- Risk sentiment continues to improve as Fed seen delaying taper signal
- Delta fears also subside as FDA’s full approval of Pfizer vaccine adds to optimism
- Wall Street flirts with record highs, dollar flounders as commodity currencies fight back
Fed taper expectations pared back amid virus risks
Growing signs that the Delta wave is proving to be a bigger headwind for the US economy than initially anticipated have cooled expectations that the Federal Reserve will commit to a tapering timeframe at this week’s Jackson Hole conference. Policymakers will begin their virtual deliberations on Thursday, but while Fed Chair Jay Powell will likely provide some further clues on how much progress has been made in the recovery, he will probably stop short of signalling a taper move in September.
Spiralling virus cases amid a worsening Delta outbreak in America appear to have dented growth in August. The IHS Markit flash PMI was the latest survey to point to slowing growth yesterday, with the composite PMI falling to the lowest since December. The worrying trend in the near-term outlook puts all the more focus on the August jobs report. And although a taper announcement in September hasn’t totally been taken off the table, investors are now more certain that the Fed won’t withdraw its stimulus too aggressively, especially after hawkish Dallas Fed chief Kaplan expressed some concern about the Delta variant.
Stocks get a shot in the arm
But as Delta woes threaten to dominate policymakers’ taper discussions this week, markets are in better spirits thanks to easing fears of a hawkish Fed and some optimism on the vaccine front.
The US FDA granted the Pfizer-BionTech Covid-19 vaccine full approval on Monday, raising hopes that the decision will encourage more people to get inoculated. Many Americans have been hesitant to get vaccinated because until now, all the approved Covid shots were for emergency use only.
America has fallen behind in the vaccination race, with both Canada and the EU overtaking it in recent months. If the move by the FDA encourages a higher uptake of the Pfizer vaccine, it would lessen the pressure for some states to tighten restrictions.
Wall Street definitely seems to be pinning its hopes on that as the rebound from last week’s troughs gathered further steam after the news. The S&P 500 closed just shy of its all-time high from a week ago, while the Nasdaq Composite set a new record.
Asian stocks also extended their recovery today on signs that the latest virus outbreak in China is subsiding. However, European shares were mixed at the open.
Dollar on steadier footing after fall, kiwi rallies again
The US dollar, meanwhile, was steadier, edging up slightly against a basket of currencies today after taking a painful tumble yesterday.
The commodity-linked currencies were once again the biggest winners. A strong bounce back in the price of major commodities such as oil and copper is aiding the commodity dollars, which have jumped between 1.5% and 2% from their lows. But the New Zealand dollar got an additional boost today, gaining 0.6%, after RBNZ Assistant Governor Christian Hawkesby said that the only reason why the Bank didn’t hike rates last week is because it would have posed a communication problem when the country just went into a lockdown. Hawkesby also confirmed that a 50 basis points hike was discussed, fuelling expectations that a rate increase in the Autumn is a done deal.
The euro and pound were slightly softer today.
New home sales out of the US is the only major data on the agenda on Tuesday but investors will be keeping a close watch on the happenings in Congress amid divisions within the House Democrats on whether to pass the $3.5 trillion social infrastructure plan before the $1 trillion bill on traditional infrastructure, which has already been approved by the Senate.