Alarm Bells in USD/JPY (159.80) Keep Ringing

Markets

Washington-based Fed governor Cook in a speech for the Economic Club of NY joined SF Fed Daly (voter) in warning that the US labour market could change very quickly and that official stand ready to respond. She also referred to the fact that payrolls job gains were overstated last year and may continue to be this year. A first big revision by the Bureau of Labour Statistics is due by the end of August and could be a gamechanger in deciding the outcome of the September FOMC meeting. For now, the labour market is “tight, but not overheated” in Cook’s view. Unlike hawkish Fed Bowman earlier on the day, Cook is solely looking in the direction of a rate cut as next move, but the timing remains unclear. She hails progress made on the inflation front and expects three- and six-month inflation rates to continue to move lower on a bumpy path with more favorable monthly inflation readings for the rest of the year (more similar to H2 2023 instead of Jan-Apr this year). She expects a sharper decline next year as the past slowing on new leases starts impacting housing-services inflation. Slightly negative core goods inflation and easing supercore inflation should also help. Cook’s comments didn’t impact yesterday’s intraday market dynamics which were mostly sentiment-driven and technical by nature. US yields eventually added 1-2 bps across the curve but are stuck near recent correction lows. The dollar was again better bid, closing at EUR/USD 1.0714. Alarm bells in USD/JPY (159.80) keep ringing. US consumer confidence held up somewhat better in June (100.4 vs 100 consensus) though coming from a downward revision in May (101.3 from 102). Details showed a bigger deterioration in the expectations component with both future income and business conditions weakening. The US Treasury’s $69bn 2-yr Note auction met with good demand after last month’s little scare. US stock markets (mainly Nasdaq; +1.26%) rebounded, driven by Nvidia.

Today’s eco calendar is extremely thin, paving the way for more rangebound action. ECB Rehn this morning labelled bets for two more ECB rate cuts this year as reasonable and believes that the current market view of a 2.25%-2.50% terminal rate is also fair. He doesn’t see disorderly market move in France or a debt crisis in the making, suggesting that the ECB won’t have to use its “Transmission Protection Instrument”, a back-up tool allowing the ECB to buy bonds from countries experiencing a deterioration in financing conditions mot warranted by fundamentals. EUR/USD is a tad softer near 1.07.

News & Views

Australian CPI rose to 4% Y/Y from 3.6% in April (vs 3.8% consensus). On a monthly basis inflation eased 0.1%, but this came on the back of a monthly rise of 0.7% in April. The most significant contributors to the annual rise were housing (+5.2%), food and non-alcoholic beverages (+3.3%), transport (+4.9%), and alcohol and tobacco (+6.7%). Inflation excluding volatile items (fruit and vegetables, holiday travel and automotive fuels) eased slightly from 4.1% to 4% but also stays well above the 2-3% RBA inflation target. The trimmed mean measure of core inflation also climbed from 4.1% to 4.4%, the highest level in six months. The next RBA meeting takes place on August 6, a week after the publication of more important quarterly price data (July 31). At its June meeting, the RBA already indicated that felt uncomfortable with inflation easing more slowly than expected, not ruling out further rate hikes. Markets attach a 50% probability to the RBA effectively increasing its policy rate in autumn. The 3-y government bond yields adds 18 bps this morning (to 4.11%). AUD/USD gains from 0.6647 to 0.6685, but holds in the tight range between 0.6575 and 0.6715.

Reserve Bank of India Governor Das said that India needs to keep its focus on bringing inflation back to 4% as this is key to maintain stable growth rates. Indian inflation eased to 4.75% in May, down from 4.83% in April. However, the RBI governor indicated one severe weather-related shock via higher food prices could push headline inflation back to 5%. This risk together with ongoing strong growth should keep the RBI’s focus on inflation. With respect to Indian growth, the RBI governor is confident that the country meets the 7.2% growth projection for current fiscal year. He even sees the country being at the threshold of a structural shift in its growth trajectory that might put it at achieving 8% growth on a sustained basis. The RBI policy rate is unchanged at 6.5% since February of last year.

Graphs

GE 10y yield

The ECB cut its key policy rates by 25 bps at the June policy meeting. A more bumpy inflation path in H2 2024, the EMU economy gradually regaining traction and the Fed’s higher for longer US strategy make follow-up moves difficult. Markets are coming to terms with that. For the time being, though, the political narrative (France) dominates. After hitting a new YtD top at 2.7%, the German 10-yr yield corrected lower on safe haven bids.

US 10y yield

The Fed is seeking more evidence than just one slower-than-expected (May) CPI is providing. Upgraded inflation forecasts and a higher neutral rate complicate the exact timing of a first cut further. June dots suggest one move in 2024 followed by four more next year. Markets are positioned more aggressively, turning the recent low in yields into a technical support zone. The US 10-y yield is testing the downside of the 4.2/4.7% trading range.

EUR/USD

EUR/USD is stuck in the 1.06-1.09 range. The desynchronized rate cut cycle with the ECB exceptionally taking the lead, strong US May payrolls and a swing to the right in European elections pulled the pair away from 1.09 resistance. The Fed meeting balanced the weaker than expected US CPI outcome. Euro fragility makes a return to the 1.06 downside more likely than not.

EUR/GBP

Debate at the BOE is focused at the timing of rate cuts. May headline inflation returned to 2%, but core measures weren’t in line with inflation sustainably returning to target any time soon. Still some BoE members at the June meeting appeared moving closer to a rate cut. This might cap further sterling gains. At the same time, the euro remains vulnerable to political event risk going into the French elections. EUR/GBP 0.84 is becoming solid support.