Macro data dog not wagging FX market tail

US macro data, including measures of US inflation, non-farm employment, retail sales, manufacturing output, ISM PMIs and consumer confidence indices, have been far less volatile since the peak in global risk aversion in March-April 2020 when the first national lockdowns decimated global growth.

However, volatility in most of these monthly metrics remains high relative to history. This is particularly true for core CPI-inflation, non-farm employment, consumer confidence and the ISM non-manufacturing PMI.

Yet volatility and directionality in US Treasury yields, including at the short-end of the curve, and in particular the Dollar has been modest in recent months.

The Dollar NEER has oscillated in a range of just 1.7% for the past 11 weeks and within that range daily volatility has been very low. Moreover daily volatility in most major currencies has fallen further in the past month, with only a few notable exceptions.

Volatility in the S&P 500 has recently picked up but remains broadly in line with the past 12 months and has arguably been spurred by the Evergrande saga rather than by US (or global) macro data releases. Finally volatility and directionality in Brent crude oil prices have also been far more limited in recent weeks.

That is of course not to say that US macro data have not mattered and will not matter going forward. They have and they will. At the very least macro data are a key input into Federal Reserve monetary policy which in turn has a strong bearing on US and global financial markets, as evidenced by markets’ reactions to the Fed’s 16th June policy.

However, our analysis suggests that financial markets have become somewhat more detached from US macro data releases, even when these have materially deviated from consensus forecasts. At the very least their direct impact on US equity and interest rate markets and global FX and commodity markets has been modest in recent months.

I will be discussing my currency views and forecasts at the (virtual) Global Independent Research Conference on Wednesday 13th October. Click here for further details.

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