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DXY closed above 110 for the first time since June 2002. DXY appreciated 0.6% to 110.21 on increased bets for a 75 bps hike to 3.25% at the FOMC meeting on 21 September. More so if the Bank of Canada delivers a 75 bps hike today. The US Treasury 10Y yield firmed 16 bps to 3.35%; 2Y closed above 3.50% for the first time this year. The US ISM Services PMI came in higher-than-expected at 56.9 in August; consensus had expected a slowdown to 55.3 from 56.7. More importantly, the employment index is back above its breakeven level at 50.2 in August from 49.1 in July. Prices paid slowed but remained high at 71.5 from 72.3. Next week, consensus expects CPI inflation to slow to 8.1% YoY in August from 8.5% in July. However, after stripping food and energy prices, core inflation is seen rising from 5.9% to 6.1%, still triple the 2% target.
Many Fed events will underpin the USD today. Fed Governor Lael Brainard and Presidents Thomas Barkin (Richmond) and Loretta Mester (Cleveland) will be speaking, followed by the Fed’s Beige Book report. At Jackson Hole in late August, the Fed convinced markets it would hold and not cut rates in 2023. With the US economy exiting its technical recession in 3Q22, the focus is on where the Fed Funds Rate will peak and pause. Mester called for a terminal rate above 4% by early 2023, in line with the Cleveland Fed’s report that labor shortages posed a challenge to controlling inflation. Hence, the Fed’s Summary of Economic Projections will become more important at the FOMC meeting.
Meanwhile, weaker stock markets from the Fed’s determination to control inflation are weighing on commodity-led and Asian currencies. Monetary policy divergences are a drag on the Japanese yen and Chinese yuan. Markets are again pressurizing the 10Y JGB yield at 0.25%, the ceiling under the Bank of Japan’s yield curve control framework. China has cut the forex reserve requirement ratio to 6% from 8%, which will take effect on 15 June. In the Eurozone, the energy crisis is eclipsing the 75 bps hike consensus now expects at tomorrow’s European Central Bank meeting. GBP remains weak near its 2020 Covid-low on economic/policy/political uncertainties under its new Prime Minister.
Quote of the day
“Growth demands a temporary surrender of security.”
Gail Sheehy
7 September in history
The US government took control of Fannie Mae and Freddie Mac in 2008.
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