Will the Fed ignite a correction?, with Dr Przemysław Kwiecień

Will the Fed ignite a correction?, with Dr Przemysław Kwiecień

good morning my name is christopher chang i’m chief economist of the xdb and you’re watching xdb weekly trading webinar today we’ll discuss incoming jackson hall symposium where an important decision is expected on u.s monetary policy which obviously is fundamental for global markets especially wall street u.s indices and the question is will the fed ignite a correction this is something that markets had in mind for a long time with u.s economy reviving from uh lockdown and driven crisis with the inflation accelerating beyond five percent and staying there in july with unemployment clearly uh declining there are many good reasons the fed should have already contained their money printing and you know reduce the qe uh monthly purchases but they haven’t decided uh to do that at least not yet so the question is will jerome powell use the opportunity of jackson hall symposium and actually announce some move and therefore will it drive the markets and you know spoil spoiler modes that have been so bright um for for quite quite a long time so this is the story for the week however let’s start from our typical monday recap of the key stories and yeah and i think that the the the main point that uh we need to bear in mind beat in this in this major theme of the market correction and the fed decision but also in a broader contest context is a rising number of um covet cases people in hospitals um you know new coverage deaths and so on so forth that’s on the rise again after vacation similar to what we had last year maybe not to this extent yet in in many places however it’s it’s looking again that despite the vaccination the the another wave is is already um taking place taking hold in many countries and it’s already causing some lockdowns we’ll discuss this uh when when when we look at oil prices we’ll discuss this when we look and the new news new zealand’s dollar and a tumble that was triggered by no hike which was fully priced in but the central banks backed off because of these restrictions so so this is this is very important development because uh the fed was using many many excuses not to contain the qe so far and therefore this possibility of another wave may provide them a fantastic excuse not to do not not to move again even though most of the data suggests that they should be moving already so let’s take a look at the latest data from the u.s economy and we start from consumer sentiment as you can see here it’s it has uh recently especially when you look at the um university of michigan index this orange line um it tumbled in august to a very low level just above 70. it hasn’t been that low for me for many months actually it hasn’t been that low this year and in the second half last year so so the question is why is this the case well as you can see here consumer sentiment was rebounding um in spring of of this year as consumers received these deposits from you know the so-called biden checks uh the economy was reopening the cove it was you know in a retreat and so on so forth and now suddenly uh things things are uh on the reverse right there there are no no more checks uh extra unemployment benefits are being withdrawn um inflation is high so if you are not bezels uh you are paying for all this all these things that are again more expensive and um and the latest things this afghanistan issue that has not impacted markets directly but send but can have additional [Music] burden on on the sentiment of u.s citizens all of this suddenly means that in a moment where the fed should be tightening policy because economy is close to overheating the sentiment is collapsing and and the question is now isn’t it too late to move um if you look at the retail sales it was a disappointment as well however these moves are relatively minor compared to these big increases driven by by these checks that people received early this year and these moves are relatively minor and the sales overall is well above the precovery trend uh at the same time despite all the money that um households in the u.s received due to this extraordinary fiscal impulse all the programs checks and so on and so forth um the credit is on the rise and the rice is the quickest ever so so the cheap money fuels borrowing even though households have a lot of money so the question is now will the fed finally make a move and uh and taper the the gui purchases frankly speaking um my my view on this is that the likelihood is relatively minor because um first of all the fed ignored very clear symptoms of economic changes and they should have acted already they should have acted in early spring to slightly adjust their policy in order to be better prepared for for different scenarios they cornered themselves into into the scenario where the economy is sure to rebound for many months and they will have plenty of time to withdraw the accommodation and now if another scenario unfolds the it would be very hard for them to respond so with all these uncertainties and the new coveted wave high possibility being a high possibility i think that um president powell will once again try to minimize the risks and they he will back down from any firm declarations so even though as you can see on this bloomberg chart there were there was this relationships where every time the index increases by 100 there is some correction territory uh it’s not necessarily going to be driven by by tapering uh story because i think that if there is something that moves these markets it needs to be something that the markets do not expect markets expect cuya tapering for for quite a long time they expected this to happen because of inflation it didn’t happen now they think