In his overnight note, SocGen's FX strategist Kit Juckes appropriates asks which is the right metaphor for the state of the US economy – Goldilocks or Groundhog Day? He points to employment growth of 1.55%, unemployment 4.4%, offset by weak wage growth of 2.46%. As Juckes summarizes the current economic situation, "weak productivity and weak real wage growth leave the economy in an endless winter of mediocrity, while solid employment growth without inflation is the ‘not to cold, not too warm’ mix that keeps the Fed normalising policy ever so slowly, equity indices marching ever higher and the economic cycle able to trundle on with no recession in sight."
What does this dilemma mean for assets?
The combination leaves the dollar somewhat soggy and investors in a brighter mood again this morning. How long the bright mood can survive depends on how far US Treasury yields rise. There’s not enough inflation threat, or enough zip in the economy, to make me think yields can march higher without interruption but I would be more relaxed if the CFTC data hinted at a massive great speculative short in 10year Notes, rather than pointing to a reduced long.
At current levels, Treasury yields still aren’t undermining global risk sentiment and so they are undermining the yen. USD/JPY continues to track yield differentials well enough and last week’s BOJ bond-buying has done the trick in getting USD/JPT over 114 and EUR/JPY above 130. If we get US yields back to their December highs and JGBs stay at these levels, USD/JPY has a chance of getting back to 120. It’s a fine balance though, with sources of risk-aversion including tension on the Korean peninsula, Japanese PM Abe’s weal poll scoring and an oil market that remains nervous.
There is some hope that the current indeterminate period will end in the coming week, in which key events include Janet Yellen’s semi-annual testimony on Wednesday, in which as Jim Reid writes, "it will be fascinating to see whether Mrs Yellen chooses this week's semi-annual testimony to reinforce the recent more hawkish global central bank speak or whether she tries to pull things back a little."
Reid expects her to reinforce the message from the June 14 post-FOMC press conference and continue to guide the market towards an announcement of the beginning of balance sheet normalisation at the September 20 meeting as well as a rate hike by year-end, which will likely set off another mini bond tantrum.
There is also a data deluge on Friday which includes CPI, IP, retail sales and U-Mich.