• Tammy Lee

Monthly Currency Report: Schumer’s Stopgap Buys Time, But For How Long?



Sustained inflation has proven to be more than transitory and it has started to raise concerns over policy makers globally, unfolding a hawkish wave of central banks shifting stance. The Federal Reserve hinted at imminent tapering expected to be announced in their upcoming meeting in November, while the market prepares expectations towards rate hikes in 2022 and 2023. The hawkish shift in stance induced a significant rise in U.S. treasury yields from 1.30% to 1.56% in a matter of days while Jerome Powell, Chairman of the Fed, said at his congressional hearing that inflation is now more concerning than earlier this year. However, Powell highlighted that even with tapering, the Fed will continue to buy bonds until mid-2022, and that employment is still a long way to go before considering any further adjustment in policy approach. The Fed still believes that inflation will come down in the mid-term, especially as supply chain bottlenecks ease, pointing at supply-chain restrictions at the heart of it.


Figure 1. US 10y Treasury yields


However, unemployment keeps making small progress towards recovery, as disappointing job reports in August suggested that summer growth drivers were offset by the impact of the delta variant on the economy. Non-farm payrolls figures failed to impress, with 235k new jobs created in August, while market participants set expectations at 750k. Despite the disappointing figures, unemployment fell 0.2% in August, posting 5.2% as previous figures for June and July were revised up to improve the aggregate figures. Although, this is still a long way from the Fed’s target of full employment. Upcoming job reports in October will be closely watched by policymakers, as efforts from U.S. authorities to improve vaccine distribution hold hopes that might have a positive impact over economic drivers. The FDA announced the full approval of the Pfizer vaccine, which enabled authorities to activate new channels of distribution.


Figure 2. US Employees on Nonfarm Payrolls Total MoM Net Change


Moreover, the U.S. congress faces budgeting constraints amid the end of the fiscal year in the U.S. and Joe Biden’s ambitious USD 3.5 trillion spending plans. Hours before the fiscal deadline on the 30th of September, the U.S. senate leader Schumer announced a last-minute stopgap bill to keep the government funded until the 3rd of December 2021. The last minute bill saved the Biden administration from the embarrassment of a government shutdown in the middle of the pandemic, although democrats are not out of the woods just yet. Treasury Secretary Janet Yellen flagged during her congressional hearing alongside Powell that the U.S. will reach the debt ceiling by 18th October, resulting in default and financial crisis if lawmakers fail to suspend or increase the debt limit by then.


Aside from internal drivers, we witnessed across the month a dampened sentiment after China’s authorities and top executives announced that Evergrande, the second-largest real estate developer in the world, was missing upcoming interest payments for its outstanding debt valued around USD 288 billion. Beijing seems reluctant to bail out the real estate giant, although it is taking steps to limit the damage it will cause to the financial system. The announcement shook equity markets globally amid fears of contagion through the financial global system. The broader risk off sentiment underpinned the dollar, triggering a significant demand for the safe-haven greenback. The U.S. dollar index, which tracks the performance of the greenback against a basket of six major currencies, rallied 1.69% after Evergrande announced its credit fallout inducing a wave of risk off flows. In addition to the risk averse dollar demand, Fed officials' announcement of imminent tapering ignited the spike in Yields, creating a snowball effect making the dollar close the month with solid momentum.


Figure 3. Dollar Index (DXY)


The Federal Reserve faces resolving “tension” between high inflation and still-elevated unemployment, which means that the central bank’s two goals are in potential conflict. Chairman Powell acknowledged that this is not a situation that policymakers have faced for a very long time, and it's one in which there is tension between the objectives of the Fed’s mandate. Inflation is high and well above the target levels and yet, there appears to be slack in the labor market. The comments for the Chairman raised eyebrows over market participants bringing fears of “stagflation” lived back in the 70’s that combined high unemployment and fast rising prices. Policymakers' working hypothesis is that inflation will ease on its own as the global economy returns to normal, after a rocky reopening from the coronavirus pandemic and as supply chain bottlenecks ease, policymakers will have room to shift policy more comfortably.

