• Tammy Lee

Do Policymakers Understand Inflation?



The U.S. Dollar has been on a downward trend since the beginning of April amid reopening expectations in developed economies, due to efficient vaccination rollout programs ahead of the summer which improved the prospects of economic recovery. The easing measures to contain the coronavirus have induced a post-pandemic optimsm, allowing commerce and service sectors to resume activities, encouraging investors to shift their risk perception and appetite seeking for more attractive yields. Equity markets have responded positively to this shift in risk appetite; Nasdaq and S&P 500 recorded new all-time highs by the end of June with important bullish price activity since mid-May as the market risk-on stance started to pick up. The U.S. Dollar Index, a coefficient used to benchmark the performance of the greenback against a basket of six major currencies, appreciated 2.35% in June, setting a change in trend based on inflation expectations which is setting the pace at which the Federal Open Market Committee (FOMC) are adjusting monetary policy.


Equity Market - Nasdaq and S&P 500 Historical Chart

Source: Bloomberg


Amid reopening expectations and dovish comments from Fed officials, the dollar trend has eased since the beginning of April, trending in a horizontal channel between mid-May and beginning of June. The rising optimism was pulled back by the Fed’s Beige Book, after it reported that the U.S. economy expanded at a moderate pace, but faster than what data showed in previous months. Inflation remarks highlighted that selling prices increased at a slower pace than input costs due to disruptions in the supply chain, courtesy of the pandemic. However, policymakers continued to emphasize that any inflationary pressures were to be transitory and that these would ease as economies reopen converging to the 2% target.


Despite policymakers undermining inflation results, data still continued to add pressure to the dovish stance of the Fed by outperforming expectations. The ADP Employment Change kicked off the month releasing 978k vs 650k expected while Initial Jobless Claims registered a positive 385k vs 395k expected. The solid unemployment figures set very high expectations for Non-farm Payrolls, which failed to impress with a shy 559k jobs created vs 5.9 expected without any previous amendments. Additionally, Markit PMIs and ISM services also registered significant gains leaving the market dislocated when trying to reconcile positive data with the dovish stance from the Fed filling the market with uncertainty.


However, as market participants cautioned ahead of FOMC, Consumer Price Index figures showed an important pickup in May, releasing 4.87% year over year price variation while expectations were defined at 4.7%. The recurring higher than expected inflation figures started to unease market participants as the “transitory” adjective used by Fed officials to describe the looming inflation seems to be falling short, the closer we got to FOMC. Ahead of the Fed meeting, Producer Price Index once again upbeat results with a historical high figure of 6.6% year over year vs 6.3% previously anticipated.


U.S. Inflation - Consumer Price Index YoY vs Producer Price Index YoY

Source: Bloomberg


The U.S. Dollar Index managed to break the horizontal channel as inflationary pressures were not exactly aligned with the Fed’s dovish comments, which seem to be trying to keep the focus on sustaining lower expectations. Moreover, after the PPI figures were released, the FOMC published its revised economic projections, highlighting that the committee had underestimated the inflationary impact of logistical bottlenecks which have disrupted supply chains globally. Policymakers revised up growth and inflation projections and increased prospects of having two interest rate hikes by 2023. Surprisingly, policymakers did not mention tapering on this occasion, but market participants suspect the FOMC members plan their approach for the upcoming meetings, especially if inflation continues to edge higher.


DXY - U.S. Dollar Index historical Chart

Source: Bloomberg


The shift in the Fed stance adjusted the risk appetite in the market, with investors looking for refuge in the USD with strong sell-offs in major currencies against the greenback. The Dollar Index benefitted from the risk-off sentiment induced by the Federal Reserve as they mentioned removing the extra loose monetary policy approach, advancing 1.9% during the week of the FOMC, the best performing week for the dollar this year. However, as the effect of the FOMC diluted, market participants seem to be returning back to their risk-on stance, easing the demand for USD. Fed officials have proven that their interventions will have an abrupt impact on market conditions. Fed officials will also touch on tapering talk in the upcoming meeting with a renewed hawkish narrative, which we expect will replicate similar levels of volatility in the financial markets. The economic recovery is well underway but it is worth noting that it will be a bumpy ride and market participants better buckle their seatbelts. Risks around the surging cases of Delta variant keep markets at unrest as governments expect that vaccination rollout and inoculation ratios will help control hospitalizations and deaths well below the reading we witnessed in 2020.

