The Federal Reserve’s annual symposium at Jackson Hole is the most important event of the week. Over the past few months, the Federal Reserve hinted about the need to reduce asset purchases, and that time has come. Central banks in Canada, the U.K. and New Zealand have already set the stage for tapering, so it would be natural for the Fed to follow suit. The Jackson Hole symposium would be the perfect venue for the central bank to prepare the market for asset reductions, but the question is: Will it?
Based on the sell-off in the U.S. dollar, new highs for the S&P 500 and the decline in 10-year Treasury yields on Monday, investors appear skeptical. In the last 24 hours, we’ve seen reports of deterioration in manufacturing and service-sector activity in all corners of the world, including Australia, U.K., the Eurozone and the U.S. The Delta variant is posing a risk to the global recovery and some investors believe the Fed could wait until September to signal taper.
In a few more weeks, there will be more information on the economic impact of Delta, and recent shifts in inflation trends (oil and lumber prices have come down sharply). There’s also one more jobs report before the September FOMC meeting. With two policy meetings beyond September (in November and December) if the Fed wanted to tread carefully, it could wait a few more weeks before providing clear guidance on when it will start reducing asset purchases.
The best performing currency today was the Canadian dollar. After falling for seven straight days, crude prices rebounded sharply, rising more than 6% intraday. Bargain hunting and a weaker U.S. dollar may have contributed to the recovery, but ultimately crude fell too far too fast, and when that happens, a relief rally becomes very likely. Canadian fundamentals are sound, with a central bank that has formally announced its plan to wind down bond buys, inflation on the rise and a newly vaccinated population (over 75% of eligible adults have received at least one shot).
The euro and sterling also traded higher despite mixed PMIs. In the euro area, manufacturing and service sector activity slowed, driving the composite PMI index down to 59.5 from 60.2. While this deterioration was slightly more than anticipated, it represented only a small dip from July’s two-decade high. In the U.K., manufacturing activity accelerated, but service-sector activity slowed. The elimination of COVID-19 restrictions should have boosted economic activity, but supply-chain and staffing issues caused the PMI composite index to drop for the third month in a row to a six-month low. None of this prevented EUR and GBP from rallying because risk appetite was strong.
The Australian and New Zealand dollars soared despite ongoing lockdowns. NZ Prime Minister Jacinda Arden said the country’s lockdown will, at minimum, be extended to Friday and, in Auckland, in particular, to the end of the month. Australian Prime Minister Scott Morrison encouraged the country to get vaccinated – saying lockdowns could become “a thing of the past” once 80% of the adult population is vaccinated. But, with only 24% fully vaccinated, there’s a long road ahead. NZD/USD will be in focus tonight, with New Zealand retail sales due for release. The second quarter was a strong one for New Zealand and the latest consumer spending report should reflect that.