Dollar Taking a Breather on its Protracted Rally

Markets

With little economic data in the way, the first trading session post-Jackson Hole mainly yielded order-driven and technically inspired trading. Fed Chair Powell reiterating the ‘higher for longer mantra’ didn’t change investors’ assessment in any profound way. At the short end of the curve, the US 2-y touched 5.10% at the start of US dealings, but the cycle top (5.1175%) was left intact. Bonds gradually rebounded. The intra-day price dynamics was reinforced by a solid $ 46 bln 2-y US Treasury action. The subsequent 5-y note auction was ok. At the end of the day, US yields ceded between 3.75 bps (5-y) and 0.7 bps (30-y). German yields added between 3.1 bps (2-y) and 0.3 bps (10-y). ECB Holzmann advocated a front-loading approach to reach the peak cycle rate sooner rather than later. However, his comments had limited impact on trading. EMU inflation data to be published later this week will be key to guide the debate whether or not the ECB should consider a pause in its hiking cycle at the September 14 meeting. Equity investors apparently felt comfortable with the post-Jackson Hole status quo on interest rate markets. The S&P500 gained 0.63%. After a poor post-PMI performance last week, the Eurostoxx 50 yesterday even outperformed, gaining 1.36%. On FX markets, the dollar is taking a breather on its protracted rally since mid-July. The DXY index yesterday closed just north of the 104 big figure (open 104.17). For now, a real attack/break of the 104.7 end May top apparently is difficult without additional strong US data and/or markets pricing in a bigger chance for a 25 bps September 21 Fed rate hike than is currently the case (+/-25%). EUR/USD (1.0819) succeeded a close north of 1.08 after testing the 1.0766 area last week. Still the picture remains fragile. The yen for now still isn’t able to profit from any USD softness with USD/JPY still closing at 146.54 after setting a minor YTD top earlier yesterday. London markets were closed.

Asian equity markets mostly trade in positive territory joining yesterday’s WS rebound. Measures to support markets announced in China yesterday maybe also still play a role. US Treasuries show a tentative bid. Dollar is losing slightly (DXY 103.94; EUR/USD 1.0825). The calendar in Europe still only contains second tier data. The US is more interesting with house price data, JOLTS job openings, consumer confidence (Conference Board) and a $35 bln 7-y Treasury auction. We don’t expect markets to break any important levels with key US data (ADP, payrolls, manufacturing ISM) and EMU inflation data to be published later this week. 4.89% is first support for the US 2-y yield. On FX the picture stays USD constructive as long as the DXY 103 area holds. Also keep an eye at the ongoing topside test in USD/JPY.

News and views

The British Retail Consortium-Nielsen’s shop price index eased further in August. Prices rose 6.9% y/y, down from 7.6% in July and the 9% series high in May this year. Food led the decline, in particular meat, potatoes and cooking oils. While grocery prices still rose 11.5%, it was less than the 13.4% last month and the slowest since September 2022. “The unpredictable weather of recent weeks has dampened consumer demand with some high street retailers increasing promotional activity and food retailers continuing to extend price cuts,” head of retailer and business insight at NielsenIQ Mike Watkins said. Today’s numbers are a welcome development for the Bank of England though offer no room for complacency with official inflation still being well over triple the 2% target. UK money markets currently price in at least two more hikes to 5.75%. Sterling this morning ekes out a small gain (EUR/GBP 0.8575).

The Japanese government in its annual economic white paper said the country finds itself at an “inflection point” in its battle with 25 years of deflation. It referred to signs of broadening price and wage rises in an echo of the Bank of Japan, which said that price- and wage-setting behaviour was changing. In last year’s edition, the government said inflation was modest except for some food and energy-related goods. Now, it pointed to a “still moderate pace” of service price increases while at the same time highlighting the importance of it since they reflect domestic demand and wages more than goods prices do. Official Japanese inflation numbers hit 3.1-4.3% depending on the gauge in July, the highest in four decades. For the government to officially declare an end to the in 2001 introduced state of deflation, it not only needs to see underlying price rises but also clear signs that Japan won’t return to periods of price drops.