July’s Economic Calendar

USD

On Thursday (07/01): OPEC Meeting | Challenger Job Cuts | Continuing Jobless Claims | Initial Jobless Claims | Markit Manufacturing PMI | ISM Manufacturing Employment Index | ISM Manufacturing PMI | ISM Manufacturing Prices Paid | ISM Manufacturing New Orders | Construction Spending | Total Vehicle Sales

On Friday (07/02): Nonfarm Payrolls | Good and Services Trade Balancer | Average Hourly Earnings | Average Hourly Earnings | Average Weekly Hours | Goods Trades Services | Labor Force Participation Rate | Average Hourly Earnings | Unemployment Rate | Factory Orders

On Tuesday (07/06) Markit Services PMI | Markit PMI Composite | IBD/TIPP Economic Optimism | ISM Services New Orders Index | ISM Services PMI | ISM Services Employment Index | ISM Services Paid

On Wednesday (07/07): Continuing Jobless Claims | Initial Jobless Claims | Consumer Credit Change

On Friday (07/09): Wholesale Inventories

On Tuesday (07/13) NFIB Business Optimism | Consumer Price Index Core | Retail Sales Ex Autos | Consumer Price Index | Retail Sales Control Group | Retail Sales | Consumer Price Index ex Food and Energy | Consumer Price index | Redbook Index

On Wednesday (07/14): Fed’s Beige Book

On Thursday (07/15): Producer Price Index | Import Price Index | Producer Price Index ex Food and Energy | Continuing Jobless CLaims | Philadelphia Fed Manufacturing Survey | Import Price Index | Export Price Index | Producer Price Index | Initial Jobless Claims | Industrial Production | Capacity Utilization

On Friday (07/16): Michigan Consumer Sentiment Index | Business Inventories

On Tuesday (07/20): Building Permits | Housing Starts | Redbook Index

On Thursday (07/22): Continuing Jobless Claims | Initial Jobless Claims | Existing Home Sales | Kansas Fed Manufacturing

On Friday (07/23): Markit Manufacturing PMI | Markit Services PMI | Markit PMI Composite

On Monday (07/26): New Home Sales | New Home Sales Change | Dallas Fed Manufacturing Business Index

On Tuesday (07/27): Durable Goods Orders ex Transportation | Durable Goods Orders ex Defense | Durable Good Orders | Redbook Index | Housing Price Index | S&P/Case-Shiller Home Price Indices | Richmond Fed Manufacturing Index | Consumer Confidence

On Wednesday (07/28): Wholesale Inventories | Gross Domestic Product Price Index | Gross Trade Balance | Gross Domestic Product Annualized | Fed Interest Rate Decision | Fed’s Monetary Policy Statement | FOMC Press Conference

On Thursday (07.29): Core Personal Consumption Expenditures | Continuing Jobless Claims | Personal Consumption Expenditures Prices | Initial Jobless Claims | Pending Home Sales

On Thursday (07/30): Personal Consumption Expenditures - Price Index | Core Personal Consumption Expenditures | Personal Income | Employment Cost Index | Chicago Purchasing Managers’ Index

EUR

On Thursday (07/01): ECB’s President Lagarde Speech | Markit Manufacturing PMI | Unemployment Rate

On Friday (07/02): Producer Price Index | ECB’s President Lagarde Speech

On Monday (07/05): Markit Services PMI | Markit PMI Composite | Sentix Investor Confidence

On Tuesday (07/06): ZEW Survey - Economic Sentiment | Retail Sales | European Commission releases Economic Growth Forecasts | Retail Sales

On Wednesday (07/14): Eurogroup Meeting | Industrial Production

On Thursday (07/15): EcoFin Meeting

On Friday (07/16): Trade Balance

On Monday (07/19): Constructions Output

On Tuesday (07/20): Current Account | ECB Bank Lending Survey | Current Account | Markit Manufacturing PMI | Markit Services PMI | Markit PMI Composite | Consumer Price Index | Consumer Price Index Core

On Thursday (07/22): Economic Bulletin | ECB Interest Rate Decision | ECB Deposit Rate Decision | ECB Monetary Policy Statement and Press Conference | Consumer Confidence

On Tuesday (07/27): Private Loans | M3 Money Supply | Services Sentiment | Industrial Confidence | Business Climate | Economic Sentiment Indicator

On Thursday (07/29): Consumer Confidence - Final Release

On Friday (07/30): Consumer Price Index - Core | Consumer Price Index | Gross Domestic Product | Unemployment rate

On Saturday (07/31): Gross Domestic Product

GBP

On Thursday (07/01): BoE’s Governor Bailey Speech | Markit Manufacturing PMI

On Monday (07/05): Markit Services PMI

On Tuesday (07/06): Markit Construction PMI

Wednesday (07/07): Halifax House Prices

On Thursday (07/08): RICS Housing Price Balance

On Friday (07/09): Trade Balance, Non-EU | Index of Services | Industrial Production | Manufacturing Production | Total Trade Balance | Goods Trade Balance | Gross Domestic Product | Manufacturing Production

On Tuesday (07/13): Financial Stability Report | FPC Statement | FPC Meeting Minutes

On Wednesday (07/14): Consumer Price index | Retail Price Index | PPI Core Output | Consumer Price Index | Core Consumer Price Index | Produce Price Index | Retail Price index | Producer Price Index

On Thursday (07/15): Claimant Count Rate | Claimant Count Change | ILO Unemployment Rate | Average Earning Including Bonus | BoiE Credit Conditions Surveys

