Dollar Remains Under Pressure as Stimulus Deal Unlikely Before September

  • The dollar remains under pressure; there has still been no movement in stimulus talks; Weekly jobless claims will be reported
  • Fed officials are sounding increasingly concerned about the economic outlook; US Treasury wraps up its record $112 bln quarterly refunding
  • Mexico is expected to cut rates 50 bp to 4.5%; Peru is expected to keep rates steady at 0.25%
  • US-EU trade tensions may be improving; meanwhile, the US and UK are having a hard time progressing on their trade deal
  • Australia employment figures came in better than expected in July, but details weren’t encouraging

The S&P 500 is essentially record highs after a 175-day trip from peak to trough and back. Year to date, the index is up 4.6% after a 50% rally from the March 23 low. This compares well against most global equity indices, especially in Europe with the EuroStoxx 600 still down 10.2%.

The dollar remains under pressure. DXY is down two straight days and has given up nearly two thirds of its recent bounce. Break below 93.05 is needed to set up a test of last week’s low near 92.52. The euro is leading this move and the break above $1.1840 today sets up a test of last week’s high near $1.1915. Sterling needs a break above $1.3115 to set up a test of last week’s high near $1.3185. Lastly, USD/JPY ran into resistance at 107 yesterday and is lower today but remains on track to test the July 20 high near 107.55.

AMERICAS

There has still been no movement in stimulus talks. Reports suggest House Speaker Pelosi rebuffed an “overture” from Treasury Secretary Mnuchin to restart talks because the White House hadn’t budged from its previous positions. She said “We have made clear to the administration that we are willing to come down $1 trillion if they will come up $1 trillion. We are willing to resume negotiations once they start to take this process seriously.” Until the Republicans raise their offer, it appears that talks will remain on hold as the Senate goes on recess today for the rest of the month. All this still looks like brinkmanship to us, but the risk of a no deal is rising. At the very least, a deal now looks unlikely until mid-September.

Weekly jobless claims will be reported. Initial claims are expected at 1.1 mln vs. 1.186 mln the previous week, while continuing claims are expected at 15.8 mln vs. 16.107 mln the previous. Despite the strong jobs report for June and the solid one for July, the fact that initial claims are still coming in at over 1 mln every week suggests the labor market is still under some stress. July import/export prices will also be reported.

US inflation is ticking up. Yesterday, headline CPI came in at 1.0% y/y vs. 0.7% expected while core came in at 1.6% y/y vs. 1.1% expected. Earlier this week, PPI also came in higher than expected, with headline at -0.4% y/y vs. -0.7% expected and core at 0.3% y/y vs. flat expected. The 5- and 10-year TIPS breakeven inflation rates have crept higher and are almost back to what they were in February. Still, runaway inflation is not being priced in yet.

Fed officials are sounding increasingly concerned about the economic outlook. Yesterday, both Rosengren and Kaplan blamed the failure to contain the virus for the loss of momentum in the US economy. Rosengren contrasted the US with Europe’s success in bending the curve, as did Kaplan with the rest of the world. Fed’s Bostic speaks today. With the US economic outlook getting cloudier, we suspect Fed officials will continue to maintain the very dovish tone established at the July 29 meeting. That said, we also believe that the Fed is unlikely to add any fresh monetary stimulus until there has been another round of fiscal stimulus.

The US Treasury wraps up its record $112 bln quarterly refunding. $26 bln of 30-year bonds will be sold today. Yesterday, $38 bln of 10-year notes were sold with mixed results. Indirect bidders took 65.4% vs. 63.4% previously, which suggests strong overseas interest. However, the bid to cover ratio was 2.41 vs. 2.62 previously while the yield was 0.677% vs. 0.653% previously. That followed solid demand Tuesday for the $48 bln of 3-year notes sold, priced to yield 0.179% with the bid to cover ratio steady at 2.44. The refunding comes at a time of global curve steepening and so the costs of borrowing have risen this week. The 10-year UST yield traded as high as 69 bp yesterday before retreating, the highest since early July.

Banco de Mexico is expected to cut rates 50 bp to 4.5%. Last week, July CPI came in at 3.62% y/y, the highest since but still within the 2-4% target range. The peso remains relatively firm and so we believe the central bank will leave the door open for further easing.

Peru central bank is expected to keep rates steady at 0.25%. CPI rose 2.15% y/y in July, the highest since August 2019 but still within the 1-3% target range. Local asset markets are likely to see some added volatility ahead after a congressional committee approved a bill allowing early pension withdrawals due to the pandemic. This follows similar moves in Chile and Brazil.

EUROPE/MIDDLE EAST/AFRICA

US-EU trade tensions may be improving. The focus today is not about tech legislation but Airbus subsidies. Recall that the most recent development in the 15-year dispute was last year’s WTO ruling in favor of Boeing, which allowed for $7.5 bln tariffs on European imports. Now, the Trump administration said it made “modest” changes to the list of tariffed goods from the EU but did not widen the list to increase the $7.5 bln total as threatened. Here, the US removed some items from the UK and Greece whilst adding some from Germany and France. The US also maintained the overall tariff rates of 15% rate on Airbus aircraft and 25% on goods, rather than increasing them to 100% as threatened.

The EU said the lack of escalation could pave the way for a broader cooperative agreement. The EU is waiting for a WTO decision on its own claims that Boeing received illegal subsidies through generous government contracts. This ruling may come this fall and could allow the EU to take similar retaliatory actions against US goods. USTR Lighthizer said the US is “committed to obtaining a long-term resolution to this dispute” and added that he would start a new process with the EU to reach an agreement.

Meanwhile, the US and UK are having a hard time progressing on their trade deal. Strong lobbying by the UK agricultural sector against US imports has been one of the main challenges. As we’ve noted before, if the UK can’t strike a relatively easy bilateral deal with the US this year, it will be next to impossible to pass a much more complicated deal with the EU before the transition period ends December 31.

ASIA

Australia employment figures came in better than expected in July, but details weren’t encouraging. The unemployment rate increased marginally to 7.5% (7.8% expected) even though total employment rose 114.7k vs. 30.0k expected and a revised 228.4k (was 210.8k) in June. Nearly two thirds of the newly created jobs were part time (71.2k), whereas in June, the entire gain was due to part-time jobs. Moreover, the July data still doesn’t capture some of the latest lockdown measures in Melbourne. The RBA just left policy steady last week while increasing its bond purchases to stop the rise in yields. It noted that it stands ready to change if needed but awaits more information on the potential impact of the widening lockdown in Victoria. Next policy meeting is September 1 and no change is expected then.