<h2>National Bank of Kuwait: "The Federal Reserve" warns against abandoning support for the economy, and its tone is pushing the dollar down
Last week witnessed very slow economic events, as the dollar’s gains retreated on the back of risk avoidance and economic recovery measures, after the financial markets were affected by the accommodative tone adopted by the Federal Reserve regarding monetary policy.
The US dollar had begun to gain some bullish momentum after the recent blue wave that swept through Congress and the White House, which boosted the chances of the government pumping additional fiscal stimulus packages.
Accordingly, according to the weekly money market report issued by the National Bank of Kuwait, inflation expectations, long-term bond returns and the dollar have risen.
However, the dollar’s rise began to decline after the statements of Federal Reserve Chairman Jerome Powell, announcing that “the US economy is still far from the targets for inflation and employment, and it is too early for the Federal Reserve to discuss changing the rate of its monthly bond purchases,” adding: “It did not come. The right time to talk about exiting the ultra-easy monetary policy, I think one of the lessons learned from the global financial crisis is to make sure not to give up early on providing support to the economy.
The Fed’s tone drove the dollar lower, giving an indirect signal to market participants not to preempt events.
US President-elect Joe Biden unveiled his new $ 1.9 trillion economic stimulus plan, placing it at the top of legislative priorities, as he prepares to enter the Oval Office on Wednesday. If the “Congress” approves that package, it will contribute to providing massive support to the faltering US economy, in addition to the $ 900 billion financial package agreed last month by US lawmakers and $ 3 trillion to support relief efforts, which were passed at the start of the pandemic. .
Democrats now control the Senate and the House of Representatives in the US Congress after two Democratic senators won the election race in Georgia. Therefore, the sweep of the blue wave of legislatures increased the possibility of passage of the Biden bill.
President Biden’s $ 1.9 trillion plan includes paying new checks worth $ 1,400 to most Americans, in addition to the $ 600 checks that were recently distributed to Americans with incomes of less than $ 75,000 annually.
This step would contribute to raising the total value of recent direct payments to $ 2,000. The plan also includes providing $ 350 billion for state and local governments that suffer from budgetary constraints, $ 50 billion will be allocated in the form of grants for troubled small companies, and directing an additional $ 400 billion to address the repercussions of the pandemic, in addition to $ 130 billion to accelerate the reopening of schools in All over the country.
In view of the US Treasury yields, the yield on the 10-year bonds increased by 28 basis points before the yields witnessed corrective actions that pushed them down, and this is a remarkable move in just seven trading days.
And the expectations that the new administration will finance its needs through long-term bonds pushed the long-term bond yield curve upward, while there were no significant changes in the short-term rates.
This move caused an increase in the steepness of the yield curve for bonds between 2 and 10 years by 101 points, at a time considered the highest difference since May 2017. The decline of the yield curve had no significant effects on the dollar, because the rise in the yields of 10-year bonds was not caused by Changing Fed policy expectations.
On the other hand, the yield on the two-year bonds increased by only two basis points. This steeper slope of the yield curve reduces the attractiveness of the USD. If the entire trend of the curve begins to shift, this is a clearer indication of a strong dollar.
<p class="ar">As for the dollar, it ended the week marginally higher against a basket of major currencies, after giving up most of its gains, affected by the cautious comments made by the Federal Reserve regarding monetary policy. While procedures are currently underway to impeach the outgoing President Trump for the second time, thus becoming the first American president in the history of the United States to be subjected to the procedures of impeachment twice. The news of his impeachment had no effect on the dollar or financial markets, as the Senate trial for Trump is unlikely to begin before his term ends the day after tomorrow. The dollar index ended its trading at 90.772, up by 1.00 percent only during the past five trading sessions.</p> <p style="color:#0a994e; font-size:22px; direction:rtl;">Inflation data discrepancy</p> <p class="ar">The headline inflation rate in the United States rose last month on the back of rising gasoline prices by 8.4 percent, which contributed more than 60 percent to the rise in the CPI. </p> <p class="ar">The data revealed that the US consumer price index rose 0.4 percent month-on-month in December, after rising 0.2 percent in November. On an annual basis, the index rose 1.4 percent, compared to 1.2 percent in the previous month.</p> <p class="ar">On the other hand, core inflation index, which marginally excludes energy and food prices, increased. Core CPI rose 0.1% month over month. The index rate that the Fed prefers to track is 1.4 percent at the moment, well below the average inflation target of 2 percent. The variation in monthly inflation readings indicates that overall inflation levels are still weak, and this will not motivate monetary policy officials to change their tone. Federal Reserve officials may search for any link between rising inflation rates and the basic effects, and they may turn to study the reasons for any temporary price hike in the later period of this year.</p> <p style="color:#0a994e; font-size:22px; direction:rtl;">Weak US economic fundamentals</p> <p class="ar">US consumers continued to cut spending for the third month in a row in December as measures re-intensified measures to curb the spread of the virus. Consumer spending accounts for roughly 70 percent of the United States' GDP, making retail sales one of the primary indicators to rely on.</p> <p class="ar">Retail sales decreased by 0.7 percent on a monthly basis, while the decline in November data increased, after being revised to -1.4 percent from -1.1 percent, as announced earlier.</p> <p class="ar">As for core retail sales, which excludes cars, gasoline, building materials and food services, they declined 1.9 percent. The latest report on non-farm sector jobs also revealed a job loss over the past month for the first time since April 2020. The economy may lose more jobs in January, with new applications for unemployment benefits rising in the first week of the month. </p> <p class="ar">All in all, the weak fundamentals of the US economy reinforce the dovish accommodative outlook of the Fed.</p> <p style="color:#0a994e; font-size:22px; direction:rtl;">Goods</p> <p class="ar">Oil prices declined last week, amid renewed concerns about global oil demand due to the rise in cases of Coronavirus in China and Europe. China, the world's largest oil importer, imposed closures in 4 major cities, due to the rise in new cases of the virus to the highest levels recorded in more than five months.</p> <p class="ar">However, the decline in US crude inventories for the fifth consecutive week and the strong Chinese oil import data contributed to limiting those losses. Crude oil inventories in the United States fell by 5.8 million barrels last week to about 484.5 million, according to American Petroleum Institute data. On a weekly basis, Brent crude oil prices fell by 2 percent, or the equivalent of $ 1.14 a barrel.</p> </div>