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Investors are looking for today’s softer US CPI data to provide a relief rally. Consensus expects headline inflation to ease to 0.2% MoM in July from 1.3% in June and core inflation to slow to 0.5% from 0.7%. According to a New York Fed survey, falling gas, food and home prices drove consumer inflation expectations lower to 6.2% in July from 6.8% in June for the next year, and to 3.2% from 3.6% for the next three years. Brent crude oil prices have fallen below USD100 per barrel this month to levels at the start of the Russian-Ukraine crisis.
Lower US inflation expectations capped the US Treasury 10Y yield at 2.84% (100d MA). On the other hand, the 2Y yield is holding near 3.25% after last Friday’s stronger-than-expected US nonfarm payrolls and Fed Governor Michelle Bowman keeping the door open for a third 75 bps hike at the FOMC meeting on 21 September. Since March, the Fed has hiked 225 bps to 2.50% over four meetings. Our chief economist expects another 100 bps over the remaining three meetings this year and sees rates peaking at 3.50%, i.e., a 50 bps hike in September and a 25 bps hikes each in November and December.
Fears of a hard landing in the US economy have not gone away. The US yield curve, as per the 10Y-2Y differential, deepened to almost -50 bps, its worst since the tech recession in 2000. Poor guidance from chipmakers Micron Technology and Nvidia drove the Philadelphia Semiconductor Index or SOX down by 4.6% to below its 100-day moving average. However, the three major indices – Dow, S&P 500 and Nasdaq Composite – were still supported at their 100-day moving averages, hoping for a relief rally from the softer US CPI expected today.
Not surprisingly, our model showed that momentum has flattened for many currencies. Most currencies bottomed after the US technical recession pulled back bets for outsized Fed hikes. Monetary policy has become more of convergence than divergence story after most central banks except Japan became as serious as the Fed in dealing with inflation. USD/JPY peaked at 139.40 and traded below 136 in August. After testing parity in mid-July, EUR/USD has recovered into a 1.01-1.03 range. Similarly, GBP/USD bottomed at 1.1760 and recovered to 1.20-1.23 this month. Commodity currencies are caught between risk appetite and weaker commodity prices. In August, AUD/USD fluctuated between 0.6870 and 0.7050, NZD/USD between 0.6210 and 0.6350, and USD/CAD between 1.2760 and 1.2810.
In Emerging Asia, the USD also peaked and consolidated. As fears of more outsized Fed hikes eased, hopes emerged for a soft landing. Over the past month, the Philippines, South Korea and India stepped up rate hikes to address inflation. Let’s see if Thailand delivers its first hike today. USD/SGD is trading between 1.3750 and 1.3850 this month after falling from 1.41 in the second half of July. USD/PHP peaked at 56.6 on 18 July and returned to a lower 55-56 range in late July. Similarly, USD/IDR fell to 14800-14950 this month after hovering around 15000 last month. After trading near 37 in late July, USD/THB fell below 36, with potential support around 34.8 (100d MA). Since mid-July, USD/MYR has been trading between 4.4470 and 4.4630, USD/CNY mostly between 6.73 and 6.77.
Quote of the day
“The EU is more resilient than we give it credit for. We always muddle through.”
Kersti Kaljulaid
10 August in history
The French monarchy was overthrown in 1972 with the imprisonment of King Louis XVI and his wife, Marie Antoinette.
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