Intraday Market Thoughts

Macklem vs Powell vs Orr

by Adam Button
Jul 14, 2021 14:17

Overnight, the RBNZ signalled it will end QE (fully tapers) this month. Moments ago, Powell's prepared speech indicated inflation is well below the level requiring tapering and in about 30 mins from now, Bank of Canada's Macklem will announce Canada's 2nd tapering of the year. Yesterday, a Fed official brushed off a high CPI print but after a weak bond auction, the market took notice. The US dollar is down across the board ,with the kiwi leading the pack. The Bank of Canada decision is at 2 pm GMT, followed by Macklem's speech 1 hr later. Ashrafs suggested for the WhatsApp Broadcast Group a 2-pronged trade on CAD ahead of the BoC decision.

Macklem vs Powell vs Orr - Tweet Taper (Chart 1)

US June CPI rose 5.4% compared to 4.9% y/y expected in the largest rise since 2008. Core and monthly numbers were similarly strong and the initial reaction in the market was a higher dollar.

As the minutes ticked by though, the dollar strength began to fade. Part of that was market participants picking apart the report. The jump in used car prices is undoubtedly transitory. They rose another 10% in June for a 45% y/y increase – a shocking number no doubt but that rise won't continue and there are already signs that used cars will be a drag on CPI in the months ahead.

There were other quirks too, including energy and some durable goods. In all, 6 items accounted for 55% of the increase in June. As that was digested, the US dollar gave back its gains, even completing the round trip against the pound, kiwi and aussie.

There are lingering concerns though. Rent inflation has risen in consecutive months in what could be a long-term tailwind for inflation.

The dollar got a second lift on a 30-year bond auction. The yield at 2.000% was much higher than 1.976% expected and that triggered a second rally in the dollar and a continued selloff in bonds that pushed 30's to 2.05%.

The price action looks a bit like bonds reversing the recent gains or pricing in higher inflation. As yields ticked up, stocks also ticked lower.

In the day ahead, we will get the BOC decision and Powell testimony. For the BOC, a taper is in the cards and a strong consensus has emerged around $1B, which would reduce weekly purchases to $2B. Also keep a close eye on forecasts as inflation is likely to move higher and confidence in the recovery may rise. That's because recent lockdowns didn't weight on growth as much as expected and vaccination rates are now just shy of 80%.

For Powell, the main message of transitory inflation is unlikely to change but he may offer more on the taper timeline. On Tuesday, SF Fed President Daly offered an early hint at a taper timeline for late 2021 or early 2022. That fits with market expectations but a reiteration from Powell would firm up the sequencing.


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