MACRO SETTING OVERVIEW:
- Low growth and high inflation sound a lot like stagflation
- US equities may risk that US Treasury yields continue to rise
- The US dollar could have been sold out too quickly, given the stability of the Fed’s rising odds
It’s not a hot Vax summer after all
In this week’s issue of The Macro Setup, featuring Dan Nathan and Guy Adami, we discussed what the recent rise in infections with the disappointing US economic data series and COVID-19 delta variant means for the US dollar, US equities, gold, oiland bitcoin.
Following the disappointing August U.S. non-farm payroll report, has U.S. Treasury returns moved… higher? While this may be confusing for some, a different perspective may be justified. Weaker US employment data against the rise in COVID-19 infections is likely to mean that the Federal Reserve is likely to decline in the near term. A higher stimulus means higher growth and inflation premiums discounted over the long run of the yield curve.
Higher U.S. Treasury yields during QE — and lower U.S. yields when QE is constrained — are not surprising, as evidenced by the U.S. Treasury’s 10-year yield graph shared in the videos above. The bigger picture, however, is that higher US Treasury yields combined with the stability of the Fund’s interest rate coefficients (“tightening is not tightening”) and the possible weakness of US stock markets have created a mix that may be favorable for the recently impoverished US dollar. .
But what can the Fed do if growth scares markets by giving up stimulus? The toxic combination of low growth, high inflation and disappointing labor market data sounds awful like “stagflation,” a political mystery that the Fed may not solve because Guy stopped leaving arrows. Marked Adam.
This may mean that in the near future there may be some weakness in the goods, especially crude oil (growth sensitive) and the price of gold (yield sensitive). EUR / USD This may be due to a drop below 1.1800 USD / JPY interest rates can be polished towards 111.00; however, recent gaps are not expected to break as market participants digest the confusing mix of data and news headlines after the US working day.
* Dan Nathani, Guy Adam and my comment on the US dollar (via the DXY index) US S&P 500, including gold prices, please watch the video at the top of this article.
CARDS OF THE WEEK
Spread of Eurodollar futures contracts (September 2021-DECEMBER 2023) [BLUE], USA 2s5s10s Butterfly [ORANGE], DXY index [WHITE]: Graph of daily rates (January 2021 – August 2021) (Figure 1)
TECHNICAL ANALYSIS OF THE GOLD PRICE: DAILY CARD (JULY 2020 – SEPTEMBER 2021) (TABLE 2)
EUR / USD PRICE TECHNICAL ANALYSIS: AGENDA (MARCH 2020 – SEPTEMBER 2021) (TABLE 3)
– Written by Christopher Vecchio, CFA, Senior Strategist