Main macro themes

Number of new Covid-19 cases has increased in many countries amid the delta variant spreading. Importantly, the vaccines appear to be effective, as for example in the US, authorities have reported that virtually all new hospitalizations and deaths are among the unvaccinated people. With most of the elderly and risk groups fully vaccinated already, new strict lockdowns in western economies appear unlikely. Vaccine inequality remains high, though, with coverage being much weaker in most emerging economies. Read more in our latest Covid-19 Update, 29 July.

ECB introduced a new strategy framework, with a symmetric 2% inflation target. ECB will aim for inflation to fluctuate around the 2% target, but the implementation will be more flexible compared to Fed’s Average Inflation Targeting (AIT), which requires inflation to overshoot the target after a period of below 2% inflation. ECB’s first meeting since the new strategy took effect was mostly about aligning the language to the review outcome. The main new element worth highlighting is a more dovish forward guidance stating that inflation has to reach 'two per cent well ahead of the end of the projection horizon and durably for the rest of the projection horizon' which compares 'to the end of the forecast horizon' previously. We see it as more of a change in wording rather than substance, since the change is more related to the duration of support rather than the size of monetary stimulus (see ECB Research: Stepping up on inflation ambitions, but not on tools).

The Fed continued to move closer to making monetary policy less accommodative, see Fed Research: Review -" Another step towards less accommodative monetary policy. The Fed now says that "the economy has made progress towards" the goals and that the Fed "will continue to assess progress in coming meetings". The Fed repeats, though, that high inflation is "largely reflecting transitory factors" and highlights that labour market developments continue to be key for the timing of the tapering of asset purchases. We continue to expect that the Fed will turn more and more hawkish in coming months so that actual tapering will start in Q4 and the Fed will signal this at the September meeting when we have had two more employment reports.

Market developments

Risk sentiment has been volatile in July. Equity markets rebounded after a big sell- off last week, helped by strong Q2 earnings reports and a patient Fed. Chinese stocks plunged after the government stepped-up its crackdown on big tech and the private education sector, but sentiment stabilized after China took steps to calm investor fears. US bond yields were little changed after the Fed meeting with 10Y Treasury yields still below 1.30%, while 10Y Bund yields eased further to -0.46%.

USD continued to weaken on a broad basis with EUR/USD climbing above 1.18 and USD/JPY falling below 110. Scandies gained ground vis-a-vis EUR, with EUR/SEK falling to 10.18 and EUR/NOK to 10.40. 

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