Dollar Shows First Signs of a Bottoming

Markets

Focus turned to the Bank of England (+50 bps to 5%), the Norges Bank (+50 bps to 3.75%), the Swiss national bank (+25 bps to 1.75%) and the Central bank of Turkey (CBRT +650 bps to 15%) yesterday. One way or another, they all had to cope with stickier than expected inflation, at least partially due to a resilient labour market keeping demand at a higher level than what is needed to bring inflation sustainably back to target. It might be coincidence, but none of the four countries’ currencies really gained, even not NOK or GBP which received larger than expected interest support. It suggests that markets think further catching up action is needed to bring policy back ‘ahead of the curve’. This feeling also dominated core global markets. Without high profile news, US yields were captured in an intraday uptrend. Rather soft jobless claims release (264k) didn’t change the course of events. Fed Powell before the Senate openly admitted that two additional rate hikes might be appropriate. US yields added between 8.5 bps (5-y) and 6.2 bps (30-y). The German yield curve inverted further with yields rising between 8.8 bps (2-y) and 2.7 bps (30-y). Even with US real yields (10-y 1.56%) trending higher again, the damage for equities remained negligible/non-existent. (Eurostoxx -0.42%, Nasdaq + 0.95%). On FX markets, the dollar shows first signs of a bottoming after the June setback. DXY closed at 102.38. The test of EUR/USD 1.10 earlier this week seems rejected (close 1.0956). As indicated, EUR/GBP closed only marginally softer at 0.8595 despite the 50 bps BoE rate hike.

Asian markets shifted further into risk-off modus this morning, with the Nikkei losing 1.8%. Mainland China markets are closed. The dollar is gaining further traction (EUR/USD 1.093, DXY 102.64). Monthly PMI releases take center stage. The US composite PMI is expected to ease from 54.3 to 53.5 with momentum in the services sector cooling at lofty levels. A similar pattern is penciled in for EMU (composite expected at 54.5 from 55.1). Question is whether the slowdown in demand is big enough for markets to see tightness in the labour market easing and filtering through into less demand-driven inflation. We’re not convinced that this will already be the case. So the downside in core yields might remain well protected. USD is ripe for a technical rebound, especially if the equity correction accelerates. EUR/USD dropping below 1.09 would call off the ST upside pattern in the cross rate. UK May retail sales this morning printed slightly stronger than expected (0.3% M/M, -2.1% Y/Y). Sterling hardly reacts (EUR/GBP 0.8600).

News and views

Japanese inflation eased from 3.5% to an expected 3.2% in May. Energy again played a huge role, with utilities bills dropping a sharp 3.9% m/m. The core gauge excluding fresh food slowed as well, be it a bit less than anticipated, from 3.4% to 3.2% (vs 3.1% consensus). Excluding both food and energy, prices accelerated to a new 42-year high of 4.3%. The Bank of Japan last week kept policy parameters unchanged and didn’t hint at a short-term change either as it considers the current price uptick mainly as supply/cost-driven. With each release, however, inflation raises pressure on the BoJ. Market attention has shifted to the July meeting, when new forecasts are due, for a potential policy tweak. By then, the BoJ will also have received the June inflation print. Meanwhile, monetary policy divergence with core countries has pressured the yen to the lowest level since November last year against the dollar (USD/JPY around 143). EUR/JPY even trades at its strongest in 15 years (EUR/JPY comfortably above 156). The Japanese currency’s gains today are negligible.

UK GfK consumer confidence continued to recover in May. The indicator rose from -27 to -24 vs -26 expected and is now at the highest level since January last year. Confident consumers appear at odds with gloomy reports of searing mortgage rates as a result of the Bank of England’s tightening campaign (+50 bps yesterday). But with the majority of mortgages at a fixed interest rate, it is taking a long time to filter through in household finances. At the same time the UK labour market is still very tight, helping consumers to withstand the current high inflation pretty well. According to Joe Staton, director of client strategy for GfK, the “most telling finding” is the subindex measuring the outlook for personal finances (12 months ahead). That indicator rose 7 points (to -1) and is almost in positive territory for the first time since December 2021. Savings intentions rose to equal the highest post-GFC level (25).