Dollar Firm as US Yields Rise Ahead of PPI

  • The dollar continues to gain traction
  • The selloff in global bond markets continues; US reports August PPI
  • Press reports China will introduce measures to ease the negative impact of the trade war
  • China announced exemptions to tariffs for some US goods; China reported strong loan growth in August
  • Scottish appeals court ruled that Johnson’s suspension of Parliament was unlawful
  • Brazil July retail sales are expected to rise 2.2% y/y; Poland is expected to keep rates steady at 1.5%

The dollar is mostly firmer against the majors ahead of PPI data.  Aussie and Stockie are outperforming, while euro and Nokkie are underperforming.  EM currencies are mostly weaker.  KRW and THB are outperforming, while HUF and ZAR are underperforming.  MSCI Asia Pacific was up 09% on the day, with the Nikkei rising 1%.  MSCI EM is up 0.6% so far today, with the Shanghai Composite falling 0.4%.  Euro Stoxx 600 is up 0.7% near midday, while US futures are pointing to a higher open.  10-year UST yields are down 2 bp at 1.71%, while the 3-month to 10-year spread is unchanged at -20 bp.  Commodity prices are mostly higher, with Brent oil up 1%, copper down 0.1%, and gold up 0.5%.

The dollar continues to gain traction.  DXY is up two straight days after four straight down days.  However, the upside will likely be a bit of a slog until we get some firmer US data from now until the end of the week.  Of note, USD/JPY is trading at the highest level since August 1 and is on track to test that day’s high near 109.30.  Elsewhere, the euro is softer ahead of the ECB decision tomorrow.  We will be sending out an ECB preview later today.

The selloff in global bond markets continues.  The yield on the US 10-year rose to 1.74% earlier today, the highest since August 9.  That’s a cumulative rise of 31 bp from the trough of 1.43% on September 3.   Similarly, the US 2-year yield rose to 1.68%, the highest since August 5.  In addition, the US 3-month to 10-year curve inversion of -20 bp is the lowest since August 2.  These US rate moves all reflect a less pessimistic global outlook.

During the North American session, August PPI will be the highlight.  Headline is seen steady at 1.7% y/y while core PPI is seen rising a tick to 2.2% y/y.  To state the obvious, a strong reading here would add to the selling pressures in the bond market.  CPI will be reported tomorrow.  July wholesale trade sales and inventories will be also be reported.

Markets are still looking for the Fed to cut rates next week.  WIRP suggests 100% of a cut, with 5% odds of a 50 bp move.  We are not going to make a definitive call until we see this week’s data.

Global Times editor Hu wrote that China will soon introduce measures to ease the negative impact of the trade war.  He added they would benefit some companies in both countries but gave no further details.  Elsewhere, China announced exemptions to tariffs for some US goods, including pharmaceuticals and lubricant oil.  No exemptions were granted for major agricultural goods like soy and pork.  These exemptions were for tariffs enacted last July.

China reported strong loan growth in August.  Aggregate financing rose CNY1.98 trln vs. CNY1.6 trln expected, while new loans came in as expected at CNY1.2 trln.  When the reserve requirement cuts go into effect this month, we should see another sizable rise in both series.  However, we think the PBOC is unlikely to cut policy rates outright anytime soon preferring instead to keep their powder dry in case the economic outlook worsens.

The Brexit situation got even more confusing with a Scottish appeals court ruling that Johnson’s suspension of Parliament was unlawful.  The decision now goes to the UK Supreme Court, which is set to take up the case next week.  Meanwhile, BOE Governor Carney likened heightened sterling volatility to EM levels.  He added that UK assets are due for a substantial repricing once the Brexit outcome becomes known.  For now, continued uncertainty is helping to keep sterling below $1.24.  Absent any good Brexit news, we suspect that area will prove tough to surmount.

Brazil July retail sales are expected to rise 2.2% y/y vs. -0.3% in June.  The economy remains weak even as price pressures remain low.  Next COPOM meeting is September 18 and another 50 bp cut to 5.5% is expected then.

National Bank of Poland is expected to keep rates steady at 1.5%.  The bank has maintained its forward guidance of steady rates thought 2021, and we expect it to reaffirm it at this meeting.  July current account and trade data will be reported Friday.