We appear to have entered into a holding pattern following a whirlwind session on Wednesday, as conflicting data and hawkish Fed commentary created some choppy conditions.
You can sense the nervousness in the markets this week. Every data release feels like it carries so much more weight and every word uttered by a central banker has the potential to shake things up. A sign of what’s to come between now and the end of the year as central banks are pressured to tighten despite their economies not firing on all cyclinders.
Higher inflation is piling on the pressure and policy makers desperately want to avoid a situation in which they’re forced to act too late. So while unemployment remains high and downside risks to the economy significant as a result of the delta spread and the risk of new strains, central bankers are pushing ahead with plans to remove emergency era stimulus and plan for rate hikes in the coming years.
Wednesday’s rollercoaster ride could be a sign of things to come over the next few months. The ADP report was a shocker, falling well short of expectations and – despite its poor record of being a reliable indicator for Friday’s jobs report – lowering expectations for the NFP number and, in turn, tapering odds. That lasted all of an hour and 45 minutes.
The record ISM services PMI, which carries far more respect than the ADP release, told an entirely different story. Employment, orders and prices all accelerated in the survey which will provide plenty of food for thought for the Federal Reserve in the coming months, especially given that services represents more than three quarters of US economic output.
This was compounded by Richard Clarida’s comments on bond buying and interest rates which saw markets reverse course, yields and the dollar recoup its losses and some, while gold gave back all of its ADP gains. A tapering announcement in September, with strong hints coming from Jackson Hole in a few weeks, looks increasingly likely now, although that could be pushed back a few months if the jobs reports and other key data points don’t deliver.
BoE cautious despite optimistic outlook
The pound was quite choppy around the Bank of England rate decision and the release of the monetary policy report and voting and at the time of writing, it isn’t trading too far from where it was pre-release. Ultimately, there was nothing shocking from the MPC, with Michael Saunders the lone dissenter on asset purchases, preferring to end new purchases as soon as possible and cap bond purchases at £830 billion, rather than the current target of £875 billion. Given that some expected a 6-2 vote, this is actually a slightly dovish outcome.
The BoE also laid out the intended conditions for unwinding purchases, ceasing reinvestments once interest rates hit 0.5% before actively selling when bank rate is at least 1%. This is slightly earlier than previously indicated but in line with expectations ahead of the meeting.
Economic forecasts were slightly better on growth and unemployment which is encouraging. But the ending of the furlough scheme, which accounted for around two million jobs at the end of June, remains a risk in the coming months. All in all, a positive outlook from the central bank but the cautious approach still has the backing of the vast majority.
Oil steadies after third day of losses
Oil took its losses for the week to more than 7% on Wednesday, with the latest fall from grace coming as risk assets sold off on hawkish Fed commentary and the strong ISM data. A surprising inventory build of 3.6 million barrels compounded the negativity for crude and saw WTI fall back below $70 and Brent may not be far behind it.
The fundamentals continue to look favourable for oil in the longer run but a combination of negative factors are taking their toll as WTI flirts with seven year highs. The last time oil came under heavy selling pressure was just a few weeks ago and it saw some strong support not far from the levels it’s currently trading around.
ISM spoils the party for gold
The ADP report offered such promise for gold prices on Wednesday. Falling well short of expectations and potentially setting us up for a below par jobs report on Friday, gold broke higher after another period of consolidation and once again found itself running into a brick wall around $1,833, an increasingly significant level of resistance.
The ISM report spoiled the party for the yellow metal, with higher yields and a stronger dollar delivering a major blow to its breakout prospects and forcing it back to the levels it traded at prior to the ADP release. With more Fed speak today and an increasingly important jobs report tomorrow, things could get more lively for gold prices.
The comments coming from various Fed officials gives the impression that the balance of power is falling in favour of the hawks, something a strong jobs report will only accelerate. This doesn’t bode well for gold, despite the technical picture continuing to look bullish. A big couple of days ahead.
Bitcoin back in the red eyeing key support
Bitcoin is back in negative territory after prices ran into a wall of resistance around $40,000 on Wednesday. The cryptocurrency is 4.5% lower on the day and trading around $38,000. Perhaps profit taking hasn’t run its course just yet.
The key level below continues to be $36,000, which coincides with resistance in late June/early July and also represents a 50% retracement of the move from the recent lows to highs.