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So far Conor Beakey has created 7 blog entries.

Sterling Moves Off Highs As Risk Appetite Slips Somewhat

Dollar The dollar remained on the backfoot through yesterday’s session, as markets continued to digest the outcome of the July Fed meeting on Wednesday night. Weaker than anticipated US GDP figures for Q2 also released yesterday reduced the scope for the greenback to recover the lost ground. The economy did return to its pre-pandemic level as growth came in at 6.5% in annualised terms in the quarter (f’cast 8.4%), driven by a surge in consumer spending as the US emerged from lockdown. However, supply chain issues saw firms continue to run down inventories in the quarter and acted as a major headwind to business investment. As we had highlighted in yesterday’s comment, the concentration of the Biden administration’s fiscal stimulus efforts in Q1 also meant that government expenditure acted as a slight drag. The emergence of some sterling weakness has seen cable (GBP/USD) trade down into the upper half of the $1.39-1.40 range, but EUR/USD remains above the $1.185 mark. There is a quiet look to the macro schedule today, though US core PCE inflation figures (Fed’s preferred measure) for July will be of interest. Consensus anticipates that the y-o-y rate will come in at a circa 30-year high of 3.9%. However, the impact on the dollar should be modest as the data follow the publication of CPI inflation figures for the same month. Sterling Sterling has moved off its recent highs overnight, with GBP/EUR backing off recent highs above €1.175 as weaker than expected corporate earnings data has

2021-07-30T08:11:52+00:00July 30th, 2021|

Dollar Softens As The US Federal Reserve Remains Dovish

Dollar The dollar opens this morning slightly softer, with cable trading at a month-to-date high above $1.39 and EUR/USD operating at the $1.185 mark. The emergence of dollar weakness followed yesterday’s key Fed rate-setting meeting, despite an outcome that was broadly in line with expectations. No changes to policy were made as anticipated, though in its meeting statement the Fed did acknowledge that the economy has made progress toward reaching the targets necessary to begin tapering its asset purchase programme. However, this is hardly a surprise given that CPI inflation came in at 5.4% y-o-y in June and the economy is projected to have returned to its pre-pandemic level in Q221. Heading into the meeting, in-line with consensus we anticipated that the Fed would not commence the tapering process until Q122 and we heard little yesterday to suggest that this timeline will be brought forward. With respect to the economic outlook, Chair Powell continued to guide in the press conference that while inflation is coming in sharper than the central bank had anticipated and may prove more persistent, it will subside over time. As a result, monetary policy tightening is not the appropriate response, with Powell arguing that this would require a significant improvement in labour market conditions. The unemployment rate was put at 5.9% in June, versus 3.5% in February 2020. Meanwhile, the Fed Chair acknowledged the risk posed by the delta variant to activity but indicated that the economic implications should be relatively modest. Today, the focus

2021-07-30T08:03:23+00:00July 29th, 2021|

Stormy Waters Ahead

Covid-19 jumped back to the forefront of investors’ mind this week as financial markets woke up to the possibility that current growth forecasts may be too optimistic given the spread of the more contagious delta variant, something we had flagged in these pages three weeks ago. Sentiment deteriorated at the beginning of the week, with the S&P 500 registering its largest fall in four months on Monday. On currency markets, the dollar benefitted from associated safe haven flows, while sterling came under pressure as markets questioned the wisdom of proceeding with ‘Freedom Day’ when new UK infections are running at 6-month highs. As a result, cable (GBP/USD) dipped to around $1.357, its lowest level since February, from $1.377 at the close on July 16. Sentiment did recover over the course of the week, with cable pushing back up toward the $1.375 mark, but investor confidence remains fragile. Ultimately, the elevated growth forecasts that are underpinning current lofty asset valuations, particularly in the US, leave limited room for error and were largely based on the assumption that Covid would disappear over H221. They certainly do not account for the surge in cases we are now seeing across developed economies, which has not prompted a return to lockdown but remains a major headwind to activity nonetheless. This was highlighted by data released last Friday in the UK, as the flash composite PMI, a closely watched measure of aggregate economic activity, dropped back to a four-month low of 57.7 from 61.7 and

