with an extension of the term of the broader supply agreement, the UAE remains firmly opposed.
[Risk Warning].
The dollar will rise further if US economic data is strong
Last week, the U.S. reported an increase of 850,000 non-farm jobs in June, and the unemployment rate rose to 5.9%. Analysts said that overall, the report was strong and moving in the right direction, which should solidify the case for the Fed to start tapering its asset purchases soon, which should be good for the dollar. On a broader scale, the dollar extended its post-rate resolution rally against other major currencies this week, said senior market analysts at Capitol Macro. If U.S. data continues to be strong, the dollar is expected to rise further.
Uncertainty in the oil market Oil prices may rise to $100 next year
There is a great deal of uncertainty about the major factors affecting oil prices, and the risk of a long-short shift is gradually increasing. Currently, for the future price trend of international crude oil, Goldman Sachs Group oil analysts believe that crude oil prices will continue to rise, not only Goldman Sachs Group, including Trafigura, Vitol and other well-known global commodity traders have similar views. According to Bank of America, the global crude benchmark oil price could rise to $100 per barrel next year as travel demand rebounds.
Japan May Extend Precautionary Measures U.S. and Japan Expected to Continue Upside
The epidemic prevention measures currently in place in Tokyo, Japan, were scheduled to be lifted on July 11, but due to the worsening of the local coronary disease epidemic, it is estimated that it will be difficult to avoid an extension of the implementation. on July 2, Japan considered extending the quasi-emergency status in Tokyo for one month, according to a report by the Sankei Shimbun. Once the key measures in Tokyo are extended, there is a possibility that they will overlap with the period of the Tokyo Olympics, which will open on July 23; if the epidemic worsens further, the Japanese government is prepared for empty games. With the recent resurgence of the epidemic in Japan, the dollar has been moving higher against the yen, hitting a 15-month high last week. If Japan hosts the Olympics with an empty stadium, it will cause huge economic losses to Japan, and the yen will probably continue its current decline.
[Key Forecast].
Tuesday 12:30 Australian Fed may maintain a dovish tone
First, to focus on the Australian Fed’s upcoming interest rate resolution. At its June meeting, the Australian Fed left its benchmark interest rate and 3-year Treasury yield target unchanged at 0.1%, in line with market expectations. In addition, the Australian Fed reiterated that it is unlikely to raise interest rates before 2024, and that the committee will not raise the cash rate until real inflation remains within the target range of 2% to 3%, and that the July meeting will consider yield targets and further quantitative easing.
Analysts at National Australia Bank pointed out that the Australian Federal Reserve may still display a decidedly dovish policy tone on Tuesday due to a number of concerns.
The Australian Fed may extend the three-year Treasury yield control operation, saying that it will not consider raising interest rates until 2024; it may also emphasize that there is no plan to exit QE in advance.
In such a scenario, the Australian Fed may not follow the Fed and release expectations of tightening policy.
Tuesday 14:00 Lowe may maintain a cautious stance
Later, the Australian Fed President Lowe will speak. In the middle of last month, Lowe said that the Australian economy is still in a recovery phase and inflationary pressures are still under pressure. Yield curve control will be determined by the likelihood of interest rate hikes over the next three years, and it is not yet time to discuss stopping bond purchases. With the outbreak still not fully under control, Lowe is likely to maintain a cautious stance. He is likely to emphasize that inflationary pressures still exist and will continue the easing policy.
Thursday 02:00 Watch for the Fed minutes on QE
In the early hours of Thursday morning Beijing time, the Federal Reserve will release the minutes of its June meeting, further elaborating the detailed insights of Fed members on the economic situation, interest rate hike expectations and QE tapering issues. Because the past few weeks the Fed members have been on the policy shift, more elaboration, the market can be extracted from this report, enough to shake the market logic of the information point is more doubtful.
Note whether the minutes mention officials discussed the speed of QE cuts, and how to allocate on the Treasury and MBS bond purchase program and other details. The market doesn’t know much about these details at the moment, so these are potential market triggers as well. The more details they discuss, the more likely it is that action will be taken sooner.
But investors need to be wary of a shock to the market similar to the April FOMC minutes. After the April rate resolution conference, Powell himself said there was no discussion of QE tapering, but the minutes show that “several participants” said that if the economy continues to make rapid progress, it would be appropriate to start discussing tapering bond purchases at the upcoming meeting.
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