September’s Economic Calendar


USD


On Friday 10/01: Core Personal Consumption Expenditures ¦Personal Income ¦ Personal Spending ¦ Core Personal Consumption Expenditures ¦ ISM Manufacturing Employment Index ¦ Michigan Consumer Sentiment Index ¦ ISM Manufacturing PMIS

On Monday 10/04: Opec Meeting ¦ Factory Orders

On Tuesday 10/05: Goods and Services Trade Balance ¦ Markit Services PMI ¦ ISM Services New Orders Index ¦ ISM Services PMI ¦ ISM Services Employment Index ¦ ISM Prices Paid

On Wednesday 10/06: ADP Employment Change

On Thursday 10/07: Initial Jobless Claims

On Friday 10/08: Nonfarm Payrolls ¦ Average Hourly Earnings ¦ Labor Force Participation ¦ Unemployment Rate

On Tuesday 10/12: Consumer Price Index Core ¦ Consumer Price Index ¦ Consumer Price Index ex Food and Energy

On Wednesday 10/13: FOMC minutes ¦ Monthly Budget Statement

On Thursday 10/14: Producer Price Index ¦ Initial Jobless Claims

On Friday 10/15: IMF Meeting ¦ Retail Sales ¦ Michigan Consumer Sentiment (Oct)PREL

On Saturday 10/16: IMF Meeting

On Sunday 10/17: IMF Meeting

On Tuesday 10/19: Building permits ¦ Housing Starts

On Wednesday 10/20: Fed’s Beige Book

On Thursday 10/21: Philadelphia Manufacturing PMI ¦ Markit Services PMI ¦ Markit PMI Composite

On Monday 10/25: Chicago Fed National Activity Index

On Tuesday 10/26: Housing Price Index ¦ New Home Sales ¦ Consumer Confidence

On Wednesday 10/27: Gross Domestic Product

On Thursday 10/28: Durable Good Orders ¦ Core Personal Consumption Expenditures

EUR

On Friday 10/01: Consumer Price Index ¦ Schnabel’s Speech

On Monday 10/04: Eurogroup meeting

On Tuesday 10/05: EcoFin Meeting ¦ Markit PMI Composite

On Wednesday 10/06: Retail Sales

On Tuesday 10/12: ZEW Survey Economic Sentiment

On Wednesday 10/13: Industrial Production

On Thursday 10/14: European Council Meeting ¦ Economic Bulletin

On Friday 10/15: European Council Meeting

On Tuesday 10/19: Consumer Price Index ¦ Consumer Price Index Core

On Thursday 10/21: Markit Manufacturing PMI ¦ Markit Services PMI ¦ Consumer Confidence

On Tuesday 10/26: ECB Bank Lending Survey

On Thursday 10/28: Consumer Confidence ¦ Industrial Confidence ¦ Business Climate ¦ ECB Interest Rate Decision ¦ ECB monetary Policy Decision ¦ ECB Press Conference

GBP

On Friday 10/01: Markit Manufacturing PMI

On Tuesday 10/05: Markit Services PMI

On Wednesday 10/06: Markit Construction PMI

On Thursday 10/07: Halifax house Prices

On Friday 10/08: FPC meeting minutes ¦ FPC Statement ¦ BoE Quarterly Bulletin

On Monday 10/11: Manufacturing Production ¦ Industrial Production ¦ Gross Domestic Product ¦ Manufacturing Production

On Tuesday 10/12: BRC like-For-like Retail Sales ¦ Claimant Count Rate ¦ ILO unemployment ¦ Average Earnings Excluding Bonus

On Thursday 10/14: BoE Credit Conditions Survey ¦ RICS Housing Price Balance ¦ Rightmove House Price Index

On Wednesday 10/20: Consumer Price Index ¦ Retail Price Index ¦ PPI Core Output ¦ Consumer Price Index ¦ Retail Price Index

On Thursday 10/21: Public Sector Net Borrowing

On Friday 10/22: GfK consumer Confidence ¦ Retail Sales ¦ Markit Manufacturing PMI

On Wednesday 10/27: BRC Shop Price Index

On Friday 10/29: Net Lending to Individuals ¦ M4 Money Supply

JPY

On Friday 10/01: Job/Applicant Ratio ¦ Unemployment Rate ¦ Tanka Large Manufacturing Outlook ¦ Tankan Large Manufacturing Index ¦ Tankan Large All industry Capex ¦ BoJ Summary of opinions ¦ Consumer Confidence