2021-07-26T15:48:06+00:00July 26th, 2021|

Inflation: It’s Getting Hot In Here

Inflation continued to dominate the market discourse last week, after UK and US CPI figures for June came in well ahead of consensus forecasts. In the former, the headline rate rose to 2.5% year-on-year (forecast 2.2%), while the rate in the latter unexpectedly picked up to a 13-year high of 5.4% (forecast 4.9%). The figures caused some anxiety in the Bank of England (BoE), with two members of the Monetary Policy Committee explicitly making the case last week for removing stimulus measures in the coming months to reduce the risk of inflation holding above target through 2022 and 2023. Over in the US, Federal Reserve Chair Jerome Powell has retained his ultra-dovish position, though even he acknowledged the central bank is “trying to understand whether inflation is something that will pass through fairly quickly, or whether we need to act”. Despite the somewhat alarming figures, we did not see any major sustained reaction in FX markets in response to the data, with cable (GBP/USD) largely confined to a narrow $1.38-1.39 band last week. GBP/EUR did test a three-month high at €1.175, but the move could not be sustained, and we closed on Friday back below €1.17. Traders essentially remain of the view that elevated price pressures will prove to be a temporary phenomenon and are taking solace from the fact that the current figures are distorted by: Base effects: Prices in the comparison period in 2020 were depressed by lockdowns. Demand-supply imbalances: Suppliers did not anticipate vaccines would be

2021-07-19T09:58:17+00:00July 19th, 2021|

China Warning Signals Overstated

Markets were in risk-off mode for much of last week, as concerns rose that the ongoing rebound in global growth will be less pronounced than anticipated. The decision by the People’s Bank of China to loosen monetary policy for the first time since April 2020 drew outsized attention in this regard, as officials moved to kickstart slowing Chinese GDP growth. Given China is further along the path to recovery, this spooked traders and led to them questioning whether they were too optimistic about the economic outlook in western economies. While a slowdown in China would have negative implications for global growth, with the export-oriented eurozone particularly vulnerable to adverse spill over effects, it is not clear to me that China offers a reliable guide for how recoveries will progress elsewhere. In contrast to western economies, China’s rebound has largely been export and investment focused. Exports are still holding up reasonably well (+23.4% on 2019 levels as of May), but the outlook for investment has deteriorated as officials have sought to curtail credit growth. At the same time, China has struggled to kickstart consumer spending as the government neglected to introduce the sort of income support schemes (be it furloughing programmes or enhanced jobless benefits) rolled out in Western economies in response to the crisis. As a result, despite largely re-opening over Q320, Chinese retail sales were up just 8.0% in May on their May 2019 level (sales in the US were up 20.7% over the same period). In contrast

2021-07-12T12:55:40+00:00July 12th, 2021|

COVID-19: Is This Time Different?

COVID-19 has shifted from the forefront of market participants’ minds, with a surge in new infections in the UK last week barely causing a stir to the Sterling. As per Bank of America’s latest Global Fund Manager survey, inflation, a ‘taper tantrum’ and asset bubbles all now rank as bigger concerns for institutional investors. This is thanks to the rapid development and deployment (at least in the US & Europe) of vaccines that based on UK data certainly appear to have broken the link between cases and hospitalisations. As a result, the UK government is confident in the latest figures. New Health Secretary Sajid Javid all but confirmed last Monday that ‘Freedom Day’ will proceed on 19 July as planned. The data are unquestionably positive but are markets underplaying the significance of the delta variant, which is two-to-three times more transmissible than the initial strain? COVID-19 remains disruptive from an economic perspective, something that we are clearly seeing in high-frequency data. OpenTable reservation figures show UK restaurant bookings are down sharply since the delta variant took hold in early June, while Bank of England (BoE) card spending data are trending in the wrong direction. It may be that consumers are waiting until 19 July to splurge again and the potential end of self-isolation rules for those vaccinated would act as a significant tailwind, but for the first time since January/February, the clouds are beginning to darken somewhat. Given lofty UK growth forecasts and expectations for a consumer spending boom

2021-07-05T10:48:13+00:00July 5th, 2021|

Will The Summer Lull Recommence?

The Bank of England followed the lead of the European Central Bank rather than the US Federal Reserve at its policy meeting on Thursday, pushing back against suggestions that the recent spike in near-term in­flation may see it taper its asset purchases programme further in the coming months. While it is questionable what additional benefit QE is providing as a stimulus measure by this point, the central bank is unwilling to back itself into a corner by sending a message to markets that it will begin withdrawing support at this early stage and risk pushing borrowing costs higher. This is a similar situation to the one that governments are facing in relation to easing Covid-19 restrictions – they don’t want to signal all clear and then subsequently have to backtrack as developments play out negatively. Ultimately, while the economic outlook has improved, risks remain considerable. The Covid-19 crisis has not yet been fully contained and the expiration of the Job Retention Scheme in September is looming on the horizon, with most analysts expecting a sharp rise in unemployment as a result. If these risks fade and inflation remains above target, the central bank knows it can contain price pressures through rate hikes. As a result, the view among MPC members now appears to be that the risk is of doing too little, rather than too much. History affirms this view, with the ECB’s decision to hike rates in response to a spike in oil prices in 2011 – ranked

2021-07-05T10:19:53+00:00June 28th, 2021|