Inflation still transitory

At the end of last week, the commentary from the US Federal Reserve created a pronounced risk-off mood among investors, with the safe-haven Japanese yen forging ahead. Time for reflection over the weekend evidently tempered that attitude. The yen and the US dollar were Monday’s weakest performers.

As for what prompted the change of heart, well, it was certainly not Monday’s exhilarating economic statistics. It could be, however, that the Federal Reserve was doing its best to downplay its appetite for higher interest rates and tighter monetary policy. In written testimony that he will give to Congress today, Chairman Jerome Powell reiterates his opinion that the current inflationary pressures are “transitory”. He goes on to say that “the Fed will do everything we can to support the economy for as long as it takes to complete the recovery”.

New York Fed President John Williams told a similar story, saying that although “the economy is improving at a rapid rate, and the medium-term outlook is very good… the data and conditions have not progressed enough for the Federal Open Market Committee to shift its monetary policy stance”. The US dollar lost an average of 0.4%, giving up a third of a cent to the euro and more than one cent to sterling.

No data to speak of

There was just one single solitary economic statistic with the potential to enliven the London session. It didn’t.

The Chicago Fed’s National Activity Index came in 0.38 higher in May, at 0.29. Three of the four broad categories of indicators used to construct the index made positive contributions in May, and three categories improved from April. Investors were easily able to contain their enthusiasm.

They were equally unmoved by a speech given by European Central Bank President Christine Lagarde. Matching the tone of Jerome Powell, Ms Lagarde spoke about the economic outlook “brightening”, with a “vigorous bounce-back of services activity” and “robust” manufacturing production. However, “tightening [monetary policy] would be premature and would pose a risk to the ongoing economic recovery”. The euro is half a cent lower against sterling.

Fed Chairman at the Capitol

The economic calendar picks up its pace only slightly today. The highlight comes this evening, with Jerome Powell’s (virtual) appearance in Congress. Even though his speech has already been published, the Q&A part might be enlightening.

Data from New Zealand released overnight showed consumer confidence rising two points to 107.1 in June, an 18-month high. “While confidence among those aged over 30 is now back around average levels, confidence among younger New Zealanders remains low.” The Reserve Bank of New Zealand reported that credit card spending increased by 27.2% between May 2020 and last month. The ONS confirmed that UK public spending borrowing remains elevated.

Today’s European ecostats cover Swedish unemployment, Italian industrial sales and Eurozone consumer confidence. The US follows with existing home sales, the Richmond Fed’s manufacturing index. Australia and Japan kick off the round of provisional purchasing managers’ index readings tonight, and the Bank of Japan publishes the minutes of its monetary policy meeting.