The focus this week is the FOMC meeting, so any moves to the upside are likely to be sold into and vice-versa until we get through Chair Powell’s press conference tomorrow night. There is still a supply issue when it comes to workers looking for work, but also there are signs that the job vacancies may be on the verge of tightening.
A slightly subdued day in the forex markets with US dollar strength creeping in to basically leave most of its peers flat for the day apart from the yen. The heatmap indicates that it was a risk-on day which should have been good for equities and yields but overall, the markets appear to have found levels ready for the FOMC meeting minutes tomorrow and are likely to stay within these ranges until then.
Despite lowering its growth forecast for 2021 slightly to 5.9% from 6%, the International Monetary Fund (IMF) left its growth expectations for 2022 unchanged at 4.9%. According to the IMF's World Economic Outlook, monetary policy will need to balance fighting inflation and financial risks while also supporting the economy. Growth is expected to be 6% in the United States in 2021, 5.7% in Canada, and 3.1% in Germany. The Atlanta Fed's GDPNow forecasting model has Q3 GDP for the US at 1.3% and from looking at the fiscal flows GDP for Q4 could be 0%. If nothing changes in terms of fiscal spending the worry economists now have is for a period of stagflation, so the IMF may have to lower their expectations for 2022. During stagflation, the economy grows slowly, and unemployment is relatively high, while at the same time prices rise (inflation). The Chief Economist of the International Monetary Fund, Gita Gopinath, said in her report that, due to the unknown nature of the recovery, considerable uncertainty remains, and inflation could exceed forecasts for a variety of reasons. Vaccination pace, supply disruptions, and climate change are also factors.
The US dollar index has pushed higher on hopes of a rate hike sooner rather than later to combat the rising inflation, though the FOMC has stated that they will reduce their asset purchases first. Reducing QE will be the same as raising short-term interest rates slightly.
Today’s Bureau of Labor Statistics job openings report showed a decline of 659,000 in August compared to July. Openings dropped by 0.4 percentage points to 6.6%, according to the JOLTS survey today. The survey said the number of hires decreased by 439,000 to 6.3 million, and the hiring rate fell by 0.3 percentage points to 4.3%.
In the earlier trading session today, the Centre for European Economic Research (ZEW) reported that the euro area's economic sentiment declined further during October. The economic expectations index fell by 10.1 points month over month to 21.0, while the current situation index fell 6.6 points to 15.9. In Germany, both the sentiment and expectations indexes, as well as the current situation estimate index, dropped to 22.3, respectively.
The EURUSD took the bad economic data worse than expected and this has been a large portion of the rise in the US dollar index. The market structure, momentum, and sentiment around the eurozone are declining as can be seen in the daily EURUSD chart.
To add to the woes of Europe, Brexit negotiations may be over, but the fallout remains up in the air. According to David Frost, the UK will submit an amended version of the Northern Ireland Protocol to the EU. He made his announcement the day before the European Union publishes its proposals to change the protocol, effectively rejecting the proposals before they are published. In Frost's view, the new UK written protocol "looks more like a normal treaty" and includes international arbitration instead of European Court of Justice jurisdiction. According to him, the current version of the protocol has a negative impact on the population, businesses, and government of Northern Ireland. He called the EU's refusal to renegotiate the protocol a "historic misjudgment."
The GBPUSD had been unable to capitalize on the US dollars inactivity yesterday and with renewed buying of the greenback, the GBPUSD has found serious resistance and is starting to work its way back down. 1.3600 will be a hard nut to crack unless there is a significant depreciation in the US dollar.