The inflation arm wrestle continues

By Jeffrey Halley, Senior Market Analyst, Asia Pacific, OANDA,

With the use of the remaining 2020 carry-over leave week off complete, it appears that in my absence, the more things change, the more they stay the same. Friday’s US Non-Farm Payrolls rose by 559,000 jobs, a slight miss to consensus, but much less bad than April’s number. The number left something on the table for the inflationistas and the transitory inflation crew, meaning the arm wrestle continued. Currency and US bond markets remained in a choppy range; equities continued to grind higher, the world’s default position and commodities continued rising.

The issue appears to be getting Americans out of the house and into work, rather than a lack of jobs. In fact, the US NFIB Survey on Friday showed unfilled positions in small businesses has climbed to record highs of 48%. Federal benefits may be playing a part, but I believe that oversimplifies the issue. Child-care appears to be one stumbling block, especially with the summer vacation season approaches, and I am sure there are others.

The next major risk point for the month in the June 16th FOMC meeting. The Fed should be able to argue that with over 7 million fewer Americans in jobs than before the pandemic, no change, or even talk of change, in monetary policy is required. The NFIB survey suggests that employers will have to pay up to get people back to work through or wait for the summer season and those unemployment benefits to run their course. All of which is likely to be inflationary but does not tell us if it is transitory or structural.

The same can be said for raw materials inflation. Once the pandemic supply chain bottlenecks are cleared, will a return to the mean occur? Despite the noise and the chest-thumping from both sides of the ring, the honest answer is we just don’t know if price stresses will ease around the world towards the end of the year. The arm wrestle is set to continue, although I would argue that the state of the world is inconsistent with US 10-year yields continuing to hover around 1.60%. A move higher to 2.0% is more realistic. That might cause a few temporary nerves in the equity and precious metals space, but it should not derail the buy-everything rally. Only a tapering of central bank quantitative support will do that, and it will be fun to watch that unfold from the side-lines.

One central bank we can guarantee will not mention the t-word this week will be the ECB. The rate decision should be a non-event, with the PEPP remaining unchanged. If anything, having never stopped quantitatively easing since the GFC, Europe is more vulnerable to tapering noise than the US. Nor will the ECB want to jeopardise the ongoing Eurozone recovery. Such talk is best left until after the long European summer holidays where a bombed-out tourism sector hopefully receives a boost.

Treasury Secretary Janet Yellen said overnight that she would welcome higher interest rates as a sign of recovery. I totally agree, but with the arm wrestle mentioned above, Ms Yellen will be waiting along with the rest of us. Markets have shrugged off the comments as they did the news from the G-7 of an agreement on a minimum15% corporate tax rate. Most of Asia, particularly Singapore and Hong Kong, are either at or above that number. You can make the same argument globally as well.

China has just released its May trade data, and in USD terms, the surplus fell unexpectedly to $45.53 billion. The fall was led by exports which rose a mere 27.90% YoY versus the 32.10% expected. To be honest, that is a cracking number by anybody’s standard and show that global demand remains robust. That likely explains why the slight miss in exports has had little to no reaction in Asia.

This week’s highlights will be China Inflation data on Wednesday, and US Inflation data on Thursday, with an ECB rate decision thrown in for good measure. We actually receive a flood of inflation prints from around the world, but it’s the big three that really matter. It would take a massive upside surprise move the inflation arm wrestle in favour of the inflationistas. Given the stubbornness of the US yield curve to steepen, the risk, if anything, is that lower to on market prints see it flatten, which should be another boost for equities if we needed another one. The US Dollar would also suffer in this scenario.

Otherwise, it looks like a quiet day ahead for Asia. Another Non-Farm lowball lifted US equities on Friday. But the Yellen interest rate comments overnight look to have added a cautious note to Asia, with China’s export number not lifting the mood.

Asia’s equities are mixed

Friday’s US Non-Farm Payroll data dampened inflation fears and lifted US stock markets. The S&P 500 rose 0.88%, the Nasdaq leapt 1.47% higher, and the Dow Jones climbed 0.52% in a very business-as-usual session. US index futures have retreated slightly in Asia, falling around 0.10% in muted trading.

