Risk-off takes a considerable pause.

The risk-off trade from last week is taking a breather as The S&P remains resilient and again fresh highs, but actually, it's the first +100bp day in a month since July 23.

The most significant development on the pandemic front was China reporting zero Delta community cases and official FDA approval of PFE/BioNTech's COVID vaccine, paving the way for more companies to institute vaccine mandates. 

On the back of these headlines, Oil prices surged, the US dollar weakened as Macro Reopening baskets clearly outperformed the Stay-at-Home Covid risk-off oriented baskets. 

Price action Monday also seems to suggest the market fears around Jackson Hole and Fed policy, in general, are easing, with both equities and fixed income higher and the US dollar slinks lower.

There is a good chance Chair Powell could use the Jackson Hole opportunity to emphasize the difference between taper and rate hikes. 

If we take Jackson Hole out of the equation, then the September meeting is crucial, with the Fed most likely giving advance notice on taper then. Intuitively, this then leaves them to map out the pace and size of the taper at the November meeting (there is no October meeting) and signaling their intention to formally announce a taper at the December meeting.

The first reduction in purchases will be $15bn ($10bn UST and $5bn MBS), and they also think actual tapering could start shortly after the December 15 meeting. They view the risks to forecast as an earlier announcement at the November meeting as a compromise for the hawks. You recall both St Louis and Boston Fed presidents Bullard and Rosengren were pushing for the taper to finish by the end of Q1 and Q2 2022, respectively, and both FOMC members are voters next year.

Economic Data 

US PMIs followed the pattern from Europe earlier on Monday. The manufacturing number came in at 61.2, lower than forecasts for 62.0 and after 63.4. The services number was a bigger miss at 55.2, lower than forecasts for 59.2 and after 59.9 as supply chain constraints continue to weigh.

A stronger case can now be made that Covid is a supply-side, rather than a demand-side, shock.

Image Source: Pixabay

FOREX

The dollar was under pressure, particularly against gold which lunged above 1800. The gold move especially suggests that expectations of a dovish Jackson Hole might be one motivation. Indeed, the fact that the symposium had to be changed to a virtual event at the last minute suggests that the overall tone will be dovish.

Downside momentum in EUR/USD has paused with risk sentiment better after European PMIs have been interpreted positively by the market. The break below 1.17 into the 1.16s may have attracted some short-term buying interest ahead of Jackson Hole. Traders may have thought it best to pare bullish USD dollar bets with Delta variant headlines filling the airways to influence the Fed policy decision. Indeed, this might be a bit of position adjustment, but as long as the broader downtrend holds around 1.1800, the market may remain bearish on the EUR.

Looking at the reaction on broader currency markets where even the JPY and CHF rallied despite the apparent risk on tilt to the tape, it suggests Monday FX moves could be little more than a "pre" Jackson Hole positioning event. Still, we will likely need to see where the near term FOMC policy dust settles before the US bulls start to re-engage 

Oil Markets

Oil prices rose more than 5% on Monday after China reported no new Covid cases and PFE/BioNTech's COVID vaccine received FDA approval.

With the Covid infused risk-off trade from last week taking a breather, oil was able to flourish as the week started more brightly, with China reporting no new Covid cases.

Oil markets are trading on sentiment alone, which is heavily correlated to US hospitalization; as case counts rise and deaths accelerate to January highs in the US, the oil trade may remain under pressure, but the downside here isn't as extreme given vaccine and mask mandates.