HomeContributorsFundamental AnalysisCentral Bankers Strike A Cautious Tone Amid COVID-19 Outbreak

Central Bankers Strike A Cautious Tone Amid COVID-19 Outbreak

Market movers today

  • The final Eurozone CPI July numbers are due including core inflation. Consensus is expecting core inflation to remain roughly unchanged at 0.7% y/y while headline inflation is expected to edge slightly higher.
  • The minutes from the Fed meeting in July is due today, where Fed members’ discussion of the need to start tapering will be in focus together with their assessment of inflation pressures.
  • COVID-19 developments are starting to affect markets sentiment as the outbreak in the US and Asia gains momentum. In the US, hospital systems in hard-hit states such as Oregon, Mississippi and to some extent Florida are reaching their limits. In Europe, the infection numbers are stable to falling. And this morning, the Covid outbreak prevented the New Zealand central bank from hiking.

The 60 second overview

Weaker-than-expected retail sales in the US: US retail sales for July dropped more than expected yesterday, driven by shortage of goods (new cars), shifting demand to services while the impact of the spread of the delta variant may be too early to gauge. Markets reacted negatively to the print fearing that the important US consumers are hitting the breaks, which could create headwinds for the continued rebound in the US economy. Meanwhile, industrial production expanded solidly by almost 1% in July, more than expected by market consensus.

Fed speakers draw a cautious tone: In his speech yesterday Fed Chair Jerome Powell did not touch on monetary policy but said that the COVID pandemic continues to cast shadows on the economic activity while Minneapolis’s governor Kashkari warned that a rate hike could be a “few years away” given the virus resurgence’s broader economic implications.

New Zealand’s central bank keeps rates unchanged amid COVID outbreak: The Reserve Bank of New Zealand held monetary policy unchanged at its meeting overnight. While a full hike was priced in until Monday, the decision was not a huge surprise following yesterday’s announcement of strict lockdown measures after a single locally transmitted Covid-case was identified in NZ. This morning, 6 new cases have been recorded. RBNZ made it clear that conditions for a rate hike would have otherwise been met given the strong domestic economic developments and housing market. Despite no rate hike, NZD has recovered slightly against USD following the decision given that RBNZ clearly revised their rate path higher, expecting the first hike in late 2021 and four additional hikes in 2022.

Equities: Global equities were mostly lower yesterday but the big story being investors seeking towards defensive sectors with healthcare as the big outperformer. Defensives outperformed for the fourth consecutive day as gold rose for the fourth day in a row just like oil fell for the fourth day in a row. This would make perfect sense if yields were lower but they were not. To be fair, they were lower at some point yesterday. These inconclusive moves between asset classes reflect the situation we are in currently where both macro and monetary policy is changing after 16 months of continuous tailwind for risky assets. Equity sentiment is positive again this morning with Asian markets broadly higher and European and US futures the same.

FI: 10Y Treasuries continue to range trade around 1.25% after a mixed set of US economic data yesterday. Tonight we will get more information on the discussion within the Federal Reserve regarding tapering given the release of the minutes from the latest FOMC meeting.

FX: The release of US retail sales reinforced weakness in equity markets and hence supported dollar yesterday. We expect EUR/SEK to stay close to 10.20, our August/Q3 target.

Credit: CDS indices remained under pressure with iTraxx Xover widening 2.2bp (to 236bp) and Main widened 0.4bp (to 46½bp). Cash bonds were more resilient and HY widened less than ½bp while IG was unchanged.

 

 

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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