Vacation Wrap-Up: Market themes over the past three weeks

Strategy: Vacation Wrap-Up - US Dollar rebounds on strong labour market and the Fed
 

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 and the Delta variant present a downside risk for economic growth in the fall. Read more in our latest Covid-19 Update, 6 August.
   
• Global manufacturing sector showed signs of peaking over the summer. The July manufacturing PMIs either stabilised (Europe) or fell back (China) with both headline and leading new orders indices declining slightly. The key reasons include weaker stimulus as well as fading catch-up effect as western economies are now near pre-pandemic levels. Despite the peak, relatively high levels of PMIs suggest that growth will continue at a brisk pace towards the end of the year, also as the service sector gains momentum, supporting job creation with non-farm payroll surprising on the upside.
   
• 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. At its July meeting ECB aligned its forward guidance in a more dovish direction to complement the new strategy framework, 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 (see ECB Research: Stepping up on inflation ambitions, but not on tools, 22 July).
   
• The Fed continued to move closer to making monetary policy less accommodative, see Fed Research: Review - Another step towards less accommodative monetary policy, 28 July. 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 one more employment report.

Market developments

• Risk sentiment has generally been strong recently. Equity markets have been supported by strong Q2 earnings reports and a patient Fed. US bond yields creeped higher over the past week after falling significantly over the summer as the Fed has sent slightly more hawkish signals and after fairly strong macro releases. These signals have also supported the USD with EUR/USD falling below 1.18. Scandies gained ground vis-a-vis EUR, with EUR/SEK falling to 10.16 and EUR/NOK to 10.40. 

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