It’s a relatively calm Monday for the FX market. Yield on 10-year T-Note which caught the markets’ attention last week saw reduced pressure on Monday, trimming gains. Treasuries were under great pressure last week causing yields to rise from 0.5% to 0.7%, the highest level since the end of June. Gold exhibited some weakness last week as well but saw renewed interest on Monday, rising half a percent.
The context of the new trading week, namely continued state of suspense, has been determined to some extent by positive US reports released last Friday. US consumer spending continued to rise strongly in July, showed July retail sales report. Sales exceeded the level of February, the last “healthy” month before coronacrisis hit world economy. Consumer sentiment also remained consistently high.
However, this is not good enough. It is clear that both Republicans and Democrats have a goal of maximizing political gain from the new round of fiscal aid ahead of the elections. This goal ensures long negotiations and intense search of trade-offs. It is the positive data on the US economy that allows negotiators to gain precious time and necessary economic stability. The latter does not allow politicians to be accused of inaction, since the data continues to indicate an ongoing recovery.
On a monthly basis, retail sales rose 1.2% in July against the forecasted 2.1%. Monthly growth in June was revised upwards from 7.5% to 8.4%. In monetary terms, the volume of sales in July exceeded the level of February by 1.6%, i.e. climbed out of the crisis pit. Sales in the “control group” of goods (which excludes goods with volatile prices, allows better identification of consumer trends by excluding goods with low elasticity of income), rose 1.4%. This is more than the 0.8% forecast.
However, there is hardening perception that next phase of recovery will be full of pain without proper action. Consumer confidence began to decline in July which is in line with stalling recovery in consumer spending which hit a plateau. In early August, consumer spending began to decline, clearly reflecting the end of the income insurance program
There are also more solid signals of slowing recovery. Shifts in oil’s futures curve hints that world stockpiles are not declining as quickly as we would like. The difference in price (spread) between the nearest contract and the contract of the next month reached 50 cents a barrel, the highest level since May. Recall that we had a deep contango (i.e. widening positive timespreads) in May which was associated with surplus of reserves. As we see that spreads started to widen again this indicates that oil demand is not recovering as quickly as previously thought. This was also reflected in the IEA and OPEC reports released last week, according to which the agencies revised down their forecasts for oil demand for 2020 and 2021. With the rise in prices, US oil production is growing which is reflected in the latest US data.
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