With a mid-week FOMC and holidays in mainland China, Hong Kong, Australia and Macau, Asia appears content to gently mimic the price action seen on Wall Street on Friday. Equities and the US dollar are modestly higher, as is oil, while precious metals remain on the back foot.
Friday was notable for the US dollar’s strong rally, which saw the major currencies all in retreat. The move was even stranger given that longer-dated US bond yields edged lower as the bond market short squeeze continued. There was some talk around of a rotation from the UK and European markets after the ECB remained unchanged, and rumours swirled that the UK will delay full reopening by a month. Both cases have merit, but the US dollar strength was broad-based. My feeling is that with markets having hung their hat, coat and their entire wardrobe on the transitory US inflation peg, what we saw was a good old-fashioned short squeeze.
Bitcoin has had some fun over the weekend, rallying over 9.0% yesterday thanks to, you guessed it, Elon Musk. Mr Musk tweeted that Tesla would accept bitcoin again once bitcoin miners started using more renewable energy, suggesting a starting point of 50%. I am not sure how he will collect the data to ascertain that, but never let the facts get in the way of a good story in the crypto-space. Bitcoin is trading at USD39,000.00 this morning, and the weekend rally has invalidated the bearish symmetrical triangle I was watching last week. The charts suggest consolidation followed by a rally through USD41,000.00 targets further gains to around USD44,000.00. Or you could say, “^$()&%&^$^*, Jeff is bullish bitcoin today, sell them all now.”
The weekend G-7 meeting passed without incident, which given the ups and downs of the previous four years under President Trump, President Biden will take as a win. The leaders endorsed the 15% global corporate tax plan, made noises on climate change, donated some vaccines and pointed fingers at China and Russia. Back to business as usual then, where’s the cocktail bar?
FOMC unlikely to shake up markets
The week’s focus will remain on the US FOMC meeting, the latest results of which will emerge on Thursday morning Asian time. I am expecting no change to the Fed Funds rate or the language. Despite US core inflation being at 30-year highs, the Fed is too heavily invested in the transitory inflation narrative to blink now. Thus, I very much doubt the members will even move their rate hike expectations forward in the dot-plot. One look at the US bond market will tell them any mention or hint of the taper word will result in carnage across multiple asset classes. I expect them to suck it up and shut up, even if some members are wavering behind closed doors. That gives them room to massage the narrative ahead of Jackson Hole in August and the FOMC meeting in September if required.
I am in the Federal Reserve’s camp on transitory inflation. The world was heading into a slowdown before the pandemic; it certainly wasn’t overheating. Strip used cars, hotels, and other leisure-related reopening plays out of the CPI, and I am not sure the inflation outlook is the end of days many are predicting. Yes, PPIs are racing higher, but will that be reflected in higher consumer goods prices from China? I am not so sure, based on past experience. I could go on and on, but the honest answer is that we just don’t know yet. Certainly, that’s what the US bond market is saying to us all.
The week is not without some highlights, the FOMC meeting aside. Norway and Japan announce policy decisions on Friday, after the FOMC. Japan will remain a rabbit in the headlight, its happy place for the last 30 years. Although it would be a surprise if they hiked rates, Norway could well be hawkish. Given that and the trajectory of oil prices, it would be a brave man shorting the Norwegian krone this week.
The Bank of Indonesia (BOI) announces its latest decision on, as does Taiwan. Both will remain unchanged, but nerves will be rising in Indonesia. Covid-19 cases are creeping up here after post-Eid travel, and testing numbers are very low. At 3.50%, rates in Indonesia are about as low as the BOI can push them without imperilling the rupiah. If Covid-19 cases rush higher, and the US bond market yields turn higher after the FOMC, the BOI will be between a rock and a hard place. The same could be said for much of Asia, with rates at rock bottom levels. The inevitable casualty will likely be the rupiah. Readers should watch developments closely in Indonesia over the coming week.
India’s WPI Inflation this morning came in at a whopping 13.07% YoY increase in May, well above expectations of 12.0%. USD/INR has risen from 73.000 on Friday to 73.192 this morning. Base effects from last year aside, India’s stagflationary bind continues, magnified somewhat by rising oil prices and their latest pandemic tragedy. An easing of the pandemic (by Indian standards) is likely to heighten the inflationary pressures from now on. USD/INR traded as low as 73.00 at the start of June, as oil importer demand slumped, dragging demand for US dollars with it. With oil consumption now recovering, international oil prices higher, and food price inflation a persistent social problem, I believe that 73.000 was USD/INR’s low, and IDR weakness will resume in earnest.
China releases Industrial Output and Retail Sales on Wednesday. Both are expected to retreat from last month’s outsized readings. However, China markets will be vulnerable to a pullback if Industrial Output prints below 9.0%, or Retail Sales below 12.0%, especially if the Covid-19 situation in Guangdong Province gets murkier.
The US also releases Industrial Production and Retail Sales data on Tuesday. With a dovish FOMC backstop to come on Wednesday, I doubt even poor numbers will have much impact. If anything, they will give more impetus to the grind lower by US long-dated bonds. Similarly, markets seemed to have discounted the Biden infrastructure package and associated spending plans some time ago. They are barely making news now, and all that news suggests the whole thing is in trouble, not just from Republicans but also middling to right-wing Democrats. If anything does emerge, it looks like it will have been impressively slimmed down to qualify for its own weight-loss advertorial.
Australia releases May Employment Change on Thursday. A volatile data series, it should bounce back into positive territory after last month’s net fall. As ever, it is the full-time/part-time components that really matter and the participation rate. I wouldn’t bet against the luck of the lucky country, though, to give us a surprise 50,000+ headline. That should be good for some volatility intra-day in the Australian dollar (AUD). However, as a bellwether for global risk sentiment and a partial substitute for Asian currency exposure, thanks to all their dirty pegs, AUD’s fate will still be decided by external forces and not internal ones.
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