Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Chief Macro Strategist
Summary: The shocking US Retail Sales jump in May helped keep the USD resilient yesterday despite a strong headwind from the ongoing rebound in risk appetite. Today we watch Powell testimony before a House Financial Services Panel and whether anything can stop the steep rebound in risky assets from the Monday lows.
The early New York hours yesterday saw a rather vicious bout of volatility, first as strong US Retail Sales boosted risk appetite and hopes for further evidence of a strong economic recovery and then a move in the opposite direction when the news crossed the wires that the new Beijing outbreak of Covid19 has prompted officials there to shut schools city-wide. Equities were quick to recover from the Covid19 concerns and the USD ended the day relatively firm, especially given recent correlations that tend to see it lower when broad risk appetite is strong.
Many have been quick to point out that the US Retail Sales rebound (a stunning +17.7% headline month-on-month rebound relative to upward revised -14.7% in April) is not echoed in other data and that one of the likely drivers for the strength of the rebound had more to do with the stimulus checks and additional Federal jobless benefits that were launched in March and April than in any return to post-lockdown normalcy. The 159 million stimulus checks alone (of 1200 dollars for individuals and 2400 for married couples) have resulted in a $267 billion cash injection in the economy that represents over 50% of a typical month of retail sales. Worth noting on that account that the stimulus check is a (so far) one off, while the Trump administration has come out against any extension of the federal benefit providing an additional 600 dollars per week for the unemployed that expires at the end of next month.
There is little to inspire the FX trader in this market until recent pivot points give way. Sterling is perhaps of the most technical interest given the avoidance of a breakdown at the start of the week, while it has likewise avoided breaking back through to the upside by fading back lower after a precise test of the 200-day moving average just below 1.2700. The Bank of England is up tomorrow.
Today’s Powell testimony before a House Financial Services Panel may prove more interesting than yesterday’s session in terms of the political temperature, given House members closer proximity to voters and therefore urgency to respond to their needs. The spin from yesterday’s session before a Senate panel was a Democratic effort to encourage the Fed to look more into support for state and local governments, where tax revenues have dried up and where the risk of fresh mass layoffs is high without further support.
Chart: EURUSD
EURUSD rather typical of the market indecision here as we have been consolidating for a week now after reaching the 1.1400+ area last week and the market eyes the potential for a further correction in the “gappy” area between the 1.1000+ resistance that was broken on the way up and the Friday low just above 1.1200. In short, we have plenty more room for consolidation in that gap area without erasing the bullish impression from the recent rise from the lower range – the troubling aspect here is whether a weaker USD requires continued constant ramping in risk appetite to enable a fall. Friday sees the next EU Council meeting where we watch for the degree of solidarity on the plans to launch a recovery package via the EU Budget in coming years.
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