By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department | Mizuho Bank, Ltd.,
Week-in-brief: Detour, Not Dead-End
Granted, Non-Farm Payroll (NFP) data was a major miss. 235K jobs for August was a rude disappointment with respect to expectations of ~733K jobs.
But this presents a mere detour, not dead-end for taper prospects. And to be sure, a fairly short detour at that. Essentially, instead of Sep FOMC being the platform for announcing taper plans, December 2021 or early-2022 emerge as the most likely timing for the Fed to rollout taper.
In other words, a 3-4 month delay in taper (potentially as short as 2 months if November FOMC is “it”). For one, despite the depth of disappointment in august data, it is worth noting that June-July averaged over a million jobs. And the three-month rolling average of 750K NFP continues to be encouraging for the prospects of achieving “substantial progress” in 2-3 months.
Put another way, current ~5.6mn shortfall in jobs from pre-Covid levels, consistent with a 75% recovery from Covid job losses (of 22.4mn), should be on course for over 80% recovery by Nov and nearly 90% by Jan 2022.
And that reasonably should fulfil “substantial progress”.
What’s more, hourly earnings rising 0.6% MoM (vs expectations of 0.3%) suggests that aspects of the labour market may be tighter than anticipated; which at the margin may diminish the extent of conviction about “transitory” inflationary pressures. And this squares taper soon.
The upshot being, NFP headlines appear to overstate the dovish implications on policy outcomes. This is to some extent captured in UST yields that have moved up modestly. But a weaker USD may be pricing in a greater degree of dovishness.
Either that, or ECB (Thu) expectations shifting markedly less dovish could be pre-emptively dragging the USD; given that any enduring EUR strength from perceptions of ECB shifts could in fact erode the Greenback in the interim.
Our sense though is that Lagarde will be careful to nuance “exit” plans and stress on the unevenness of the recovery; and as such EUR may not deliver the more hawkish bets.
Meanwhile, the RBA (Tue) will be watched very closely for signs of pulling out of taper plans (Sep to Nov); to slow AGB purchases from A$5bn/wk to A$4bn/wk. We think the RBA will stick to its taper plans on forward-looking activity resumption though may retain dovish options in its guidance.
And in turn, this may prompt greater volatility around AUD.
Finally, BNM (Thu) is set to hold the wheel steady as Malaysia navigates out of the pandemic.
FX Theme: Breather, Not Bear
After Jackson Hole and August NFP, it is understandable that USD Bulls are taking a breather; but not surrendering to (USD) bears durably.
Admittedly, at the Jackson Hole, Jerome Powell kicked the hawkish can – and corresponding bullish USD impulse – a little further down the road, with NFP shortfall providing validation.
This has ostensibly reversed some of USD upswing since mid-June. But not by as much or perhaps as durably as the NFP disappointment might lead us to believe.
Partly as markets wait to assess post-NFP US data strength through the Sep FOMC.
On the whole, data are likely to be mixed, with evidence of decelerating rebound. But not enough to impede taper at the turn of 2021-2022. And this should square with late-Sep/early-Q4 USD squeeze in response to overdone dovish consolation/USD pullback from Jackson Hole and US NFP.
And so, even after an extended pullback in the USD since Jackson Hole, we caution against bets on one-way strength in EM Asia FX. Caution is likely to seep in on a few counts.
First, China’s regulatory/slowdown risks continue to play out, with impact via supply-chains and commodity channels; which suggests that gains in commodity (and EM Asia) currencies on Fed/NFP triggers may be a tad extended.
Second, despite receding threat of debilitating outbreaks in EM Asia, “variant” risks have not been convincingly put to bed in EM Asia.
Which is to say that EM Asia FX remain vulnerable to bouts of weakness should disruptions from Covid re-emerge (albeit to a lesser degree).
Finally, neither Jackson Hole nor NFP derail plans for taper. But merely pushed out the flag off to end-2021/early 2022. And so, forward-looking markets ought to be cautious about over-doing USD weakness vis-a-vis EM Asia FX.
US Treasuries: Subdued
The pick-up in UST yields despite post-Jackson Hole dovish inferences and disappointment in Aug NFP data may appear counterintuitive on the surface; but hold up on closer inspection given that wages have risen faster than expected and taper expectations are not dismissed, but merely deferred 2-4 months.
The wider point being, despite a massive disappointment in US NFP data (235K vs. 733K expectations), Jun-Jul average NFP of >1mn jobs alongside sustained (albeit) slowing recovery in jobs keeps the Fed on course for taper.
Hence, 10Y UST yields up ~4bps at 1.32% (on NFP release) alongside 2Y yields were mostly sideways just above 0.20% is; not inconsistent with a subdued uptick in UST yields in response to decelerating but sustained jobs recovery amid of enduring wage pressures.
While the slowdown in ISM was expected, UST yields may remain a tad subdued ahead of Sep FOMC; insofar that data suggest Fed’s refrain on taper kick off.
But the more important question is whether signs of taper in Q4 remaining on track (insofar that US data remains mixed rather than slowing severely) will start to bump up long-end UST yields in anticipation.
For this week though, 1.22%-1.46% 10Y yields are likely.
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RBA Cold Feet or Cool Head?The pertinent question is whether the RBA will get cold feet about dabbling in (very) gradually slowing the stimulus; in other words, planned and impending “taper”.
