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All Eyes Turn Focus to This Week’s Humphrey Hawkins Testimony. 

By:
Stephen Innes
Updated: Jul 8, 2019, 08:23 UTC

Forget the Taylor Rule, NAIRU or the Phillips Curve all that should matter for traders are forward guidance and inflation expectations.

All Eyes Turn Focus to This Week’s Humphrey Hawkins Testimony. 

And if it’s Fed guidance they need, there should be plenty of that on offer this week when  Fed  Chair Powell delivers his semi-annual Monetary Policy Report to Congress and the Senate which should guide markets to the timing and amplitude of the next easing cycle.

NFP

June NFPs were much stronger than expected at 224k USD (UBS: 170k; consensus: 160k), gold suffered, and the USD recovered some of its losses as the markets immediately started repricing of potential rate cuts in  July-September and December lower by between 5-7 bps.

US stocks

US equities fell from all-time highs after the stronger jobs data as in case of good news is bad, the robust headline print cooled hopes for a 50 bp cut in July, but risk sentiment hardly fell off the table.

Although one might typically expect upward pressure on wage growth from this type headline beat, this is not the case again as wage pressures remain anchored to 3 % which is unlikely to generate sufficient inflation pressures to breach the  Federal Reserve’s 2% target.

While the NFP headline was great, it’s tepid inflation that will direct the markets focuses this week on Chair Powell to see if he delivers a strong case for near-term monetary easing in his testimony.

Oil markets

A very caution opens this morning supported by a better than expected NFP, but traders remain incredibly cautious about the dimmer global economic overhang.

The adverse price reaction after a much better than expected G20/OPEC+ has been the biggest shocker which has traders rationalising downward global growth momentum and re-focusing on demand concerns. Failing a middle east escalation this narrative should continue to weigh on oil markets.

The NFP provided a brief respite, but with last week’s sluggish manufacturing data still fresh in traders’ minds, given the plethora of economic data out this week and the fact we are little more than 1 or 2 financial market data wobbles away from another significant sell-off,  that threat alone could cap price action early in the week.

But the middle east tensions continue to smoulder.

The US will maintain a maximum pressure campaign against Iran, but the real flashpoint is the nuclear deal.

Iran has already stockpiled more enriched uranium than the country was supposed to.

While Middle East GPR Indexes (geopolitical risk index) are soaring through the roof, the modest dollar price per barrel transmission suggests by historical Middle East escalation standards, that these risks remain underpriced.

Macron is looking for a diplomatic solution, but any failure could jeopardise European efforts to save the accord, and when diplomatic efforts are exhausted, it could trigger an aggressive US response.

Gold Markets

India’s gold import tax could cool demand over the short term.

However, gold strategic demand should remain hardy due to escalating middle east tensions, economic uncertainty with the balance of risks skewed more to the downside all framed by the dovish central bank pivots.

After a Friday’s long position clear out, I wouldn’t be surprised to see Gold markets consolidate early this week ahead of a deluge of economic data and Chair Powell crucial Humphrey Hawkins testimony.

Currency markets

June NFPs were much stronger than expected at 224k USD (UBS: 170k; consensus: 160k), and the subsequent re-pricing of potential rate cuts repricing lower helped the dollar recover some of its losses as a result.

The Fed said that incoming data would be a big part of its decision, and what counts under the Powell regime is inflation expectations. It seems the threat of inflation expectations de-anchoring to the downside has caused the Fed’s pivot. With inflation data muted and the balance of economic risks skewed downwards and even with the NFP report raising the bar for the Fed cut, the FOMC needs to prove, for the sake of policy credibility, its ability to spark inflation.

A presumed dovish Fed fueled the weaker USD and to a lesser extent, so made President Trump’s comments on currency manipulation last week.  But with the markets overflowing with weaker USD narrative, after a few days of weakness, traders start asking themselves if you don’t buy USD and US assets, what assets are you going to buy instead? Dollar shorts were getting squeezed during the run-up NFP then were completely squished after the release.

But what should be equally concerning for currency traders, in general, is when will these agonisingly low volatility conditions abate as G-10 central banks squeeze the juice out of currency markets volatility by universally adopting more moderate interest rate policies

Indeed, this current Fed regime brings back memories of Bernanke era Forex markets despair as currency moves have a shelf life of around 24 hours then mean reversion takes hold.

The Ringgit

We expect the Ringgit to trade with a negative bias due to a strong USD post-NFP ahead of the BNM rate decision on Tuesday., with economists expecting them to hold interest rates after a .25 bp cut in May.

This article was written by Stephen Innes, Managing Partner at Vanguard Markets LLC

About the Author

Stephen Innescontributor

With more than 25 years of experience, Stephen Innes has  a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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