Reflation trade wanes in US, second try may be staged in EU
The European currency made piece with the US dollar for several days maintaining relative equilibrium around 1.14. Two major rivals suspend struggle amid a leveling yield curve in the German and US bond markets. Talking heads optimism over global growth momentum caused investors to dampen low-yield bonds while the release of the weak report of the NFP and Fed Minutes managed to partially reverse the trend.
The minutes of June ECB meeting also turned out to be rather ambiguous: the forecast for core inflation were downgraded to 1.4% in 2018, with the economy sticking to the line of pickup, the report suggests. Wages respond to the rest of the positive in the economy quite badly - due to the structural features of the labor market of the eurozone. The Phillips curve, suggesting an inverse relationship between inflation and unemployment, was practically flattened, indicating a very weak connection of wages with a jobless rate.
However, if the reflationary forces mentioned by Mario Draghi are only gaining momentum in the euro area, investors in the United States have already lost faith in them. The large-scale reforms that were part of Trump's election campaign for the most part have not yet been implemented and investors are beginning to lose patience, preparing for market correction. And if the dollar has already demonstrated this disappointment, then flattening indices curve may prove to a be first sign of bearish consolidation. The industrial DOW index shows signs of attempts to establish a downward pressure, which have so far been successfully eliminated. Bulls may be ready to withdraw from the US indices causing massive drop and move into European assets waiting for the Fed Chairman Janet Yellen speech. In her address on Wednesday and Thursday, she will probably try to support the US currency by saying that the regulator will soon need to start reducing the balance sheet and the economy needs at least one more rate hike. However, weak wage growth, as follows from a recent NFP report, will probably make statements less hawkish.
Among other positive moments there is rising volume of consumer lending in the US economy. In May, US borrowers received $18 billion in loans, $5 billion more than forecasts, what indirectly indicates a possible increase in consumption and high economic confidence.
The oil market stroke by negative news on demand outlook. Consumer inflation in China slowed to 1.5%, with a forecast of 1.6%, indicating a weakening of economic growth. Mortgage loans declined in Australia to 1%, which plays in favor of keeping the RBA low interest rates, indicating some cooling of the real estate market.
Regards,
Idiatulin Arthur
Tickmill Analyst
The minutes of June ECB meeting also turned out to be rather ambiguous: the forecast for core inflation were downgraded to 1.4% in 2018, with the economy sticking to the line of pickup, the report suggests. Wages respond to the rest of the positive in the economy quite badly - due to the structural features of the labor market of the eurozone. The Phillips curve, suggesting an inverse relationship between inflation and unemployment, was practically flattened, indicating a very weak connection of wages with a jobless rate.
However, if the reflationary forces mentioned by Mario Draghi are only gaining momentum in the euro area, investors in the United States have already lost faith in them. The large-scale reforms that were part of Trump's election campaign for the most part have not yet been implemented and investors are beginning to lose patience, preparing for market correction. And if the dollar has already demonstrated this disappointment, then flattening indices curve may prove to a be first sign of bearish consolidation. The industrial DOW index shows signs of attempts to establish a downward pressure, which have so far been successfully eliminated. Bulls may be ready to withdraw from the US indices causing massive drop and move into European assets waiting for the Fed Chairman Janet Yellen speech. In her address on Wednesday and Thursday, she will probably try to support the US currency by saying that the regulator will soon need to start reducing the balance sheet and the economy needs at least one more rate hike. However, weak wage growth, as follows from a recent NFP report, will probably make statements less hawkish.
Among other positive moments there is rising volume of consumer lending in the US economy. In May, US borrowers received $18 billion in loans, $5 billion more than forecasts, what indirectly indicates a possible increase in consumption and high economic confidence.
The oil market stroke by negative news on demand outlook. Consumer inflation in China slowed to 1.5%, with a forecast of 1.6%, indicating a weakening of economic growth. Mortgage loans declined in Australia to 1%, which plays in favor of keeping the RBA low interest rates, indicating some cooling of the real estate market.
Regards,
Idiatulin Arthur
Tickmill Analyst
This analysis is provided as general market commentary and does not constitute investment advice. Past performance is not indicative of future results