At the last policy meeting (8-Aug), the RBA decided to stick to its guns on a calibrated “taper” set to start in Sep (and run through mid-Nov); disappointing more dovish camps calling for a rollback of “taper” plans (set to reduce bond purchases to A$4bn/wk from A$5bn) announced in July.
Admittedly since then;
i) the lockdown amid COVID variant outbreaks have been more extensive and prolonged, with attendant economic dent;
ii) China risks (diplomatic, policy and regulatory) have grown, threatening via commodity, trade and financial conduits, and;
iii) fiscal fade conspiring with slowing global recovery momentum has dialled back potential for tailwinds. .
In which case, there is (at least in principle) justification for the RBA to turn more dovish at the margin. But certainly not enough to decisively rollback taper plans.
Mainly because “taper” is sufficiently calibrated (from $5bn to $4bn per week), and mid-Nov reassessment will allow flexibility for tightening/loosening.
To be clear, the RBA’s call is not open and shut. Our best gauge is a 30% chance of taper being deferred (at the last minute) and 70% odds of a continued dovish hold.
RBA getting cold feet is an understandable risk, but what’s more likely is a cool headed taper kick off.
CNY: Bracing for More Two-Way Volatility?
In the context of post-Jackson Hole shifts in FX markets, it may be perfectly reasonable to shrug off headlines about CNH implied volatility on the rise. Context is key.
But precisely because context matters, it would be negligent to dismiss a potentially more worrying situation when tangential dots are connected.
Specifically, if taken alongside;
i) the SAFE (State Administration of Foreign Exchange) undertaking an unusually detailed survey to assess hedging capabilities (banks/corporates) to manage yuan volatility, and;
ii) on-going regulatory clamp-down aimed at anti-monopoly, unfair practices and “social ills”; backed by “common prosperity” objectives.
The question is to whether the survey by SAFE is merely a coincidental enhancement of the questionnaire passively assessing safe-guards, or; it is a gauge of how much volatility may be absorbed via FX channels as guard rails may be removed and/or SAFE anticipates FX ripples from further (necessary) regulatory tightening.
In other words, it cannot be ascertained whether Beijing, may concede policy boat-rocking to contain volatility; or is bracing for volatility as necessary price for wider policy objectives.
In any case, broad-based USD strength (DXY up >3%) conflicting with corresponding year-to-date yuan out performance (+0.6-0.9%) suggests scope for (downside) volatility;
Especially when Fed’s taper risks begin to re-emerge; after being temporarily quelled by Jackson Hole’s dovish “insurance” and the sharp shortfall in August NFP jobs.
Finally, a fairly rich CNY NEER may also be seen as technical justification for allowing some “catch-down” downside in CNY.
And if this catches the USD on an uptrend,, CNY nerves may be tested; as greater two-way volatility is tolerated.
Bank Negara Malaysia: Better Placed To Hold
Since BNM’s last meeting on 8 July, events have taken a turn for the better in Malaysia. This will allow BNM to keep its policy rate unchanged at 1.75% at its 9 September meeting from a more comfortable place.
For one, near-term political uncertainty has been removed. Although a new PM was appointed, the cabinet appointees largely remain unchanged for key positions including finance minister. He suggests a degree of continuity which will allow Covid containment to remain the focus and a sustainable path out of (or to deal with) the pandemic.
Second, the revision of the fiscal deficit to a wider range of 6.5%-7% of GDP from an originally budgeted 5.4% of GDP underscores the larger share of burden that fiscal policy will bear in pulling the economy through the pandemic.
This was complemented by an acknowledgement that the statutory debt ceiling will need to raised from the current 60% of GDP.
Third, with the pace of vaccinations picking up; Sinovac and booster shots considerations aside, the government has allowed parts of the country to move into the less socially restrictive ‘Phase-II’ of the National Recovery Plan with greater mobility and economic activities allowed.
It is also considering opening up the Langkawi islands to local tourism, along similar lines to Thailand’s Phuket travel bubble.
Fourth, the generally buoyant commodity price and oil backdrop will continue to provide much needed tailwinds to the economic recovery.
This is not to say that monetary policy accommodation will be removed any time soon, like in the case of Korea.
On the contrary, BNM will be careful not the throw the baby out of the bathwater and hold true to easier credit and liquidity conditions required for firms and households alike to deal with the significant balance-sheet pain brought on the periodic (stringent) lockdowns.
ECB: (Rapidly?) Heading Towards A Cross Road
The jump in headline inflation to 3% YoY in August from 2.2% in July coincided with the voicing of hawkish opinions from ECB Governing Council members.
Robert Holzmann and Klass Knot both concurred that it was time to start talking about the process of removing pandemic induced highly accommodative monetary policy. Views from other members of the Governing Council will be expressed during the 9 September and it seems clear that opinions will span a wide spectrum from hawkish to dovish.
This will not be a surprise given the inherent heterogeneity of the EU economies and the different stages of pandemic recovery for each economy.
However, from ECB’s standpoint sending a clear message on timing and potentially the process of accommodation withdrawal will, first and foremost, benefit regional governments which will have to brace for rising borrowing costs.
Some points of discussion for the Council will be reducing the “significantly higher pace” of asset purchases under the PEPP before the pre-defined end of the program in March-2022; setting out criterion associated with the reduction of asset purchases, clearly explaining the ECB’s view on inflationary pressures and its trajectory into 2022.
Credit: Mizuho Bank Ltd