Market minutes overview:
- Measured at a base on March 8, exactly three months ago, the VIX, OVX, MOVE, and GVZ have all contracted to double digits; the VIX and MOVE are offset by more than -30% each.
- United States Dollar which for the moment lacks an important engine. Yields on U.S. Treasuries have moved sideways for almost two months, and it now looks like inflation expectations to have started to settle down too.
- Aaccelerating price pressures still may not do much to shake things up for the FOMC in the wake of the May report on the non-farm payroll in the United States. Having said that, it seems that the cone talk is about to escalate as inflation readings peak.
Is there anyone there?
The markets are calm. Maybe too calm. Stocks are hovering near their highs and some technical evidence is starting to accumulate over shorter time frames as bearish momentum begins to build. But with several inflation reports expected over the next few days – from China, Mexico, the United States – as well as decisions from the Bank of Canada and the European Central Bank, it looks like the summer lull. “Historically standard” before a wave of significant event risk.
GVZ, MOVE, OVX and VIX technical analysis: daily price chart (March 8 to June 8, 2021) (Chart 1)
The summer doldrums seem to be here after all. Measures of volatility are collapsing across the board. Measured on a March 8 basis, exactly three months ago, the VIX (volatility of stocks), OVX (volatility of oil), MOVE (volatility of treasury bills) and GVZ (volatility of gold ) all contracted to double digits; the VIX and MOVE are offset by more than -30% each.
Video technical notes: DXY index
- The DXY index continues to hold below the former bearish flag support that defined price action from late November 2020. Momentum continues to neutralize, with the pair intertwined between the daily 5, 8, 13 and 21 EMA envelopes, which is still neither in bearish nor bullish sequential order. Daily MACD is rising while below its signal line, and the daily slow stochastic turns lower but stay above their midline. Price action expected to remain limited ahead of Thursday’s ECB meeting taking into account the euro weighting of 57.6% (unless a “leak” via a privileged media like Reuters).
A thread goes through
The major constituents of the DXY Index – the British Pound, the Euro and the Japanese Yen – have something to do with common: the US dollar component (of EUR / USD, GBP / USD and USD / JPY rates) one important motor is missing at the moment. Yields on US Treasuries have moved sideways for almost two months, and it now appears that inflation expectations (as measured by the 10-year break-even point) have also started to stabilize. The net result was that US real yields got stuck in negative territory and moved sideways as well.
US Treasury yield curve (1 to 30 years) (June 2020 to June 2021) (Chart 2)
US inflation data due Thursday
A further rise in price pressures is expected, according to a Bloomberg News survey, with headline inflation expected at + 4.7% vs. + 4.2% (y / y) in May, while inflation underlying should stand at + 3.4% vs. + 3%. Still “largely” anticipated by Federal Reserve policymakers, the acceleration of price pressures may not yet do much to move the FOMC needle in the wake of the May payroll report non-agricultural in the United States.
Having said that, it seems that the cone talk is about to escalate as inflation readings peak. The Fed’s official efforts to shift the focus towards tighter monetary policy could lead to lower US Treasury yields – a worrying future for the greenback, especially if inflation expectations remain elevated.
DailyFX economic calendar, “high” interest rate events, next 48 hours (Table 1)
— Written by Christopher Vecchio, CFA, Senior Currency Strategist