THE MACRO SETUP OVERVIEW:
• Low growth and high inflation sounds a lot like stagflation
• US equities may be at risk of US Treasury yields continue to climb
• The US Dollar may have sold off too far too fast given stability in Fed hike odds
Not a Hot Vax Summer After All
In this week’s edition of The Macro Setup, featuring Dan Nathan and Guy Adami, we discussed what the recent streak of disappointing US economic data and continued surge in delta variant COVID-19 infections mean for the US Dollar, US stocks, gold, oil, and bitcoin.
Following the disappointing August US nonfarm payrolls report, US Treasury yields have been moving…higher? While that may be confounding for some, perhaps a different perspective is warranted. Weaker US jobs data against the backdrop of rising COVID-19 infections possibly means that the Federal Reserve is less likely to taper in the near-term. More stimulus means higher growth and inflation premiums discounted into the long-end of the yield curve.
Higher US Treasury yields during QE – and lower US yields when QE is tapered – is not a surprise, as evidenced by the US Treasury 10-year yield chart shared in the video above. But the bigger picture is that higher US Treasury yields, coupled with stability in Fed rate hike odds (“tapering isn’t tightening”), and potential weakness in US equity markets has created a blend that could prove favorable for the recently beleaguered US Dollar.
What can the Fed do, though, if a growth scare makes its way through markets on the precipice of stimulus withdrawal? The toxic combination of low growth, high inflation, and disappointing labor market data sounds eerily like ‘stagflation,’ which is a policy conundrum that the Fed may not be able to address, having “no more arrows left in its quiver,” as Guy Adami noted.
This may mean that some weakness in commodities could be coming into play shortly, particularly for crude oil (growth-sensitive) and gold prices (yield-sensitive). EUR/USD could be due for a drop back below 1.1800, while USD/JPY rates could grind higher towards 111.00; however, breakouts from recent ranges aren’t expected as market participants digest the confounding mix of data and news headlines post-US Labor Day.
*For commentary from Dan Nathan, Guy Adami, and myself on the US Dollar (via the DXY Index), the US S&P 500, gold prices, among others, please watch the video embedded at the top of this article.
CHARTS OF THE WEEK
Eurodollar Futures Contract Spread (September 2021-DECEMBER 2023) [BLUE], US 2s5s10s Butterfly [ORANGE], DXY Index [WHITE]: Daily Rate Chart (January 2021 to August 2021) (Chart 1)
GOLD PRICE TECHNICAL ANALYSIS: DAILY CHART (JULY 2020 TO SEPTEMBER 2021) (CHART 2)
— Written by Christopher Vecchio, CFA, Senior Strategist