Although risk assets rallied at the end of last week, weaker than expected US July retail sales data and China’s July data slate including industrial production and retail sales, helped to intensify growth concerns. As it is, many indicators are showing that we are past peak growth. US economic surprises are becoming increasingly negative as reflected in the Citi US economic surprise index, which has fallen to its lowest level since May 2020. Combined with intensifying Delta virus concerns, worsening supply chain pressures and sharply rising freight rates as reflected in the spike in the Baltic Dry Index to its highest since June 2008, it has led to a marked worsening in investor risk appetite. This has been compounded by China’s regulatory crackdown and rising geopolitical risks in Afghanistan
The US dollar has been a key beneficiary while safe haven demand for Treasuries has increased and commodity prices have come under growing pressure. Equity markets wobbled last week after a prolonged run up though the pull back in the S&P 500 looked like a healthy correction rather than anything more sinister at this stage. The moves in the USD have been sharp, with the USD index (DXY) rising to its highest since November 2020 and EURUSD on its way to testing the 1.16 low. Some Asian currency pairs broke key levels on Friday, with USDCNH breaking through 6.50. Safe haven currencies such as CHF and JPY are holding up much better, highlighting that USD demand against other currencies is largely due to a rise in risk aversion while currencies such as CAD appear to be pressured by weakening commodity prices.
This week attention will turn to the Jackson Hole Symposium (Fri) where markets will look for clues to the contours of Fed tapering. Fed chair Powell is likely to repeat the message from the July minutes, with QE tapering likely by year-end if the labour data continue to strengthen. Markets will be on the lookout for any further clues on the timing and shape of tapering. Separately the US July Core Personal Consumption Expenditures (PCE) report is likely to show a high 3.6% y/y increase though this is unlikely to change the Fed’s perspective on transitory inflation pressures. Monetary policy decisions in Hungary (Tue) and Korea (Thu) will be in focus, with the former likely to hike by 30bps and the latter on hold, albeit in a close decision. Ongoing US budget talks and European Central Bank minutes (Thu) will also be in focus. Finally, closer to home New Zealand (Tue) and Australia (Fri) retail sales reports are in focus.