Rate decisions galore, solid US data

A simple tweet from a CNN reporter reminded us that the most powerful man in Washington, DC remains Senator Joe Manchin. Chief Congressional Correspondent Manu Raju tweeted, “Manchin just told me he has NOT decided on whether to vote to proceed to the Build Back Better bill. If he voted NO, it would stall the effort.”

US stocks dropped on the possibility that Senator Manchin would derail Biden’s social spending agenda and over some hawkish comments on inflation from Fed’s Williams.  Wall Street only wants to focus on inflationary themes, the strength of the US consumer, possible shifts on pricing pressure views at the Fed, and whether Biden will get anything else passed before midterm elections.  Fed’s Williams said he doesn’t want to see long-run price expectations up significantly.

US unemployment, manufacturing data improves

The US economy is still looking pretty good after weekly jobless claims showed the labor market recovery continues and the Philly Fed posted a significant rebound, along with constant inflationary pressures. The overall trend with jobless claims is heading in the right direction but still above pre-pandemic levels. Weekly initial jobless claims dropped from 268,000 from an upwardly revised 269,000.  Continuing Claims fell from 2.21 million to 2.08 million.

The Philly Fed Business Outlook showed manufacturing activity popped from 23.8 to 39.0, a strong beat of the consensus estimate of 24.0.  The Philly report screamed inflation as price indexes remain near long-term highs and as firms expect their own price increases to exceed the inflation rate. Demand looks robust and employment is struggling, which continues to support the pressure for further wage gains.

FX

Diverging monetary policy themes remains the theme globally as central banks grapple with runaway inflation. The Fed and ECB appear to be stubbornly dovish and they probably can afford to do so given how before COVID they saw inflation easily run below their target.

In Asia, the focus was on emerging markets after the Indonesia and Philippine central banks kept interest rates steady at record lows.

The Indonesia central bank kept the 7-day reverse repo rate at 3.50%, which will continue to provide support to the economy as it exits the pandemic. The decision was widely expected as was the upbeat outlook for the rest of the year. Governor Warjiyo expects faster economic growth this quarter as the country reopens and all that pent-up demand is released.

The Philippine central bank kept the overnight borrowing rate at 2.00%, maintaining its patient stance on providing support for the economic recovery. Inflation will get uglier next year, but over the next several months that should not make the bank deviate from its accommodative stance.

Deputy Governor Dakila anticipates the nation can achieve a pre-pandemic level of economic activity by the second half of next year.

Both the Philippine peso and Indonesia rupiah are slightly firmer on the day.

Turkey

The Turkish lira is a reminder to FX traders that you can’t just trade technically. The Turkish central bank’s disregard for traditional monetary policy is sending the lira into freefall. Despite runaway inflation, a third consecutive rate cut was delivered and FX traders aren’t convinced the central bank is done listening to President Erdogan.  The lira remains a punching bag and further weakness has no end in sight.

South Africa

The South African central bank raised interest rates by 25 basis points to 3.75%. This was a close vote as three supported lifting rates from record low levels and two wanted to keep rates steady. The rand remained heavy after the rate hike as inflation risks remain elevated and the growth outlook is shaky at best.

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