OVERNIGHT MARKET SUMMARY
The U.S. dollar slipped across the board this morning after a cooler than expected print on the closely watched consumer price index (CPI) for July, which recorded an increase of just 0.1%(m/m), half of the forecasted 0.2%(m/m). Ex-food and energy it was the same story, a 0.1%(m/m) print for core CPI versus the forecast for a rise of 0.2%(m/m). The cooler CPI figures this morning follow similarly lower than expected wholesales price data yesterday and together, have highlighted the extremely benign inflation backdrop that has reduced expectations for Fed lending rate hikes in the months ahead. The market reaction was swift and decisive with the dollar and yields falling to lows across the board.
The euro jumped to session highs against the broadly weaker dollar this morning after U.S. CPI for July undershot market expectations and once again, highlighted the near total lack of inflation pressure in the economy. The lack of meaningful price pressures reduce the case for another Fed lending rate hike in December- market pricing of a December rate hike slipped to 40% from around 45% just before this morning’s U.S. CPI data.
The predominant theme in global financial markets remained aversion to riskier assets thanks in large part to the escalating war of words between the U.S. and North Korea. Investors have taken the mounting tensions as an excuse to take some profits on assets like developed world and emerging market stocks as well as riskier and higher yielding currencies, which had been on a very strong run over recent weeks and arguably, looked ripe for a pullback. The Dow Jones snapped a nine-day streak of consecutive record closes this week to fall by 200 points to a two-week low yesterday. Emerging market equities, as measured by MSCI’s benchmark index, tumbled by nearly two and a half percent to a one-month low yesterday after hitting its highest level in close to three years on Wednesday.
In the foreign exchange world, the escalation of rhetoric between the U.S. and North Korea has resulted in a strong rally in traditional safe-haven currencies like the Japanese yen and the Swiss franc while riskier and higher yielding currencies have underperformed.
USD: The dollar index tumbled to a one-week low and gave up most of last Friday’s U.S. payrolls-driven gains following this morning’s cooler than expected CPI figures for July. The very light 0.1%(m/m) increase in both headline and core CPI undershot market forecasts and once again, highlighted the very benign price pressure environment that has fueled doubts about the need for further Fed lending rate hikes this year. Year-over-year CPI inflation, which came in at a slightly hotter than expected 1.8%, has been well under the cycle peak of 2.7% since February. The longer inflation pressures remain low, the more investors (and policymakers) are inclined to view the forces keeping a lid on prices as likely more entrenched than transitory- a view that will likely keep the longer-term outlook for Fed rate hikes subdued. The disappointing CPI print, which was this week’s headline U.S. economic release, is likely to keep the dollar’s upside limited.
JPY: The Japanese yen rose to a two-month peak against the dollar overnight and added to its gains following this morning’s cooler than expected U.S. CPI report. The yen continues to benefit from the escalation in tensions between the U.S. and North Korea, which has undermined the appeal of riskier assets across global financial markets and has boosted the appeal of traditional safe-havens like the yen, the Swiss franc and gold.
EUR: The euro jumped against the broadly weaker U.S. dollar this morning following the disappointing U.S. CPI data, which once again highlighted the very benign inflation backdrop in the U.S. and underscored the view that the Fed can maintain a very gradual approach to monetary policy normalization. The market is likely to turn its attention to the Fed’s annual symposium at Jackson Hole, Wyoming later this month for direction. Fed and ECB officials will speak and likely take the opportunity to fine-tune market expectations for any changes to monetary policy like to take place in the months ahead.
GBP: Sterling briefly rose against the broadly heavier U.S. dollar but was unable to meaningfully rise off of a three-week low, despite this morning’s cooler than expected U.S. CPI data. The pound remains dogged by fading expectations for a BOE lending rate hike in the months ahead and by the latest round of U.K. economic data that has weakened the case for higher rates even further.
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