On Monday 10/04: Monetary Base

On Tuesday 10/05: Tokyo Consumer Price Index ¦ Jibun Bank Services PMI

On Thursday 10/07: JP Foreign Reserves ¦ Foreign Investment in Japan Stocks ¦ Foreign Bond Investments ¦ Leading Economic Index

On Friday 10/08: Labor Cash Earnings ¦ Overall Household Spending ¦ Current Account ¦ Bank Lending

On Tuesday 10/12: Producer Price Index ¦ Money Supply M2+CD ¦ Machinery Orders

On Thursday 10/14: Industrial production ¦ Capacity Utilization ¦ Foreign Investment in Japan Stocks ¦ Foreign Bond Investments

On Friday 10/15: Tertiary Industry index

On Wednesday 10/20: Merchandise Trade Balance ¦ Imports ¦ Exports

On Thursday 10/21: Foreign Investment in Japan Stocks ¦ Foreign Bond Investments

On Friday 10/22: National Consumer Price Index ¦ CPI Excluding Food, Energy ¦ Jibun Bank Manufacturing PMI

On Tuesday 10/26: Corporate Service Price Index

On Thursday 10/28: Foreign Investment in Japan Stocks ¦ Foreign Bond Investments ¦BoJ Monetary Policy Statement ¦ BoJ Interest Rate Decision ¦ BoJ Outlook report ¦ BoJ Press Conference

On Friday 10/29: Job/Applicant Ratio ¦ Unemployment Rate ¦ Retail Trade

CAD

On Friday 10/01: Gross Domestic Product ¦ Markit Manufacturing PMI

On Monday 10/04: Building Permits

On Tuesday 10/05: Imports ¦ Exports ¦ International Merchandise Trade

On Thursday 10/07: Ivey Purchasing Managers Index

On Friday 10/08: Unemployment Rate ¦ Participation Rate ¦ Average Hourly Wages ¦ Net Change in Employment ¦ Housing Starts

On Monday 10/18: Bank of Canada Business Outlooks Survey

On Tuesday 10/19: Wholesale Sales

On Wednesday 10/20; BoC Consumer Price Index Core ¦ BoC Consumer Price Index ¦ Consumer Price Index

On Thursday 10/21: ADP Employment Change ¦ Employment Insurance Beneficiaries ¦ New housing Price Index

On Friday 10/22: Retail Sales

On Wednesday 10/27: BoC Rate Statement ¦ Bank of Canada Monetary Policy ¦ BoC Interest Rate Decision ¦ BoC Press Conference

On Friday 10/29: Raw Material Price Index ¦ Gross Domestic Product ¦ Industrial Production

CNY

On Thursday 10/07: Foreign Exchange Reserves

On Friday 10/08: Caixin Services PMI

On Saturday 10/09: Consumer Price Index ¦ Producer Price Index

On Monday 10/11: Foreign Direct Investment ¦ New Loans ¦ M2 Money Supply

On Wednesday 10/13: Exports ¦ Imports ¦ trade Balance ¦

On Friday 10/15: NBS Press Conference ¦ Retail Sales

On Monday 10/18: Gross Domestic Product ¦ Fixed Asset Investment ¦ Industrial Production

On Wednesday 10/20: PBoC Interest Rate Decision ¦ House Price Index

On Sunday 10/31: Non-manufacturing PMI ¦ NBS Manufacturing

BRL

On Friday 10/01: HSBC PMI Manufacturing ¦ Trade Balance

On Monday 10/04: Fipe’s IPC Inflation

On Tuesday 10/05: Industrial Output ¦ Retail Sales

On Friday 10/08:IPCA Inflation

On Friday 10/22: Current Account

On Tuesday 10/26: Mid-month inflation

On Wednesday 10/27: Unemployment Rate

On Thursday 10/28: Inflation Index

On Friday 10/29: Primary budget Surplus

MXN

On Monday 10/04: Consumer Confidence

On Thursday 10/07: 12-month inflation ¦ Core Inflation ¦ Headline Inflation

On Tuesday 10/12: Industrial Output

On Thursday 10/21: Retail Sales

On Monday 10/25: Jobless Rate

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