US Open Note – Stocks log slight gains while greenback is unreactive

Stocks glow temporarily and dollar digests US GDP and jobless claims

While stocks marginally pick up and the Nasdaq 100 index claims a new all-time high, the threat of rising inflation, associated with supply bottlenecks, continues to be somewhat downplayed. Furthermore, Fed-taper talks are said to be on the horizon, but a far ways down the road, with Fed Chair Powell highlighting that they will not act hastily towards higher interest rates. Today, the 10-year Treasury yield rose slightly to 1.45% but any related-support to the dollar appears non-existent, even after yesterday’s stronger US manufacturing sector results.

The greenback remained muted as the final reading of US GDP for Q1 was confirmed at 6.4% in annualized terms, while jobless claims rose to 411K, overshadowing expectations of a drop from the previous week to 382K. The pickup in economic activity due to more businesses opening their doors has led to increased demand for labour. However, the hiring process is encountering shortages as attractive government benefits and fears of getting infected linger. Furthermore, the deceleration in the core durable goods figure to 0.3% versus 0.8% m/m expected and the headline figure to 2.3% versus 2.9% m/m seem to be reflecting employers’ hesitance to purchase goods related with capital expenditure.

That said, markets also seem confused around the Fed’s outlook for transitory inflation. Nonetheless, the reflation trade is expected to boost markets as we move forward into the year, as inflation has yet to be fully dismissed. The dollar index has softened a tad down to 91.60 and the dollar’s influence in the forex arena is subdued, with pound pairs making the bigger moves after the UK’s Monetary Policy Committee voted to leave policy unchanged.

The USD/JPY pair has eased slightly but remains above the 110.50 mark.

BoE doesn’t budge

Cable fell aggressively by nearly one cent before rebounding somewhat today, after the UK’s Monetary Policy Committee decided to leave the interest rate unchanged at 0.10% and the asset purchase facility of £895B as is. The BoE has made it clear that they will not tighten monetary policy until the recovery has made significant advances, likely highlighting limited changes until year end.

Investors are likely to look for more clues from the meeting about economic growth and the inflation outlook. If the UK is to follow through with lifting restrictions on social gatherings on July 19th, despite rises in coronavirus infections, the UK’s recovery could be getting its second boosting jab. Fully vaccinated individuals could encounter easier traveling experiences, while a persisting Delta variant could see more Britons opt out of travel due to quarantines, which could produce some economic setbacks for the pound.

Euro persists above $1.1900

The euro held strong above the $1.1900 mark, after activity in the Eurozone expanded, reflected in yesterday’s June figures, aided by a growing inoculation pace and recent re-openings of businesses. Germany’s ifo business climate data hit a 2½-year high in June reaching 101.8, above expectations of 100.6 as these relaxations in restrictions delivered a booster jab to Europe’s largest  economy.

Nonetheless, virtually all of the recent ECB speakers remain in the dovish camp and slowing asset purchases will likely be kept at the back of the line, at least for the near future, as worried policymakers fear removing accommodation too early.

Oil defies gravity, metals continue ranging

Oil defies gravity extending to $74.25 per barrel as US supplies shrank by 7.6M barrels in the previous week as demand grows and travel resumes. With the European and the US inoculation campaigns progressing and summer travel nearing, expectations of rising fuel demand are highly likely, which could see the black liquid hike higher in the near-term.

WTI futures eased close to $73.00 per barrel, while gold and silver were consolidating around the $1,785/oz and $26.00/oz levels respectively.

Scheduled to speak at 13:30 GMT is FOMC Member Bostic, while Williams is due at 15:00 GMT.

At 23:30 GMT, Japan’s core inflation y/y figures will be released.

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