- Central bank emergency stimulus measures are winding down
- US Federal Reserve making a mistake?
- European Central Bank likely to maintain dovish rhetoric
- A few central banks have turned hawkish
- Earnings: Focus turns to technology from banks
- Macro data and earnings highlights include ECB and PMIs
US index futures managed to rebound on Friday after what has been a choppy week. The market was relieved to hear dovish rhetoric from the Fed and BoJ. But other central banks have turned hawkish in light of rapidly rising inflation across the globe. Investors are still giving the Fed the benefit of the doubt and evidently happy to buy any dips in US stocks. But with a falling number of stocks supporting the indices, are the US markets going to correct themselves in the week ahead, or will the bullish trend continue? The focus will turn to the ECB policy meeting and technology earnings after another strong season for banks.
Central bank stimulus measures are winding down
The major central banks have been consistent at one thing: sending mixed signals regarding their respective monetary policy guidance in the near-term outlook. But amidst the uncertainty, one thing is becoming clear: emergency measures are slowly being removed or reduced. However, not all central banks are at the same wavelength, as growth has been strong in some regions and not so strong in others. Meanwhile, there are elevated levels of uncertainty over whether inflationary pressures are transitory or likely to be more sticky. Complicating the economic outlook further has been the rapid rise of the delta variant of coronavirus despite successful vaccination programmes across the major developed economies. There is also the unknown threat posed to vaccinated people by future strains of the virus, as lockdown measures continue to ease, and people return to office life.
US Federal Reserve making a mistake?
The uncertainty surrounding central bank policy has started to hurt some stocks and sectors, while causing the major currencies to weaken with the US dollar coming back amid rising inflationary pressures in the US and despite the Fed’s continued dovish rhetoric. On the one hand, it looks like the market is betting that the Fed is making a major policy mistake by not withdrawing monetary support sooner given the above 5% CPI inflation. On the other hand, the lack of a more significant sell-off on Wall Street or in Treasuries suggest some investors are still giving the Fed the benefit of the doubt.
This week, we have twice heard from Fed Chair Jay Powell, who was characteristically dovish at
his testimony, causing yields to dip he continued to defend the central bank’s stance to keep providing support to the U.S. economy despite rising inflationary pressures. However, while adamant that inflation is going to be transitory, Powell did warn that the Fed is ready to act if needed, particularly because there’s still a lot of unknowns. He acknowledged that no one knows for sure how much longer price pressures in categories like used cars, which has been one of the main drivers behind CPI, will remain elevated. “We also don’t know whether there are other things that will come forward and take their place,” Powell added.
We won’t be hearing from Fed officials given that the next policy decision is less than two weeks away now. And with the economic calendar being fairly quiet in the week ahead, we won’t have many macro indicators to provide us strong clues as to what the FOMC might decide at its next meeting on 28 July. But given the stronger-than-expected rise in inflation, will the Fed surprise the market at that meeting? Time will tell. It could be a long wait.
European Central Bank likely to maintain dovish rhetoric
The European Central Bank meeting on Thursday will likely be the week’s main macro event. Last week, the ECB announced a change in its strategy, allowing the central bank to tolerate inflation higher than its 2% goal when rates are near rock bottom. That is the case right now, but this does not mean the Governing Council will agree on the economic and inflation outlook – and thus on how much more bond buying stimulus is needed. ECB President Christine Lagarde has also said that “forward guidance will certainly be revisited." At the moment, the guidance says the ECB will purchase bonds for as long as necessary and will keep interest rates at current levels until the inflation outlook "robustly” converges to its goal. With the cases of the delta variant of Covid-19 rising sharply across Europe and elsewhere, you can rest assured that the centra bank will not even entertain the idea of dialling back stimulus. Indeed, Lagarde has already said that her sense is that the ECB will be “maintaining favourable financing conditions in our economy," and that the ECB's Pandemic Emergency Purchase Programme (PEPP) could "transition into a new format" after March 2022, which is the earliest the programme can end.
In short, expect the ECB to remain dovish, especially if we see further sharp rises in Covid cases until the central bank’s meeting. This should keep the likes of the EUR/NZD under and EUR/GBP under pressure, while supporting the European stock markets.
A few central banks have turned hawkish
Above I mentioned the EUR/NZD and the reason for that is that the Reserve Bank of New Zealand has announced it will end QE and we have seen further gains in NZ inflation data on Friday. Meanwhile, the Bank of Canada has already been tapering its asset purchases programmes. Elsewhere, a couple of policymakers from the Bank of England
also spoke last week, calling for the reduction of monetary stimulus, which helped to keep the pound stable and caused the FTSE to once again struggle. The next BoE meeting is scheduled for 5 August, and ahead of that meeting I wouldn’t expect too much of a moment in the pound -although it could move higher against currencies where the central bank is still dovish – such as the euro and yen.
Earnings: Focus turns to technology from banks
The earnings season will kick into a higher gear and the focus will turn to the US technology sector after banks posted mostly above-forecast results thanks to strong deal making in the last quarter. Morgan Stanley posted its second-most profitable quarter on record thanks to $2.38 billion in revenue from its investment banking division. This helped to offset a big drop fixed-income trading revenue. Other US banks such as JPMorgan and Goldman Sachs have posted similar results.
In the week ahead, we will hear from the likes of Netflix, Intel and Twitter, among others.
- After its meteoric rise, Tesla will be in focus afters its shares pulled back about 25% from record highs in recent months. Its shares have fallen in part due to valuation concerns with other carmakers such as GM, Ford and Daimler all ramping up their own electric vehicle offerings.
- Netflix has managed to regain its poise after the big miss on Q1 user growth in April saw its shares tumble. Investors will be wondering how many new subscribers the streaming services has been able to add after its explosive growth during the pandemic. With lockdown restrictions having been eased further in the recent quarter, the risk is that we may see another miss.
Macro data and earnings highlights
The economic calendar for the week ahead is fairly quiet with only a handful of potentially market moving data to look forward to in the second half of the week. These include the European Central Bank meeting, retail sales from Australia, Canada and the UK, and global services and manufacturing PMIs.
- No major data
- Earnings: IBM
- RBA meeting minutes, and US building permits and housing starts
- US Earnings: Netflix
- European Earnings: Volvo, EasyJet
- Aussie retail sales
- Earnings: Texas Instruments, Verizon, Coca-Cola and Johnson & Johnson
- ECB policy decision and press conference
- US jobless claims and existing home sales
- US Earnings: Intel, Twitter, AT&T and Snap
- European Earnings: Unilever, SSE
- Retail sales from UK and Canada
- Global flash manufacturing and services PMIs, including from Eurozone
- Earnings: Honeywell International (US) and Vodafone (UK)
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