There are quite a number of things going on in markets at the moment, even if the main focus remains on the US jobs report on Friday. Let's take a closer look to get a better sense of how things are playing out.
White House says employment may "cool off"
Eamonn and Greg had the headlines earlier this week here and here respectively. That could be a reason for why the dollar has been softer or at least not as strong in the aftermath of Jackson Hole. But so far, the Fed message remains clear i.e. inflation is the number one priority at the moment. A 75 bps rate hike is what markets are likely leaning towards but it needs confirmation from Friday's data and more importantly the US CPI figures on 13 September.
Equities stay under pressure
The early gains yesterday were dashed by the time Wall Street took to bat in trading yesterday. While there was a bit of respite early on today, we have also seen that vanquished with European indices now down by close to 1% and S&P 500 futures falling flat after having been up by 30 points at one point during the day.
The technicals continue to do the talking and a further break in the S&P 500 below its 50.0 Fib retracement level at 3,982 could spell more danger for stocks in the sessions to come.
China looks to slow down or put a stop to the latest yuan drop
After having allowed the yuan to slide in the past few weeks, the PBOC is starting to draw a line on the situation near 6.90 today as noted earlier here. Reports on state-owned banks also bolstering the yuan serves to reinforce the notion and another way to look at things is that this does take away one of the tailwinds for the dollar as of late.
No escape from COVID-19 restrictions yet in China
The constant downgrade to Chinese growth prospects this year has been a major headwind for risk assets and the data is starting to show that as well. As such, the continued headlines involving more COVID-19 restrictions such as this one today will do little to ease worries surrounding China and the global economic outlook in general.
Europe stuck between a rock and a hard place
Surging inflation on one side and soaring energy prices on the other. There is just no escape and it is going to be a troubling winter for Europe, as much as governments are maintaining that they have sufficient gas supply to brave through the coming months. But come next year, we are likely to run it all back again and that is perhaps the big issue. Europe needs a better plan to get through these tough times.
For now, households and consumption will start to feel the pinch but we are also surely going to see businesses suffer and the fear is that it will lead to an increase in bankruptcies and closures i.e. rise in unemployment, if not carefully managed.
The ECB has a tall order to try and balance out the situation and with the window to tighten policy closing in on them, they have little choice but to frontload rate hikes now before it is too late. In this case, it perhaps already is.
Policymakers are pushing for a 75 bps rate hike next week and that is now the baseline expectation, though it won't do much to convince markets of a better euro outlook at this point.
UK not any better..
The news on Ofgem raising the gas and electricity price cap in the UK by 80% to £3,549 is perhaps a bigger deal than one would think. The issue here is that this is just the beginning as we head into winter and the price cap is likely to jump further next year.
With inflation already struggling to be kept under control, the news is but a major blow to UK households who are already struggling to keep it together as food prices and energy prices are weighing on their livelihoods. According to analysts, the latest price cap increase could see some UK households pay more on electricity than they do on mortgages. That fact alone is rather mind boggling and tells you how dire the situation on the ground really is.
Dollar the best of the bunch but only just
With the Fed maintaining its resolve at Jackson Hole, the dollar continues to sit in a good spot when viewed fundamentally across the board. Sure, recession risks are building and inflation could be starting to plateau but the Fed is adamant that its job is not done yet. That message itself i.e. more rate hikes to follow is enough to keep the greenback ahead of the rest of the major currencies, but only just.
The phrase "the cleanest shirt among the dirty laundry" comes to mind and there's not much reason to stick with other major currencies over the dollar. For one, equities are under pressure and the Fed vs BOJ policy divergence is arguably allowing the dollar to maintain its favourable preference over the yen as a safe haven as such.
Then, we have the whole dire economic outlook situation in Europe and the UK with the ECB and BOE among the first two central banks likely to fold in the tightening policy race. That makes both currencies also less desirable against the dollar with the Fed still maintaining its composure.
The swissie is perhaps a close contender but only on merit and not actual market flows, at least that would be my view. The SNB surprised with tightening policy and that has been enough to bolster the franc but with emerging market currencies also being routed amid faltering risk sentiment and a less optimistic global outlook, the dollar is still a major beneficiary from outflows there as a result.
Even if the dollar may be edging the rest of the major currencies by that little bit, that gap is more than enough in a market where thin margins count for a lot - especially when central banks are the ones dictating the pace of the game.
There will come a time where the dollar reverses course and we run things back the other way but unless US data significantly compels the Fed to back down, that time isn't here yet.