The Federal Reserve and the US payroll report for August
Weaker than expected employment growth shared the headlines with strong wage gains, suggesting that inflationary pressures will not be as transitory as hoped. The US dollar promptly sold off even as US yields rose, a reversal of the usual correlation between the two. Risk assets put in a mixed performance last week. Commodities rose strongly to a fresh five-year high, pulling emerging market currencies with them, in a further sign that inflationary pressures are not abating. Equities had a rougher time, dragged down by the downbeat payroll report. The unambiguous loser of the week was the US dollar, down against nearly every major currency.
The unusual stagflation of the most recent macroeconomic news, particularly the US, makes it particularly hard to predict how policymakers will react. We expect at least some spirited debate within the ECB council, though it is not clear the consensus is there yet to start reducing the monthly PEPP purchases of sovereign bonds.
Improved sentiment towards the EM currencies supported a decline in the EUR/CZK to its lowest level since mid-June. However, recent economic data from Czechia had been largely positive, with most readings surprising to the upside from 0.6% to 1% quarter-on-quarter. With Friday’s inflation report for August, likely grabbing the most attention, could provide some cues regarding the pace of monetary policy tightening in Czechia.
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