Dollar in broad retreat as long-term rates creep higher worldwide
The dollar ended the week lower against most of its peers, but the more important action took place away from currency markets.
Highlights:
US CPI report almost confirms September Fed cut.
Dollar retreats ahead of Jackson Hole conference.
Trump-Putin meeting fails to yield clear peace progress.
GBP gains after solid UK GDP growth figures.
RBA cuts rates, hints at further easing ahead.
RBNZ set to deliver another 25 basis point rate cut.
While stocks continue to hit new highs, the worldwide sell-off in long-term government bonds is gathering pace. Rates actually rose more in nearly every G10 country than they did in the US last week, which certainly contributed to dollar weakness. These rumblings in fixed income markets are taking on added importance amid the general summer trading torpor and a relative absence of critical economic or monetary policy news.
In a week with relatively sparse releases, the focus should be on the annual conference of central bankers at Jackson Hole, Wyoming. With markets pricing in a near certainty of a September Federal Reserve cut, it will be interesting to find out whether chair Powell pushes back against this forecast on Friday, given the distinct stagflationary whiff emanating from the latest economic releases in the US. Prior to the conference, UK inflation figures on Wednesday and the G3 PMIs of business activity on Thursday will be the main economic data releases this week.
USD
The US consumer inflation figures for July came out roughly in line with expectations and as yet are showing little passthrough from tariffs. Producer inflation (PPI), on the other hand, was much hotter than expected in a sign that tariff-related price pressures are working their way through the supply chain, but have yet to reach final consumers.
Markets are pricing in nearly a 90% chance of a cut at the September meeting of the FOMC going into the Jackson Hole conference this week. Inflation remains stubbornly high and shows little sign of trending down, and the labour market slowdown seems to have more to do with stagnating labour force than anything else, so we eagerly anticipate speeches by FOMC voters this weekend to see if there is significant pushback against this market pricing.
EUR
The euro has held onto its recent gains, despite the lack of clear progress towards peace following Friday’s Trump-Putin meeting. As we mentioned on Friday, however, the promise of further talks down the line is probably the best that markets could have hoped for. The main data point last week out of the Eurozone were the disappointing June industrial production figures. Yet, this number was distorted by the payback from the first quarter surge in production and shipments ahead of US tariffs, so it may be less meaningful.
The PMIs of business activity out this week will provide a better and more timely read on the state of manufacturing and services in the Eurozone. With short term rates at 2% and core inflation slightly above target markets are becoming skeptical that there is much room for further easing. ECB president Lagarde is set to provide further clarity on this at the Jackson Hole conference. In the meantime, today’s Trump-Zelensky meeting will be closely watched.
GBP
A slew of backwards looking data on GDP and employment came out somewhat better than expected and have done little to sway the Bank of England into easing policy aggressively. The UK economy grew by a solid 0.3% in the second quarter of the year, after economists were bracing for effective stagnation. With demand still growing, even if only partly a by-product of the recent pleasant weather, the MPC’s focus should remain on reining in stubbornly high inflation, which remains almost double the 2% target level.
Swap markets currently see no change in the base rate for at least the next couple of MPC meetings, with a two-in-three chance of another cut in December. We think that there’s a good chance that we see no more rate reductions at all during the rest of the year, which should continue to support the pound. Wednesday’s inflation report for July could be highly important in this regard, although it will probably take a big surprise here to bring further easing into view.