Dollar Firmer in the Wake of FOMC

  • The dollar is broadly firmer in the wake of the FOMC statement, which remains a key talking point; two word clues suggest that the bar to a September rate hike is low
  • Today’s first look at Q2 US GDP is the main focus; weekly initial jobless claims may also draw some attention
  • The market appears reluctant to sell sterling ahead of next week MPC meeting
  • The Scandies are firmer, helped by some month-end flows and the stronger than expected Swedish Q2 GDP
  • German states reported soft July inflation numbers; German employment data was disappointing
  • Brazil reports July IGP-M wholesale inflation; late last night, COPOM hiked rates 50 bp to 14.25%, as expected
  • Mexico central bank meets and is expected to keep rates steady at 3.0%

Price action:  The dollar is mostly firmer against the majors in the wake of the FOMC meeting.  The Scandies are outperforming, helped by strong Swedish GDP data, while the Kiwi and the yen are underperforming.  The euro is little changed, trading just below $1.10.  Sterling is trading around $1.56, while dollar/yen is trading back above 124.  EM currencies are mostly weaker, with RUB and ZAR underperforming.  The CEE currencies are outperforming.  MSCI Asia Pacific was flat, with the Nikkei up 1.1%.  The Shanghai Composite fell 2.2%, while the Shenzhen Composite fell 3.2%.  Nearly 20% of Chinese stocks are still not trading.  Euro Stoxx 600 is up 0.5% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is up 2 bp to 2.31%, while European bond markets are also mostly firmer.  Oil prices are firmer, building on gains from yesterday’s DOE US oil inventory data. 

  • The US dollar is broadly firmer in the wake of the FOMC statement, which remains the key talking point.  Although we read the statement with a clear hawkish bias, we note that the September and December Fed funds futures contracts were unchanged (implied yields of 17.5 bp and 31 bp respectively).  Not everyone was convinced.
  • There were two word clues that the bar to a September rate hike is low.  First, the Fed referred to the recent job gains as “solid.”  This is an upgrade from June where the Fed had noted that job growth had picked up.  That followed the April statement after the softer March jobs report that acknowledged that the pace of job gains had moderated.
  • The second word clue was in the minimal forward guidance.  Previously the FOMC statement had read that officials wanted to see additional improvement in the labor market.  They are seeing it and modified the desire by wanting to see “some additional improvement.”  This qualification seems to soften the requirement.  We take this mean that essentially if there are no significant negative surprises in the next two employment reports that will be released before the Fed meets again, a hike will be delivered in September.
  • This has been our view since the poor Q1 data shifted our June call to September.  Comments by the IMF’s Lagarde yesterday also pointed toward a September hike.  Not that she knows but was probably politely informed that despite the IMF’s recommendation to wait until next year, it was likely to go this year.
  • At the June meeting, a slight majority of officials had indicated that two rate hikes this year may be appropriate.  Developments since then probably have not changed many assessments.  In order to maximize the Fed’s options, it has to hike in September.  Without a hike then, two hikes this year seems unlikely. Whereas a hike in September gives it the flexibility to not only hike once, but also twice if desired.
  • Today’s first look at Q2 US GDP is the main focus.  We suspect there is upside risk to the consensus 2.5% forecast.  However, the wild card is the annual revisions that will, among other things, include new seasonal adjustments.  Some growth that we anticipate for Q2 could be pushed back into Q1.  In addition to the headline, we expected consumption improved from the 2.1% pace in Q1 toward almost 3%.  Also, the core PCE deflator may double from the 0.8% Q1 pace.
  • The weekly initial jobless claims may also draw some attention.  Last week’s 255k is the lowest in more than 40 years, and covered the week that the July nonfarm payrolls survey was conducted.  Although there may not have been any irregularities in the jobless claims report, economists expect a rebound.  This time series is volatile, which is why it is often smoothed with a four-week average.  That now stands at 278.5k.  Ideally, any rebound will keep the new claims below 270k.
  • Also today, the US will introduce a new advance report on merchandise trade.  It is intended to be released 4-7 business days before the international trade report (that covers trade in services as well).  Today’s report will provide preliminary data for June.
  • The market appears reluctant to sell sterling ahead of next week MPC meeting, where hawkish dissents are likely, the immediate release of the minutes, and new macro forecasts.  The Australian dollar is resilient in the face of a drop in building approvals nearly twice what the consensus expected (-8.2% vs -4.4%), and the continued fall in gold, copper, and the Chinese stocks (Shanghai -2.2%).
  • The Scandies are firmer too, helped by some month-end flows and the stronger than expected Swedish Q2 GDP.  The 1.0% quarter-over-quarter expansion bests the consensus forecast for 0.7% and Q1 GDP of 0.4%. The year-over-year pace was lifted to 3.0%, the fastest pace in nearly four years, from 2.5%.
  • The Riksbank’s negative interest rates and QE are not responses to growth concerns but to deflation.  This flies in the face of worry that deflation saps growth.  The same anomaly is evident in Spain as well.  Today Spain also estimated Q1 growth at 1.0% (3.1% year-over-year).  This was as the central bank had forecast.
  • Sweden and Spain enjoy the strongest growth among the high income countries, and both are experiencing deflation.  Preliminary July CPI data was released for Spain today as well.  The harmonized measure fell back to -0.1% from zero in June, snapping five months of improving (less negative) prices.
  • Separately, German states reported July inflation numbers and were on the soft side, suggesting risk that the harmonized national rate eased back to zero from 0.1% in June.  German employment data was disappointing.  Although the unemployment rate was unchanged at 6.4%, the number of unemployed increased by 9k (the consensus was for a 5k decline) and the June unemployed rose 1k rather than fall by 1k.  The June-July gains come after an eight-month streak of declines.
  • Brazil reports July IGP-M wholesale inflation, expected to rise 7.0% y/y vs. 5.6% in June.  Late last night, COPOM hiked rates 50 bp to 14.25%, as expected.  What was not so expected was that the COPOM statement implied that this was the last hike.  We are not so sure.  Price pressures continue to build, and we think this may put pressure on the central bank to continue hiking rates.  The vote was unanimous, even as International Affairs Director Volpon abstained from voting after his recent public comments about the need to continue tightening.
  • Mexico central bank meets and is expected to keep rates steady at 3.0%.  Mid-July CPI came in lower than expected at 2.76% y/y vs. 2.87% consensus.  This was the lowest since at least 1989, and moves further below the 3% target.  Real sector data remains fairly soft.  Under these conditions, we do not expect Banco de Mexico to make good on its intent to hike rates this year.  USD/MXN is making new all-time highs this week, yet there simply has been no inflation pass-through to date.