- U.S. yields are rising again; yet U.S. financial conditions remain loose
- Italy will reportedly nominate former Finance Minister Daniele Franco as its candidate for the European Central Bank’s Executive Board
- Japan announced that it will raise the minimum hourly wage; New Zealand reported weak July trade data; China banks set their Loan Prime Rates higher than expected; Taiwan reported July export orders and Q2 current account data
The dollar is treading water as the new week begins. DXY is trading flat near 103.335 after trading last week at a new high for this move near 103.68. Clean break above the July 6 near 103.572 sets up a test of the May 31 high near 104.699. The euro is trading higher near $1.09 but remains on track to test the July low near $1.0835. Sterling is trading flat near $1.2730 but remains on track to test the late June low near $1.2590. USD/JPY is trading higher near 146 and remains on track to test the 150 area. We believe the relative fundamental story continues to move in favor of the greenback. As we expected, the recent FOMC, ECB, and BOJ decisions as well as the ongoing economic data underscore the divergence theme and so further dollar gains seem likely.
U.S. yields are rising again. The 10-year yield traded near 4.31% after ending last week near 4.25%, and is nearing the October cycle high near 4.34%. Elsewhere, the 30-year yield traded near 4.44% after ending last week near 4.38% and has broken above the October cycle high near 4.42%. This sets up a test of the February 2011 high near 4.79%. The 2-year yield is lagging a bit as it traded near 4.97% after ending last week near 4.94%. While below last week’s high near 5.02%, we still look for a test of the 5.12% cycle high from July 6.
Yet U.S. financial conditions remain loose. Some of the Fed doves have been talking up the potential for a soft landing without acknowledging why the economy has so far avoided a hard landing. The Chicago Fed’s measure of financial conditions is the loosest since early March 2022, before the Fed started hiking. Until financial conditions tighten, there’s unlikely to be any landing whatsoever as growth remains at or above trend. The Chicago Fed’s weekly reading will be out Wednesday. As things stand, the Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 5.8 % SAAR. Next model update comes Thursday.
Italy will reportedly nominate former Finance Minister Daniele Franco as its candidate for the European Central Bank’s Executive Board. Franco served as Finance Minister in Prime Minister Mario Draghi’s government after a long career at the Bank of Italy that began in 1979 that saw him become Senior Deputy Governor. Franco is reportedly became the leading candidate for the Executive Board after it became clear that he wouldn’t win the top job at the European Investment Bank after EU competition chief Margrethe Vestager and Spanish Deputy Premier Nadia Calvino were nominated, as both are considered stronger candidates for the post.
European Central Bank tightening expectations remain subdued. WIRP suggest odds of a 25 bp hike stand near 55% September 14, rise to 75% October 26 and top out near 85% December 14. These odds will rise and fall with the data but Madame Lagarde clearly accentuated the negative at the last ECB meting and that’s what markets should focus on. What’s very interesting to us is that the ECB may stop hiking before the Fed does and we don't think the markets have priced this risk in yet. Lagarde speaks Saturday at Jackson Hole.
Japan announced that it will raise the minimum hourly wage to an average of JPY1,004. This is slightly more than the government’s advisory panel recommendation for an increase to JPY1,002. This represents an increase of 43 yen per hour, the largest since records began in 1978. It will take effect in October. The Bank of Japan has said that it wants to see higher wage growth before tightening policy but earnings (both nominal and real) have lagged. The planned hike in the minimum wage will be welcomed but we don’t think it’s enough to bring on any near-term change in policy. Next policy meeting is September 21-22 and no change is expected then.
New Zealand reported weak July trade data. Exports came in at -14% y/y, the worst since 2016, while imports came in at -15.5% y/y. Weak exports came from a combination of lower volume and lower prices for much of its key dairy shipments. Of note, whole milk powder prices have fallen to the lowest since 2016 on weak demand from China. Q2 real retail sales will be reported Wednesday and is expected at -0.2% q/q vs. -1.4% in Q1. If so, it would not bode well for Q2 GDP.
China commercial banks set their key Loan Prime Rates higher than expected. The 1- and 5-year LPRs were both expected to be cut 15 bp but instead, the former was cut 10 bp to 3.45% and the latter was kept steady at 4.20%. Officials from the central bank and financial regulators reportedly met with bank executives and told them to increase loans to boost the economy. July new loans were the lowest since 2009. Authorities also urged banks to make adjustments for home mortgages but there were no further details. It seems clear to us that the solution to a huge looming debt crisis is not to pile up more debt.
Taiwan reported July export orders and Q2 current account data. Orders came in at -12.0% y/y vs. -15.5% expected and -24.9% in June. This was the best reading since October but due in large part to low base effects. The regional outlook for trade and activity is likely to remain weak until 2024.