Markets
The message hit the dollar with a delay. And with the message we obviously refer to the Fed’s new medium to long term policy framework. Fed Chair Powell spelled out the average inflation targeting principle, allowing for temporary overshoots, while upgrading the maximum employment goal. Given the flat Philips curve of the past years, it sends the same message: the hurdle for policy tightening is high. The prospect of higher inflation (negative) and higher US real yields (positive) kept the greenback in limbo yesterday. Inflation expectations remain upwardly oriented today while real yields reverse yesterday’s increase. The double whammy hits the US currency hard. The trade-weighted dollar snaps from 93 to 92.20, approaching this year’s low at 92.18. EUR/USD takes out 1.19, but the year-to-date high at EUR/USD 1.1966 still seems safe right now. The damage against the yen is even bigger with the Japanese currency adding some strength. USD/JPY drops from the high 106 area to the low 105 regions. The yen gained after Japanese PM Abe confirmed speculation about his resignation. He won’t let personal medical issues interfere with governing. The longstanding PM (since 2012) and architect of “Abenomics” singlehandedly weakened the yen from the USD/JPY 80-area to as high as USD/JPY 125 in 2015. He rubberstamped an audacious set of reforms, winged by an easy fiscal and monetary policy to help the Japanese economy back on its feet. Cable (GBP/USD) briefly passed the 1.33 bar for the first time since December last year. Interestingly, the UK currency kept its composure even during BoE governor Bailey’s speech at the virtual Jackson Hole Symposium. Bailey removed all doubts by opening that the BoE’s tool box included negative policy rates. In line with his colleagues he kept a very dovish tone: monetary stimulus isn’t going anywhere anytime soon. EUR/GBP flipped sides around the 0.8950 handle all day, holding above EUR/GBP 0.8930 support.
The belly of the US yield curve outperforms the wings today. US yields shed 1.6 bps (30-yr) to 3 bps (5-yr). Technically, the US 10-yr yield bounced into first resistance around 0.78% (April highs). Changes on the German yield curve vary between -1.7 bps (3-yr) and +0.9 bps (30-yr). The German 10-yr yield faces similar technical difficulties around intermediate resistance near -0.37%. 10-yr yield spread changes vs Germany are narrowly mixed. On other markets, we see gold profiting from combination that hurts the dollar. Gold prices return north of $1950/ounce. Mixed European equities give no guidance at all, with main US indices opening with small gains.
News Headlines
US personal spending continued to rebound in July rising by 1.9% M/M. Spending growth slowed from the June pace (6.2%), but was still slightly ahead of expectations. Indicators on price growth remained subdued, with the PCE deflator rising 0.3% M/M and 1.0% Y/Y (from 0.9% in June). The US July merchandise trade deficit widened sharply in July to $79.3bn, the second largest on record. Both exports and imports rose at 11.8%. US two-way trade rose from $ 276.7bn in June to $ 309.3bn, but remains below pre-pandemic levels (eg. $334,3bn in February).
More than 100 UK lawmakers a joined call from trade union Unite asking the government to provide extra state support to airlines and airports as they continue to be hard hit by the negative impact of the corona pandemic on travel, with more jobs at risk. The lawmakers are asking the government to extend its job retention scheme for the sector until March next year. The scheme is planned to close for all businesses by the end of October.
Bondholders of Argentina government debt will decide whether to accept the country’s $65 billion restructuring proposal. The main three creditor committees holding a large part of the bonds backed a deal earlier this month, bolstering confidence that the government will get the required level of support to allow a full deal to go ahead.
