Markets
Investors turned to a cautious wait-and-see attitude as they looked forward to Jerome Powell’s speech at Jackson Hole where the Fed chair was expected to reshape the bank’s monetary policy framework for the years to come. The expected ‘soft’ message of that speech as such shouldn’t be negative for risky assets. Still, European equities failed to build on yesterday’s record close on WS (Nasdaq and S&P 500). Eco data were few and any market reaction was hampered by the upcoming speech of Powell. Still the US jobless claims provided the weekly update on impact of the pandemic on the labour market. New claims dropped from 1 104 000 to 1 006 000, the second lowest level since the pandemic toppled the US labour market mid-March, but close to expectations and thus providing little impetus for trading. Core European and US yields declined. As was the case for the correction on the equity markets, this move shouldn’t be automatically linked to expectations on Jerome Powell’s speech. Technical factors were also in play. Yesterday, the rise in the German 10-y yield was blocked at first resistance near -0.40 %. This technical signal today caused outperformance of bunds over Treasuries. The German 10 yield declined 5 bp at some point this morning. The dollar initially gained marginal ground in the run-up the Powell’s speech, but 1.18 provided solid support.
As expected Fed Chair Powell provided the update of the new Fed policy framework. The Fed reformulated its approach on inflation. The FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it “seeks to achieve inflation that averages 2 percent over time.” To this end, the revised statement states that “following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time”. This shift in the Fed inflation approach was quite close to market expectations. At the same time Fed also amended its approach on the impact of the labour market on its policy assessment. “On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its assessments of the shortfalls of employment from its maximum level. The original document referred to deviations from its maximum level”. In its commentary Powell added that ‘This change reflects our appreciation for the benefits of a strong labor market, particularly for many low and moderate income communities’.
The market reaction to the new Fed approach for now is rather guarded. Changes in US Treasury yields are modest. The US yield curve steepens modestly with the 2-y declining about 0.5 bp and the 30-y rising 3 bp. For now, there is no further rise in market based inflation expectations. German yields decline between 2 bp and 0.5 bp (30-y). On the FX market, the dollar initially declined during Powell’s speech with EUR/USD revisiting the 1.19 barrier, but this move is being reversed at the time we are finishing this report (EUR/USD 1.18 area in a volatile market). USD/JPY also returns north of the 106 barrier. US equities show modest gains of 0.5% +, with the Nasdaq underperforming. This first market reaction suggests that market doesn’t see the new Fed approach as a big soft surprise.
News Headlines
Eurozone households and companies increased their deposits at banks by €184bn in July. Deposits soared by almost €300bn in March when lockdowns across the continent were introduced but eased somewhat in the months that followed. Total deposits rose 10.3% in the year to July (7.4% by households and a record 20.4% by businesses), pushing the absolute number above €12tn for the first time.
Poland expects a budget shortfall in 2021 of 82.3bn zloty, its forecasts showed today. That compares to a 109.3bn gap for this year, or about 5% of GDP, which brings the debt ratio to 62.2%. The government projects the economy to shrink 4.6% this year, followed by 4% growth the next while inflation is to slow to 1.8% in 2021 vs. 3.3% this year.
