The Dollar extends yesterday rebound with EUR/USD drifting below the 1.1600 big figure

Markets

With markets counting down to Jackson Hole, US data yesterday didn’t provide much need for Fed Chair Powell to commit to any aggressive further policy easing already at this stage. US jobless claims and the Philly Fed Business outlook were a bit softer than expected but that was more than counterbalanced by a big beat in the US August PMI. With the composite measure PMI at 55.4, US business activity grew at the fastest pace this year and suggests strong Q3 growth (S&P global sees it consistent with 2.5% annualized growth). Solid growth was seen both for services activity (55.4) and manufacturing (53.3, 39 month high), also resulting in strong job creation. The report mentions tariffs as a key driver of further costs increases, both for the services and the manufacturing sector. The report concludes that “combined with the upturn in business activity and hiring, the rise in prices signaled by the survey puts the PMI data more into rate hiking, rather than cutting, territory according to the historical relationship between these economic indicators and FOMC policy changes”. The US yield curve bear flattened with yields adding between 4.6 bps (2-y) and 2.2 bps (30-y). Also Fed’s Goolsbee in a Bloomberg interview at least showed some concerns on the recent up-tick in services inflation. After a less impressive (but still decent) EMU PMI, German yields added 3-4 bps across the curve. EUR/USD initially however in the mid 1.16 area, but the dollar finally took the lead after the PMI’s (EUR/USD close 1.1606, DXY 98.62). The strong PMI report didn’t help US equities with major indices again easing 0.35/0.50%. Oil trended higher (Brent $67.6/b).

Asian equities are trade mixed this morning. The dollar extends yesterday rebound with EUR/USD drifting below the 1.16 big figure as markets are looking for more specific guidance on Fed policy from Powell’s Jackson Hole speech (4pm CET). The WSJ suggests that the core of Powells speech might be the Fed Chair commenting the conclusions of the 5-year review of the Fed policy framework. The previous review was mainly focused on issues related to policy efficacy in a context of (too) low inflation and near zero policy rates. Amongst others, that review included an approach allowing a temporary overshoot of the 2% target. As such, changes/a reversal in the longerterm policy framework shouldn’t have too much impact on day-to-day policy. Still, a return to more balanced 2% inflation targeting contains somewhat of a more hawkish message. If the Fed Chair touches on short-term policy, we also expect him to hold to a guarded, data-dependent approach. In such a scenario, markets might turn more cautious on the chances for a September Fed rate cut. (currently 70 % discounted). It could support the recent USD rebound. EUR/USD might correct somewhat further south in the EUR/USD 1.18/1.14 trading range. It’s too early to draw any conclusions on the established USD downtrend yet.

News and views

National Japanese inflation numbers for July printed broadly in line with expectations. Both headline and core CPI (ex fresh food) rose by 0.1% M/M with both annual readings slowing from 3.3% Y/Y to 3.1% Y/Y. Stripping out energy as well, inflation held steady at 3.4% Y/Y. Services inflation also matched June’s pace at 1.5% Y/Y. Sticky Japanese inflation above the BoJ’s 2% inflation target suggest that the central bank might be lured into continuing its normalization (hiking) cycle at the October 30 policy meeting, when new quarterly projections will be released. Japanese money markets currently see a 50/50 chance of that happening.

Market research firm GfK’s UK consumer confidence indicator rose from -19 in July to -17 in August, its best outcome since December. Especially household sentiment over personal finances improved (both last 12 months as next 12 months) with the Bank of England’s latest rate cut contributing to the improving mood. GfK commented that there’s no sense yet that consumer confidence is about to break out into fresher, more optimistic territory. It’s more wait-and-see with rising inflation and potential tax increases in the autumn budget being downside risks in the (near) future.

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