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Key Takeaways
- Powell stays the course as inflation increases
- Job openings reach record high
- Strengthening U.S. economy lifts U.S. interest rates and Dollar
- Energy demand heats up
Market Overview
The return to normal in the U.S. has been achieved faster than anyone thought possible. With the swift vaccine rollout, demand across all sectors – including leisure and hospitality – is soaring. Companies of all sizes are struggling with supply shortages and a lack of labor despite millions still out of work. Unlike past recoveries, when too few jobs were available, the opposite is true today. The most recent Job Openings and Labor Turnover Survey (JOLTS) skyrocketed to over nine million jobs, the largest number in its 21-year history. Disappointing back-to-back jobs reports suggest to some that employment growth is being held back as a consequence of a slowing economy. However, second quarter GDP forecasts in excess of 9% suggest that the economy is accelerating. Wages are increasing, some new employees are receiving signing bonuses and teenage unemployment is the lowest since 1953. With COVID-19 cases falling further and enhanced unemployment benefits expiring soon, the labor supply is expected to improve. Nonetheless, with the current uninspired job growth, the market sees no signs that the Fed will alter its easy policy in the face of a strengthening economy.
Source: Bloomberg
Foreign Exchange
In FX markets, we expect an enhanced focus on monetary policy and long-term interest rates over the coming months. Recent inflation data has been concerning for some market participants, but the Fed has consistently communicated that inflation is transitory. This has driven U.S. yields lower during the second quarter, weakening the dollar as a result. The dollar’s performance in the second half of 2021 will be greatly influenced by how the Fed’s policy announcements compare with those of other central banks around the globe. If the Fed keeps ultra-accommodative monetary policy in place, the dollar could continue the downward trend that we’ve seen in Q2. However, if the Fed takes its foot off the gas and begins tapering, long-term U.S. yields should rally and boost the greenback as we saw in Q1.
We encourage companies to hedge their currency risk. The future is uncertain, and the dollar could experience a significant shift up or down in the second half of 2021 depending on COVID-19 variants, employment data, inflation predictions, fiscal policy and central bank policy adjustments. For example, though the current EURUSD spot rate is 1.21, it could easily decline to 1.15 or soar to 1.27 by year-end.
Source: Bloomberg
Interest Rates
Near-record-high inflation gauges – arising from accelerating consumer demand meeting supply chain bottlenecks and labor shortages – continue to be the primary focus of the interest rate market. Regardless of whether mounting price pressures will diminish following the economy’s stabilization or persist and inevitably lead to higher, lasting inflation, there is a widening dichotomy between the Fed’s “transitory” view and the market’s “persistent” assessment of inflation. With term rates still well below pre-pandemic levels and knowing that the Fed’s resolve may be tested if inflationary pressures and the labor market’s rebound continue, client discussions have revolved around addressing future variable rate exposure.
A key question about risk: What happens if the Fed ends its stimulus program sooner than anticipated? Clients can secure future rate certainty in today’s economic environment through forward starting strategies to address maturing hedges or future debt financings, as well as pushing out the maturity of current hedges. This solution may not only extend rate certainty, but could also lower the current cost of funds.
Source: Bloomberg
Commodities
U.S. natural gas futures are at a seven-month high based on forecasts for blistering summer heat scorching the lower 48, which would increase the demand for cooling and power-plant fuel. As of June 14, futures for July delivery are at $3.31/MMBtu – the highest level since last November and approaching a 2.5-year high. The added demand for power generation is expected to limit the amount of natural gas injected into storage this year, posing the risk of a deficit heading into the winter. As storage remains below the five-year average, consumers of natural gas should consider hedging their price exposure to avoid the worst of a potential squeeze in gas prices if this winter proves to be severe.
Source: Bloomberg