Last week’s bout of risk-aversion proved short-lived though more volatility likes lies ahead. The reflation trade looked like it was falling apart last week as reflected in the sharp decline in US Treasury bond yields and the shift out of value into big tech/growth stocks. The markets appeared to have increasingly absorbed the Fed’s message that inflation increases will be transitory while a reversal of crowded market positioning in reflation trades exacerbated the moves. The malaise in markets coincided with several indicators revealing peak growth has passed and the rapid spread of the Delta variant globally.
However, clearly that didn’t appear to be the case by the end of last week as equities rallied strongly and the US Treasury curve shifted higher. The US dollar gave up some of its gains while oil and gold rallied. While there are still concerns about peak growth passing and the rapid spread of the Delta variant, there are obviously still plenty of buyers willing to jump in on dips.
China’s central bank, PBoC went ahead with a much anticipated reserve requirement ratio cut sooner than expected on Friday though this targeted liquidity easing is unlikely to change the fact that growth is losing momentum amid a weakening credit impulse. This week, key events include China’s June trade data (Tue) for which outsized gains in exports and imports is likely. China’s monetary and credit aggregates will also be out sometime over the week as well as Q2 GDP and the June data dump, with some further moderation likely to be revealed.
Top US data includes June CPI inflation (Tue) and retail sales (Fri). CPI is likely to record another sizeable 4.9% y/y increase though the Fed’s repeated message of transitory inflation, will limit any market concerns over inflation pressures. Also given the gyrations in markets last week, there will be even more focus on Federal Reserve Chair Powell’s semi-annual testimony to Congress (Wed & Thu). The start of the Q2 earnings season will also come under scrutiny, with expectations of a 63% surge forecast according to FactSet data.
Monetary policy rate decisions in New Zealand, Canada, Turkey (all on Wed), Korea (Thu) and Japan (Fri) are on tap, with the former two likely to reveal upbeat views while the CBRT in Turkey will have limited room to ease given the recent spike in inflation. BoK in Korea may dial back a little of its hawkish rhetoric giving increasing virus cases in the country, while BoJ in Japan is likely to revise higher its inflation forecasts but leave its economic outlook unchanged. Australian and UK jobs data (Thu) will also garner attention.