Asia has refused to blithely follow Wall Street higher today, presenting a much more mixed picture. The Yellen interest rate comments adding a note of caution. The Nikkei 225 is 0.35% higher, while the Kospi has added 0.15%. Mainland China markets have fallen, though, after export data underperformed this morning. The Shanghai Composite is 0.20% lower while the CSI 300 has fallen by 0.45%, with Hong Kong 0.80% lower.

Singapore has risen by 0.75%, with Kuala Lumpur down 0.75% and Taipei edging 0.40% lower. Jakarta is flat while Bangkok has risen 0.80%, with Manila falling 0.45%. Australian markets have shrugged off an impressive rise in ANZ Job Advertisements and an upgrade in outlook by S&P. The ASX 200 is down 0.30%, with the All Ordinaries edging 0.15% lower.

Without an overriding theme to drive direction today, local markets have been left to their own devices as Asia seems content to await developments in Northern Hemisphere markets as the week gets started.

Currency markets struggle for direction

After a week away, not a lot has changed in the currency space. Overall, the US Dollar looks slightly weaker as inflationary fears refuse to show up beyond all reasonable doubt in the data prints. That has led to a period of noisy but ultimately range-trading markets. The dollar index unwound most of Thursday’s gains on Friday, falling 0.40% to 90.13, where it remains in Asia. The index remains in a broad 89.50 to 90.50 range, with a breakout indicating the US Dollar’s next directional move.

Similarly, the EUR/USD and GBP/USD retraced losses after the Friday US data. EUR/USD is unchanged at 1.2165 while GBP/USD has eased 20 points to 1.4140 in Asia. Ultimately, EUR/USD is bouncing around in a wider 1.2100 to 1.2150 range this past fortnight, while GBP/USD has clear support and resistance at 1.4100 and 1.4250. In the bigger picture, only failure of 1.2000 and 1.4000 respectively undermine the longer-term bullish outlook for both.

USD/JPY showed once again its sensitivity to rate differentials, falling 0.70% to 109.50 on Friday as US long-dated yields tumbled after the Non-Farm Payrolls. Almost unchanged at 109.55 today, failure of 109.30 signals a deeper retracement to 108.50, although a rise in US yields will see the cross move back above 110.00 once again. The US inflation data on Thursday looms as an important directional driver.

Asian currencies are locked in neutral after the PBOC succeeded in putting a floor under Yuan appreciation last week. USD/CNY at 6.4000 today, hardly changed from a week ago. Until the PBOC signals comfort at more Yuan appreciation, the broader Asian grouping will likely mark time around these levels.

Oil markets grind higher

Oil prices crept higher on Friday after the soft payroll data, a trend that had continued throughout the week. An improvement in India Covid-19 case numbers and the ongoing recovery in the US and Europe ahead of their summer is supporting prices. OPEC+ is content to postpone tinkering with their production targets for now.

In the absence of any significant weekend drivers, oil prices have experienced some long-covering this morning, helped along by soft China export data. Brent crude has eased by 0.20% to $71.45 a barrel, while WTI has edged 0.15% lower to $69.30 a barrel in a quiet Asian session.

With some improvement in the pandemic situation in India and the recovery in the US, China and Europe remaining on track, oil should remain a buy on dips, with no warning signs coming from the technical momentum indicators.

Only a fall through $70.00 a barrel by Brent crude, or $68.00 from WTI, would signal a deeper downside correct. Brent crude remains on track to test resistance at $72.00 a barrel this week and WTI at $70.00.

Gold runs into headwinds above $1900.00

A soft Non-Farm Payroll saw longer-dated US yields tumble on Friday, lifting gold 1.10% higher to $1891.50 an ounce. However, that only retraced half of the 2.0%+ losses seen on Thursday and hints that gold’s upward momentum will be more sensitive to negative price inputs from now on.

Although gold is no longer overbought from a technical perspective, the RSI retreating to neutral territory after Thursday’s wipe-out, it appears that gold’s correlation to US yields is back. With an avalanche of inflation data due this week, notably from the US and China, gold may struggle to rally and maintain gains above $1900.00 an ounce.

I expect gold to jump around in a choppy $1860.00 to $1900.00 range this week, with last week’s high at $1817.00 an ounce unlikely to be retested this week.