On Monday (07/19): Rightmove house Price Index

On Wednesday (07/21): Public Sector Net Borrowing

On Friday (07/23): GfK Consumer Confidence | Retail Sales Ex fuel | Retail Sales | Markit Manufacturing PMI | Markit Services PM

On Thursday (07/29): Nationwide housing Prices | Net Lending to Individuals | Consumer Credit | M4 Money Supply | Mortgage Approvals

JPY

On Thursday (07/01): Tankan Large Manufacturing Outlook | Tanakan Non Manufacturing Outlook | Foreign Investment in Japan Stocks | Foreign Bond Investments | Tankan Non -Manufacturing Index | Tanakan Large All industry Capex | Jibun Bank Manufacturing PMI

On Friday (07/02): Monetary Base

On Monday (07/05): Jibun Bank Services PMI

On Wednesday (07/07): JP Foreign Reserves | Coincident Index | Leading Economic Index

On Thursday (07/08): Current Account | Bank Lending | Foreign Investment in Japan Stocks | Foreign Bond Investment | trade Balance BOP Basis

On Monday (07/12): Machinery Orders

On Tuesday (07/13): Producer Price Index

On Wednesday (07/14): Industrial Production | Capacity Utilization | Industrial Production

On Thursday (07/15): Foreign Investment in Japan Stocks | Foreign Bond Investment | Tertiary Industry Index

On Friday (07/16): BOJ Monetary Policy Statement | BOJ Interest Rate Decision | BOJ Outlook Report | BOJ Press Conference

On Monday (07/19): Adjusted Merchandise Trade Balance | Imports | Exports

On Tuesday (07/20): National CPI ex Food, Energy | National CPI ex Fresh Food | Consumer Price Index

On Thursday (07/22): BoJ Monetary Policy Meeting Minutes | Foreign Investment in Japan Stocks | Foreign Bond Investments

On Tuesday (07/27): Corporate Service Price index

On Wednesday (07/28): BoJ Summary of Opinions | Coincident Index | Leading Economic Index

On Friday (07/30): Jobs/Applicants Ratio | Large Retailer Sales | Unemployment Rate | Retail Trade | Industrial Production | Construction Orders | Housing Starts | Consumer Confidence Index | Annualized Housing Starts | Consumer Confidence Index | Annualized Housing Starts

CAD

On Friday (07/02): Imports | International Merchandise Trade | Building Permits | Exports | Markit Manufacturing PMI

On Monday (07/05): Bank of Canada Business Outlook Survey

On Wednesday (07/07): Ivey Purchasing Managers Index

On Thursday (07/08): Housing Starts

On Friday (07/09): Unemployment Rate | Participation Rate | Average Hourly Wages | Net Change in Employment

On Wednesday (07/14): BoC Rate Statement | Bank of Canada Monetary Policy Report | BoC interest Rate Decision | BoC Press Conference

On Thursday (07/15): Manufacturing Sales | ADP Employment Change | New housing Price index

On Friday (07/16): Foreign Portfolio Investment in Canadian Securities | Canadian Portfolio Invested in Foreign Securities

On Tuesday (07/20): Wholesale Sales

On Wednesday (07/21): BoC Consumer Price index Core | Consumer Price index

On Thursday (07/22): Employment Insurance Beneficiaries Change

On Friday (07/23): Retail Sales ex Autos | Retail Sales

On Friday (07/30): Raw Material Price Index | Industrial Product Price | Gross Domestic Product


MXN

On Monday (07/05): Consumer Confidence

On Thursday (07/08): Core Inflation | Headline Inflation

On Monday (07/12): Industrial Output

On Tuesday (07/20): Trade Balance

On Friday (07/23): Retail Sales | 1st Half month Inflation

On Monday (07/26): Jobless Rate

On Friday (07/30): Fiscal Balance

CNY

On Thursday (07/01): Caixin Manufacturing PMI

On Monday (07/05): Caixin Services PMI

On Wednesday (07/07): Foreign Exchange Reserves

On Friday (07/09): Consumer Price Index | Producer Price Index

On Monday(07/12): FDI | New Loans | M2 Money Supply

On Tuesday (07/13): Exports | Imports | Trade Balance

On Thursday (07/15): Housing Price Index | Gross Domestic Product | Fixed Asset Investment | NBS Press Conference | Industrial Production | Retail Sales

On Tuesday (07/20): PBoC Interest Rate Decision

On Saturday (07/31): Non- Manufacturing PMI | NBS Manufacturing PMI

BRL

On Thursday (07/01): HSBC PMI Manufacturing | Trade Balance

On Friday (07/02): Fipe’s IPC Inflation |Industrial Output

On Wednesday (07/07): Retail Sales

On Thursday (07/08): IPCA Inflation

On Friday (07/23): Mid-month Inflation | Current Account

On Thursday (07/29): Inflation Index | Interest Rate Decision

On Friday (07/30): Unemployment Rate | Primary Budget Surplus | Nominal Budget Surplus


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