okay maybe now the unemployment rate is down the latest nfp report was very good maybe this is the time so even if they batch eventually and even if power set which i think is relatively unlikely that yes we are going to taper this autumn there could be some profit taking but i don’t think this is the thing that could move the market actually this there needs to be something something bigger and if you look at this another bloomberg chart or picture where even though the majority of the fed is for some kind of changes in monetary policy the key members especially with power but also brainerd who is um you know um often said that he she could replace powell if powell is not here for for a second tenure um these guys there are decision makers so the fat is not it’s it’s not the democracy it’s the it’s actually the president a new york president they really have uh the most of the clout and yeah these guys are clearly ignoring every every argument for for any kind of type tapering or tightening so when you look at these ma at the markets um it also doesn’t look as if any change is imminent if you look at s p 500 we had this pattern of defending 50-day moving average that’s been very successful so far and again last week we had some minor profit taking two and a half days of profit technology which was very typical for what we saw over the past few months and strong rebound from there so if we have if we look at all these examples in all the cases it led to new all-time highs so so i would say this is the base scenario and unless something older than the fed happens i wouldn’t expect a major change here on the dax maybe the the move over the past few months it is a bit less pronounced it’s less dynamic partly because there are no major attacks in the dax that are clear beneficiaries of um of this never-ending lockdown stories um but again due to the this incredibly excessive monetary policy we are still in the blue trend and for as long as we are in this slightly upward upward tilting consolidation i wouldn’t expect any any bigger market change over here we had this attempt it was failed once again the bulls prevailed and right now after this small profit taking from last week again we are we are pushing higher so so again i wouldn’t expect any bigger um change in the trend what is it what is uh interesting is you’re a dollar and a dollar situation in general because as you can see here we are into important support zone between 1 16 117 and if once if this zone is broken we we can have something even bigger than this relatively large abc correction that right now looks like a correction but it could very well turn into big head and shoulders formation so from that perspective this jackson home meeting will be relatively important because if there is a tapering discussion this could be enough because you know despite all the reluctance from the fed to to move the dollar uh remains strong so if they eventually move this could be enough with the would would having in mind what the acb is doing and that you know they are even thinking about more expansionary moves that that means that even the smallest step from the fed could be enough to you know make this make this happen and crack this support zone and change this correction and then trend continuations are into something bigger for for the dollar so so this is the market that certainly is worth paying attention to and then finally oil markets that saw a very substantial correction over the past two weeks to three weeks um where you can see that already this where we started from these rising cases and more lockdowns so far in asia but it looks like some some kind of restrictions will be increased in many places of the world this will have an impact on tourism this will have an impact on trade this will have an impact on air travel so already the forecasts are are more gloomy for oil consumption and therefore unless there is some some kind of action from the opec uh limiting supply once again um we may see a trend reversal in oil prices so so just as with the euro dollar i would say that oil is one ones of one of the more uh interesting markets right now because there is a risk you you already see we are below this moving average um that managed to kind of support this market for for quite a long time but right now uh we have to we we see a relatively large correction and yeah with the risk of of a bigger uh drawdown um because i think you know from from the scovid perspective it’s pretty clear there will be rises in cases there are you know the governments there will be increasing restrictions and unfortunately this is something that we have seen as a very clear pattern and i think it will be continued so the question will be will oil producers respond to it and unless they will and the quest that there is a possibility that there will be bigger heat too to oil prices so ladies gents um yeah i think we have interesting week ahead it’s starting with bmis from europe and asia and u.s later in the day today and then we will have jackson hall symposium starting on thursday and this is the most anticipated event as i said i don’t think president powell will make any firm um commitments on the on the qe tapering so um so yes so this will have some impact on your dollar and indices but to make or to trigger a really big move we have to see something unexpected the jackson hall probably will not be enough to move markets stop substantially but we will see we’ll see especially on friday when power speech is expected thank you very much for your attention we see each other next week 7 30. have a great week [Music]
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Will the Fed ignite a correction?, with Dr Przemysław Kwiecień

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