DXY did not break out of its 105-107 range last week. Despite Fed officials pushing back against US recession talk and a stronger-than-expected US jobs report, the US Treasury 10Y yield recovered only to 2.83% from 2.51% last week. The 2Y yield firmed 34.1 bps to 3.23%, in line with Fed officials pushing for the Fed Funds Rates to rise from 2.50% to 3.00-3.25% at the FOMC meeting on 21 September. The 10Y-2Y yield curve further inverted to almost -40 bps, its deepest since September 2000. The market’s message was clear: outsized Fed hikes could turn the US technical recession turning into a hard landing. In a poll conducted by ABC News and Ipsos, nearly 70% of the American public did not share the Fed’s optimism and believed the US economy was weakening. The poll was conducted after the upside surprise in US nonfarm payrolls to 528k in July. Bloomberg consensus had expected a fall to 250k from 398k (revised up from 372k) in June.
This week, consensus expects US CPI inflation out on 10 August to slow to 0.2% MoM in July from 1.3% MoM in June, or 8.7% from 9.1% in YoY terms. Markets could not shake off the weak demand that lowered Brent crude oil prices by 13.7% last week to USD95 per barrel, below 100 for the first week since the start of the Russia-Ukraine conflict. Prices paid in the US ISM manufacturing and services PMI surveys also fell in July.
GBP to test the 1.20 support against USD. Last week, GBP depreciated 0.7% to 1.2073 despite the Bank of England’s first 50 bps hike since 1995. Although the central bank forecast CPI inflation to rise further to 13% YoY in October from a 40-year high of 9.4% in June, it played down the odds of another 50 bps hike in September. Consensus took, at face value, the BOE’s prediction for this Friday’s GDP to contract by 0.2% QoQ sa in 2Q22 from 0.8% growth in 1Q22. While the BOE expects growth to turn positive by 0.4% in 3Q22, it also predicted a recession from 4Q22 to early 2024. Ironically, this fits nicely into the push for tax cuts by the two candidates – frontrunner Foreign Minister Liz Truss and former Chancellor Rishi Sunak – vying to become Prime Minister at the Conservative Party leadership elections on 5 September. Hence, we cannot dismiss of GBP finding support at 1.20.
EUR is not showing signs of breaking out of its 1.01-1.03 range set on 18 July. Today, consensus expects Sentix Investor Confidence to weaken to -29 in August from -26.4 in July. Germany is anticipating a resurgence in Covid infections in autumn and winter. However, the Health Ministry ruled out a nationwide lockdown in favour of basic Covid measures first, and stricter measures should the situation worsens. Germany will proceed with the annual Oktoberfest festival after a two-year absence. In Italy, the fragile centre-left alliance collapsed after a week, with the country headed for general elections on 25 September. However, the 10Y yield spread between Italian and EU bonds narrowed by 13.6 bps to 206.8 bps, in line with the weak global economic outlook.
Quote of the day
“I have never been lost, but I will admit to being confused for several weeks.”
Daniel Boone
8 August in history
US Congress unanimously chose the dollar as the monetary unit for the USA in 1786.
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