The Dollar shows no clear trend

Markets

The rise in global bond yields took a breather yesterday after many tenors in multiple countries set multi year highs earlier this week. Some balanced comments by Fed’s Waller and a slower rise in oil prices (Brent closed at $95.5/b) prevented yields from extending their protracted uptrend. Waller said he would support holding rates stable in September if August inflation confirms the disinflation process. Clearly a conditional assessment as he also said that he is heavily influenced by the August CPI reading to published next Friday. At the same time, if inflation comes in hot, he would consider a hike. We see not that much of ‘new news’ in the comments, but US yields at the end of the day eased between 3.3 bps (2-y) and 1 bp (30-y). Later in the session, the US services ISM printed strong at 55.1, with high readings for new orders (60.9) and prices paid (72.6). At the same time, the employment subseries stays below 50 (47.8). The market reaction was negligible. German yields declined/corrected between 4 bps and 2.2 bps. The pause on global bond markets supported a further risk-on correction on (US) equity markets (S&P 500 + 1.06%) and pushed the dollar lower. EUR/USD rebounded to close back north of 1.16. Even so, the focus in FX remained on the yen. The Japanese currency extended the rebound that was triggered on Wednesday by hawkish comments from BoJ policy maker Takata. Markets taking into account faster BoJ tightening caused a further unwinding of yen-funded carry trades. USD/JPY closed below 156 (155.8) and nears the key 155 support area. After recent retracement, sterling also outperformed yesterday. EUR/GBP dropped to close at just below the key 0.86 technical reference. 

Asian markets join the US rebound yesterday with several regional indices showing gains of 1%+. Japanese yields ease between 1.4 bps (2-y) and 10.6 bps (30-y). The dollar shows no clear trend. USD/JPY rebounds slightly to 156.3. At the same time, EUR/USD gains marginally (1.163). Later today, the market focus turns to the August US payrolls even as the report this time might be far less important for markets compared to next week’s US CPI release. Markets expect 55k of net US job growth with the unemployment rate stable at 4.1% and average wage growth at 0.1%M/M and 3.1% Y/Y. As was the case this week with the ISM’s, a big surprise is probably needed to trigger a sustained market reaction. A decent figure at least should confirm the (Fed’s) assessment that it can fully keep its focus on inflation. Aside from the eco data, (German bond) markets also will keep an eye at the regional elections in the State of Saxony-Anhalt where polls indicate that the far-right AFD might win with a big margin, which could have consequences for broader political stability in the country. 

News and views

Bloomberg, citing a person familiar with the matter, reported that the Hungarian central bank may announce a new inflation target at the September 22 policy meeting. Governor Varha said last month that the MNB was finishing its review of the goal and was considering a multi-step approach in adjusting it. The person told Bloomberg that the new target would be 2.5% instead of the current 3% (+/- 1 ppt tolerated deviation). A potential next, future move would then align it with the ECB’s 2% objective. The timing of such a decision is not coincidental. Hungarian inflation is currently at a decade low of 1.2%. That’s offering the central bank a window of opportunity to lower the target without necessarily needing to tighten monetary policy. The person did say that it’s likely that the central bank would halt its rate cut cycle after three consecutive moves lower from June through August. Hungarian swap rates extended earlier declines yesterday. The textbook bull flattening saw net daily changes varying between -12 bps (2yr)  to -22 bps (10-yr). The Hungarian forint strengthened as the convergence trade picked up again. EUR/HUF closed below 362.

Bank of England chief economist Pill singled out government pressure on central banks to finance huge deficits as the biggest threat to monetary policy independence. Pill’s comments come as slow growth and a series of multiple inflationary shocks in recent years have caused budget deficits and debt to rise sharply. Government bond yields have been responding accordingly, including in the UK, by topping multidecade highs. Unlike the pre-Covid era when rates were low and central banks were scooping up government debt in secondary markets, however, monetary policy’s hands are now firmly tied.  “How central banks meet such threats to independence in an uncertain and difficult economic environment is the defining challenge they currently face”, Pill said.

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