Powell reaffirms commitment to pursuing full employment

• Federal Reserve Chair Jerome Powell on Tuesday reaffirmed the Fed’s intent to encourage a broad and inclusive recovery of the job market, and not to raise interest rates too fast based only on inflationary fears. Powell also said the central bank would keep its eyes focused on a broad set of labour market statistics, including how different racial and other groups are faring. The Fed chief was pressed by lawmakers on how the Fed was balancing rising inflation risks with its promise to ensure the economy recovers all the jobs lost after the onset of the coronavirus pandemic. While there was little perceived conflict between those goals, since Powell last appeared before the subcommittee in September, the central bank's outlook for inflation has doubled. Projections released last week by the Fed showed prices in 2021 are expected to increase at a 3.4% rate, compared to the 1.7% projected as of last September. Powell's own focus is on returning the economy to the conditions of early 2020, despite some of his colleagues now openly suggesting the pandemic prompted so many people to retire it may be unrealistic to think the economy can return to the pre-crisis level of employment before the Fed needs to tighten monetary policy.
• US home sales fell for a fourth straight month in May as reported by the National Association of Realtors on Tuesday. Record-high prices amid low inventory put-off potential buyers, a trend that could persist for a while as builders are unable to deliver more houses because of expensive input costs such as lumber. Existing home sales dropped 0.9% to a seasonally adjusted annual rate of 5.80 million units last month. Sales fell in the Northeast, West and the densely populated South. In the Midwest, which is generally considered as having more affordable homes, sales rose. As millions of Americans sought more spacious accommodations for home offices and schooling during the pandemic, the single-family housing segment saw the most declines. Single-family home sales, the largest segment of the housing market, fell 1.0% to 5.08 million units, the lowest since last June. Sales of multi-family homes were unchanged, though they continue to grow as more people return to cities. Home resales, which account for the bulk of U.S. home sales, surged 44.6% YoY. There were 1.23mn previously owned homes available for sale in May, up 7.0% from April and down 20.6% from one year ago. The median existing house was up 23.6% from a year ago to an all-time high of USD 350,300 in May, with sales remaining skewed towards bigger homes. First-time buyers accounted for 31% of sales in May, down from 34% a year ago. All-cash sales made up 23% of transactions, up from 17% last May. At May's sales pace, it would take 2.5 months to exhaust the current inventory, down from 4.6 months a year ago. Properties typically remained on the market for only 17 days in May, down from 26 days a year ago. 
• UK manufacturers reported the strongest growth in output on record. The data by the Confederation of British Industry's monthly index for industrial output growth over the past three months was +37, the highest since the CBI records began in 1975, aided by the lifting of coronavirus restrictions. The CBI expect to raise their prices at the fastest pace in nearly 40 years, adding to signs of growing inflation pressures. The CBI's orders balance - measuring the difference between the proportion of employers who say order levels are above or below normal - hit +19 in June from +17 in May, its highest since 1988.The survey's price balance rose to +46 from +38 in May, the highest since 1982 and well above its average of +3.

Today’s Economic Data and Events

• 11:30     EU    German Manufacturing PMI (Jun)   Forecast 64.4
• 12:30     UK    Composite PMI  Forecast 62.9
• 12:30     UK    Manufacturing PMI  Forecast 65.6
• 12:30     UK    Services PMI  Forecast 62.9
• 16:30     CA    Core Retail Sales (MoM) (Apr) Forecast 4.30%
• 18:00     US    New Home Sales (May) Forecast 863K
• 18:30     US    Crude Oil Inventories     Forecast -7.355M

Fixed Income

• Fed speakers, led by chair Jerome Powell, played down the prospect of rate hikes in comments yesterday with Powell appearing before a US House committee. He acknowledged the build-up in inflation but noted it was related to the reopening of the economy and that they would ultimately fall. He explicitly said that the Fed would not raise rates “preemptively”.”
• After several days of sharp moves, the US Treasury market took Powell’s comments in their stride. Yields fell across the curve although the moves were relatively contained after the last few days. The 2yr yield closed down almost 3bps at 0.2281% although it has recovered much of that drop in early trade today while the 10yr fell more than 2bps to 1.4632%.
• The drop in UST yields helped to support emerging market bonds although the moves there were small. Yields fell on Indian, Turkish and South African bonds although the decline was contained to around 1bps or less.

FX

• As dust settles on the market after last week’s FOMC and commentary from Fed officials remains highly dovish the dollar has wobbled. The DXY index fell 0.2% overnight to 91.756 and is now about 1.4% higher than it was prior to the Fed versus almost 2% immediately afterward. Fed officials did note they were talking about tapering as the next policy option rather than rates and when that conversation begins in earnest it should provide a floor for the dollar.
• Gains against the dollar were widespread if a little muted overnight. EURUSD has pushed back up above the 1.19 level, rising around 0.2% yesterday. ECB have been dovish in recent commentary with president Christine Lagarde saying in recent days that the bank had room to cut rates if required while Olli Rehn noted the steady need for stimulus and Peter Kazimir said there was no “reason to change” accommodative policy. Nevertheless, with an economy opening up and set to outperform the US in H2 2021 the grounds could be set for the Euro to move higher over the next several months.
• Improving risk sentiment appeared to weight on the Yen with USDJPY pushing higher to 110.65 overnight, a gain of 0.34% while it continues to rise in trade today. The yen is testing its highest level in the past year and 111 would be the next major target.
• Sterling will be focused on the Bank of England meeting this week and moves in the last few days have been more controlled. We don’t expect any imminent announcement of tightening policy at this stage.

Equities

• One of the big stories in equities yesterday was the ongoing rebound in growth stocks as value stocks, which had outperformed in recent months, saw slower growth. While the Blue Chip Dow Jones added just 0.2% yesterday, the tech-heavy NASDAQ gained 0.8%, with some of the tech giants among the biggest gainers. The S&P 500 gained 0.5%.
• Equity markets were on the front foot around the world, with the Nikkei being a notable gainer as it closed up 3.1%. The index is trading higher still this morning, but remains down -1.3% w/w. Elsewhere in Asia the Shanghai Composite added 0.3% yesterday.
• In Europe, the composite STOXX 600 added 0.3%. The FTSE 100 closed 0.4% higher.
• Within the region, the DFM gained 0.3%, the ADX 0.5% and the Tadawul 0.3%.

Commodities

• Oil prices took a breather yesterday with both Brent and WTI declining. Brent futures fell 0.1% to USD 74.81/b but have already recovered to back above USD 75/b while WTI fell 0.8% to USD 73.06/b. There were few fundamental catalysts to derail oil going higher overnight while press reports suggest OPEC+ is considering whether to increase production at its next meeting.

Click here to download charts and tables