The US Dollar tries to regain some ground

Markets

Core interest rate markets yesterday tried to further build on a tentative pause/bottoming out process that started on Monday. With 100 bps Fed cuts discounted for this year and another 125 bps of reduction priced in for next year, markets for now apparently feel themselves as trading in line even with the new Fed guidance of a genuine scaling back of policy restriction. However, US data were inconclusive and didn’t really help to kickstart a real directional countermove. US house price data were close to expectations. Consumer confidence (Conference Board) for the second consecutive month beat market expectations (103.3 from 101.9) with both the current situation assessment and expectations adding to the improvement. At the same time, Richmond Fed business surveys suggest a further cooling in activity both in manufacturing and services. With markets still more sensitive to soft rather than strong data, the latter to some extent capped an intraday rebound in yields. Later in the session, (US) bonds were also supported by a strong investor buying interest at a $69 bln 2-y Treasury auction. US yields at the end of the day finished little changed in a tentative steepening move (2-y 3.7 bps; 30-y +0.8 bp). German Bunds outperformed with yields rising between 0.6 bp (2-y) and 5.4 bps (30-y). First August EMU inflation data to be released tomorrow and on Friday might help to clarify whether the ECB might have room to step up the pace of easing beyond an expected 25 bps step in September. The unconvincing intraday picture in US yields also capped any upside momentum in the dollar. DXY closed at a YTD low (100.55). EUR/USD finished at 1.1184. Sterling continued its outperformance, both against the euro and the dollar despite mixed CBI retail data (cable 1.326, EUR/GBP 0.8434). Equities didn’t go anywhere with investors looking forward to the Nvidia results to be published after the close in the US this evening. Oil reversed Monday’s jump higher to close near $ 79.55 p/b (Brent).

This morning, Asian equities mostly trade lower, with China underperforming. US yields show no clear trend. The dollar tries to regain some ground (EUR/USD 1.1145; USD/JPY 144.45, DXY 100.85). The eco data calendar is extremely thin in both side soft the Atlantic. The US Treasury will sell $70 bln 5-year Notes. Nvidia results (after the close) might help to investors to make up their mind whether there is further upside momentum in equities even as US indices are nearing record levels. For yields and the dollar some further consolidation near/slightly above recent lows might be on the cards today.

News and views

The Financial Times runs an article on China’s plans to issue billions of dollars of government bonds before the end of the year. People close to the central bank warned that they have the potential to burst the bubble in the country’s bond market. Official data show that as of July the government had yet to issue about Rmb 2.68tn ($376bn) from its full-year quota of special local government bonds (Rmb 3.9tn) and ultra-long central government treasuries (Rmb 1tn). Proceeds of the former are used by lower authorities for projects and investments while the latter serve to help stimulate the overall, slowing, economy. The wall of supply threatens a bullish Chinese bond market which push yields at 10-yr tenors to as low as 2.2%. Other agencies working close with the PBOC warned earlier this month as well that LT government bond yields have deviated from a reasonable range and show a tendency towards some degree of bubble.

Czech National Bank governor Michl yesterday indicated that it’s better to have a more consistent, but overall more restrictive monetary policy. The economy should be based on savings, not on debt. If we remain strict, one day we will prevent a repeat of high inflation. His comments came in the wake of his visit to Jackson Hole. He also warned against making rushed, ad-hoc monetary policy steps and experiments. The CNB cut its policy rate by 250 bps in total since December, to 4.5%. They meet next on September 25 where we expect a 25 bps rate cut.

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