It was a wild session in financial markets. The dollar took a hit early on after the ADP jobs report disappointed, only to stage a massive comeback after the Fed’s vice chief talked about rate increases and the ISM services survey hit a new record high. The Fed’s second in command - Richard Clarida - said that the conditions for raising interest rates could be met by late 2022. He also stressed that the economy has made progress towards the goals required for tapering asset purchases, foreshadowing a potential announcement in the coming months.
Make no mistake, Clarida’s views are tremendously important. He is both a member of the Fed’s inner core and a true centrist, so when he throws his weight behind something, that is typically the consensus view within the FOMC. Indeed, the San Francisco Fed president soon echoed his remarks.
As for the dollar, this is great news. The Fed is slowly but surely setting the stage for dialing back stimulus. For now, everything hangs on tomorrow’s nonfarm payrolls. The labor market needs to come back in spectacular fashion for the Fed to take the next step soon.
But in the bigger picture, it doesn’t really matter whether tapering is announced in September or December. What matters is that the Fed is years ahead of the ECB and the BoJ in the normalization game. Ultimately, this argues for a stronger dollar against the euro and the yen. That said, for real US yields to recover from depressed levels and the dollar to shine, actual tapering might be needed, not just talk.
BoE neutral, with a touch of optimism
The main event today will be the Bank of England decision. The UK economy is humming along nicely and a couple of BoE officials have recently called for withdrawing some stimulus, but it is probably too early for that. Most policymakers don’t share this view. They believe that withdrawing stimulus too early would be an even bigger risk as it could hamstring the recovery, especially now that the government is also phasing out its jobs programs.
The reaction in sterling today will depend on the votes around QE and the updated economic forecasts. The most likely conclusion is a 6-2 split vote, where most members favor keeping their asset purchase program intact but Saunders and Ramsden dissent, calling for an immediate end.
Coupled with some rosy macroeconomic forecasts, that might be enough to lift the pound. When two members vote for an immediate withdrawal of stimulus, it shows which way the wind is blowing. Otherwise, if the vote is 7-1, the pound could slide.
Meme stocks, gold, and oil
Meanwhile, the meme stock madness has returned for another round. This time it was Robinhood, whose stock soared 50% yesterday. This was the first day when options on the stock traded. Massively skewed towards calls. Just another reminder that options drive stock markets these days.
In the commodity sphere, gold went for a rollercoaster ride. Bullion soared initially as the ADP report disappointed and the dollar got hammered, before surrendering those gains once Clarida spoke. The fundamental picture doesn’t seem attractive with the Fed preparing to take its foot off the accelerator, something also endorsed by the chart, which is ready to post a ‘death cross’.
Finally, oil prices took another beating yesterday after a surprising build in US crude inventories compounded fears over a slowdown in demand, as the Delta variant threatens to kneecap consumption in developing economies.