The Daily Update: The Week Ahead

Last week began with concerns about the growth outlook on worries over the spike in Covid infections around the world. This led to a slide in risk assets across the board, equities (it was the Dow's biggest one-day fall this year) , EM and commodities, with oil leading the way with 6-7% in losses on the day. Oil’s plight was not helped by the OPEC agreement to increase production, 400k a day starting next month. UST rallied aggressively on the back of this with the 10-year at one point trading at just below 1.17%, down over 10 bps on the day. The dollar picked up a bid on the back of the risk off worries (up for the fourth straight day and trading at the highest level since the beginning of April).

On Tuesday the risk off impulses quieted down. Global equity markets were up on the day, while bond prices overall stabilised. Yet the dollar remained largely flat on the day after making new cycle highs against a variety of currencies over the last 48 hours. Economic releases of note were building permits down 5.1%, the market had been going for up 0.7%.

The biggest rally in US equities in four months has helped stabilise global shares midweek with treasury yields drifting higher. We also had Biden wading into the inflation debate, dismissing concerns that the U.S. will experience persistent inflation as the economy emerges from the global pandemic. Over on Capitol Hill, Republicans thwarted a move to open the debate on a USD1.2tn bipartisan infrastructure. 11 Republicans said they are willing to vote for the bill as soon as next week. They hoped to have resolved the outstanding issues with the proposal by then, including one biggest one, how to pay for it.

On Thursday ECB was the main event of the day. As widely anticipated, the central bank held monetary policy steady. Interest rates were left unchanged, with the rate on the main deposit facility remaining at -0.5%, the benchmark refinancing rate at 0% and the marginal lending facility at 0.25%. However not all the members are singing from the same hymn sheet it seems. According to various news outlets two ECB policy makers did object to the new interest rate guidance. Belgian Governor Pierre Wunsch and Bundesbank President Jens Weidmann were concerned about wording that can be seen as making too much of a long-term commitment to loose monetary policy.

We also had the initial jobless claims in the States. In another reminder that the labour market is not out of the woods, new claims for unemployment benefits rose to a two-month high last week. Unemployment benefits jumped from 368,000 to 419,000 in the week ended July 17th the highest level since mid-May. The consensus had been for 350,000 jobless claims.

The recovery for risk assets continued into the weekend as the S&P500 made a new all-time high. However, the surge in US equities did not have any significant effect on either treasury yields or FX as both traded fairly choppy throughout Friday. Going forward the new delta variant of the virus is again threatening to slow the economic recovery in several countries with new social restrictions being introduced. However, the feeling is that we should learn to live with the virus as we do with the flu which kills hundreds of thousands every year around the world. While the existing vaccines seem to have lost some of their ability to prevent the illness, they remain a powerful protection against hospitalisation and death.

For the week ahead we have the FOMC meeting ending with a decision Wednesday afternoon; we get our first look at Q2 GDP Thursday with weekly initial jobless; core PCE data for June will be reported Friday; Fed manufacturing surveys for July will continue to roll out. The US Treasury will sell USD60bn 2y notes, USD61bn 5y notes and USD62bn 7y notes. The eurozone will report Q2 GDP Friday, with German IFO later today with July CPI and unemployment data Thursday. Australia reports Q2 CPI Wednesday. In Asia Japan reports preliminary July PMI readings and June department store sales Monday. June labour market data, IP, retail sales, and housing starts will all be reported Friday.

Have a good week ahead.