DYX Dropped Below 104 (Close 103.5)

Markets

US and EMU markets yesterday initially held to the guarded technical trading as was the case on Monday. However, with central banks working under the highest the degree of data dependency, things can move quickly. Both US JOLTS job openings (8827k from 9165k, lowest since March 2021) and consumer confidence (106.1 from 114) showed an unexpected tumbling, causing markets to raise the odds for a pause in the Fed hiking cycle at the September meeting, despite chair Powell and other central bankers holding to the higher for longer narrative at Jackson Hole just a few days ago. In a perfect re-steepening the US 2-y yield dropped 15.4 bps leaving behind the 5.0%+ area (4.90%).The 30-y eased 4.7 bps. The decline was mainly driven by the real yields (10-y minus 6.4 bps). The spill-over to European markets was modest. The focus in the EMU is on inflation data to be published today (Germany) and tomorrow (EMU). German yields lost between 2.3 bps (2-y) and 5.7 bps (30-y). The sharp decline in US yields propelled equities (S&P 500 +1.45%, Nasdaq 1.74%). Important support levels that were at risk only a week ago look again relatively safe now. The lost of (real) interest rate support and the risk rebound broke the USD’s momentum. The DYX dropped below 104 (close 103.5). A potential test of the 104.7 end May top is called off for now. EUR/USD jumped to the high 1.08 area (close 1.088). Even the yen received some breathing space after USD/JPY initially jumped well north of 147 (close 145.88). Even so, the USD/JPY uptrend remains intact for now.

Asian equities mostly open in green but gains could have been bigger give the price action on WS yesterday evening. Persistent uncertainty on Chinese growth and on the country’s property sector are tempering sentiment. US ADP private job growth later today is expected to decline from a very strong 324k in July to 195k in August. Markets are sensitive to negative surprises, but after yesterday’s repositioning expectations for a September Fed rate hike have already become low going into Friday’s payrolls report (0.15%). So the room for a further sharp decline in ST US yields probably isn’t that big anymore. The reaction of European interest rate markets to the German August CPI data could be more interesting. Headline HICP inflation is expected to slow down further to 0.3% M/M and 6.5% Y/Y (from 0.5%M/M and 6.5% Y/Y in July). With markets discounting a close to even chance between a rate hike and a pause at the September 14 ECB meeting, there is room for a market reaction either way in case of a surprise. The EUR/USD decline over the previous month was mainly driven by overall USD strength. After yesterday’s rebound, the pair is now closing in the ST downtrend line marking the decline since mid-July (coming near 1.09). The payrolls will have the final say on the overall USD performance. Even so, higher than expected EMU inflation data might help to put a floor the euro short term.

News and views

Headline Australian inflation rose by 0.3% M/M in July following a 0.7% gain in June. The Y/Y figure dropped more than forecast, from 5.4% to 4.9%, matching the lowest level since February 2022. Declines in holiday travel and accommodation (-3.3%), fruit and vegetable prices (-2.9%) and automotive fuel (-0.2%) weighed on headline CPI while price for rents (0.7%), electricity (6%) and gas and other household fuels (2.3%) increased. Government energy rebates prevented a 19.2% increase in electricity prices, according to the Australian Bureau of Statistics. CPI excluding volatile items remained higher at 5.8% Y/Y (vs 6.1% Y/Y in June). The Aussie dollar briefly ticked lower on the release, but already returns towards yesterday’s 0.6480 top (USD weakness). Incoming RBA governor Bullock yesterday said that inflation is still too high in Australia and that the RBA may have to raise interest rates again. For the time being and at least until next year, the central bank will be taking decisions month by month. She’s reluctant to give any sort of predictions on how long interest rates may have to stay high.

People familiar with the matter told news agency Bloomberg that China’s largest banks are preparing to cut interest rates on existing mortgages (loans on first homes) and deposits as soon as today in the latest bid to revamp consumer spending. In separate news, the China Securities Journal reports, citing analysts, that the country’s currency will receive government support to prevent excessive volatility awaiting pro-growth measures to take effect. USD/CNY is camping around 7.30, matching the weakest CNY level since end 2007.