Although the FOMC statement was close to that of the last meeting, the hawkish forecasts and “dot plots” surprised markets. Some Fed members are now looking for an increase in rates by the end of 2022! Fed Chairman Powell will be testifying on Tuesday on “The Federal Reserve’s response to the coronavirus”. Traders will be eagerly watching for more information from the Fed. Following up the FOMC this last will be the Bank of England on Thursday. The last time they met, the central bank cut their bond buying program from 4.4 billion Pounds per week to 3.4 billion Pounds per week. Will they follow that up with another taper? In addition, major data releases this week include Global Manufacturing and Service PMI Flashes and US Core PCE. Will the data show other central banks should be tapering?
Surprise!!
For the last 15 months, the Fed has been purchasing bonds at a rate of $80 billion in treasuries and $40 billion in MBS. At the FOMC meeting on Wednesday, via the “dot plots” and later in the press conference, the Fed indicated that talk of tapering these purchases has begun. This caught markets by surprise, and rightly so! The Fed had been saying that current inflation is transitory and that they will focus on maximizing employment while inflation runs hot. Recall that Non-Farm Payrolls were worse than expected over that last 2 months, hardly indicative of a “sting of months” which show the labor market is on the path to a “sustainable” recovery, as indicated in March. Fed officials “dot plots” now show that they expect 2 interest rate increases in 2023. In addition, 7 of 18 members see a hike next year!
The next question is one of timing? Economists expects the Fed to announce tapering either at the Jackson Hole Symposium in August or the September FOMC meeting. (The September meeting will be the next time growth and inflation forecasts will be released.) Fed Chairman Powell will testify on Tuesday this week regarding the Federal Reserve’s response to the coronavirus. Watch for any clarification from the latest meeting or for clues as to when taping may begin.
More tapering?
On Thursday, the Bank of England will get its chance to decide if they wish to continue with their tapering of bond purchases. Last week, the UK reported a claimant count decrease of 92,600 vs a decrease of 62,000 expected. This a much better than expected print. In addition, the April print was revised from -15,000 to -56,000! This shows that employment in the UK is on its way back. Their manufacturing is strong, however as with most countries, inflation is high. One big negative data piece released Friday showed that headline Retail Sales was -1.4% vs +1.5% expected. Retail Sales, ex-gasoline, was -2.1% vs 1.4% expected.
Another problem the BOE must consider is the coronavirus (still!). Just as the country was about to fully lift all restrictions, health officials felt it was necessary to delay the final stop on the roadmap until mid-July, citing an increase in new cases due to the delta variant. This will give time for more citizens more time for get vaccinated before fully reopening the economy. Therefore, the BOE may be in no hurry to increase their tapering at this meeting, until they see how the 1-month re-opening delay plays out.
Economic Data
Although the economic calendar is light this week, markets will get their first look at Markit Manufacturing and Services PMIs for June. This will give central banks a better look at how these industries are holding up in their respective countries. In addition, the US will release Core PCE Price Index for May, which is considered to be one of the Feds favorite measures of inflation. The current expectation for the May YoY print is 3.5% vs 3.1% in April. This is well above the Fed’s targeted inflation rate of 2%. Some of the major releases this week are as follows:
Monday
- Australia: Retail Sales Prel (MAY)
- EU: ECB President Lagarde Speech
Tuesday
- UK: CBI Industrial Trends Orders (JUN)
- EU: Consumer Confidence Flash (JUN)
- US: Existing Home Sales (MAY)
- US: Fed Chair Powell Testimony – The Federal Reserve’s Response to the Coronavirus Pandemic
Wednesday
- Global: Manufacturing and Services PMI Flashes (JUN)
- Japan: BOJ Monetary Policy Minutes
- Canada: Retail Sales (APR)
- US: New Homes Sales (MAY)
- Crude Inventories
Thursday
- Germany: Ifo Business Climate (JUN)
- UK: BOE Interest Rate Decision
- Canada: Manufacturing Sales Prel (JUN)
- US: Durable Goods Orders (MAY)
- US: GDP Growth Rate Final (Q1)
Friday
- Japan: Tokyo CPI (JUN)
- Germany: GfK Consumer Confidence (JUL)
- US: Personal Income (MAY)
- US: Personal Spending (MAY)
- US: Core PCE Price Index (MAY)
- US: Michigan Consumer Sentiment Final (JUN)
Earnings
Slow. There won’t be much in the way of earnings data until July. However, there are a few notable exceptions for this week. They are as follows: MANU, KBH, ACN, BB, FDX, NKE, CAN
Chart of the Week: Weekly Soybeans (ZS)
Source: Tradingview, FOREX.com
Commodities have been in the news lately as China has said they would begin to crack down on commodities traders for excessive speculation, hoarding and spreading of fake news. As a result, soybean prices in been moving lower over the last few weeks. However, this week alone, prices fell 10%!
The orderly rise of Soybeans began in mid-August 2020, as price formed as orderly channel on its way to highs in early May at 1667’4. Notice on the highs that not only was price at trendline resistance, but the weekly candlestick formed a shooting star, a strong signal that price may reverse. 2 weeks ago, price formed a bearish engulfing pattern as price dropped 4.75% from 1623’4 down to 1508’4. This week, the selloff continued. Soybeans broke through the bottom trendline of the upward sloping channel and fell aggressively. Price dropped from 1504’2 down to 1289, before recovering slightly to close as 1357’4, just below the 38.2% Fibonacci retracement level from the August 10th, 2020 lows to the May 10th highs. Notice that on the weekly timeframe, the RSI had been diverging since January! Support is at the week’s lows of 1289, ahead of the 50% retracement from the same timeframe near 1270. First resistance on the weekly timeframe isn’t until the week’s highs at 1504’2, which confluences with the bottom trendline of the channel. If price breaks above there, horizontal resistance is at 1537’2.
Although the FOMC outcome was extremely hawkish for the markets, the BOE may not produce the same results. With recent weaker retail sales and a delay in the final lifting of the all restrictions in the UK, the central bank may wish to hold off until their next meeting. Watch the PMIs and US Core PCE data for further evidence that markets are recovering, and inflation is rising.
Have a great weekend!
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