Dollar and U.S. Yields Continue to Climb

September 22, 2023
  • U.S. yields continue to rise; Fed officials will spread the hawkish message that emerged from this week’s FOMC; preliminary S&P Global September PMI readings will be the data highlight; weekly jobless claims are worth discussing; Canada reports July retail sales; Chile central bank releases its minutes
  • ECB Chief Economist Lane is clearly part of the peak camp; preliminary eurozone September PMI readings were mixed; BOE delivered a dovish hold; preliminary U.K. September PMI readings came in soft; U.K. reported August retail sales
  • BOJ meeting ended with a dovish hold; August national CPI was reported ahead of the decision; preliminary Japan September PMI readings came in soft; preliminary Australia September PMI readings came in firm; New Zealand reported August trade data

The dollar continues gain from the hawkish hold by the Fed. DXY is up for the third straight day and traded at a new cycle high today near 105.782 and is on track to test the March high near 105.883. Break above that would set up a test of the November 30 high near 107.195 and then the November 11 high near 108.44. The euro made a new cycle low today near $1.0615. Clean break below last week’s low near $1.0630 sets up a test of the March low near $1.0515. Sterling made a new cycle low today near $1.2235 in the wake of the dovish BOE hold yesterday (see below). Break below $1.2315 yesterday sets up a test of the March low near $1.18. USD/JPY traded at a new cycle high yesterday near 148.45 but there has been no follow-through yet. The pair remains on track to test 150 after the BOJ’s dovish hold today (see below). The fundamental story remains in favor of the greenback as the U.S. economy is in a much stronger position than the other major economies such as the eurozone or the U.K. Indeed, the worsening outlook in Europe led the ECB, BOE, and BOJ to deliver dovish messages. With firm U.S. data and a hawkish Fed, this should feed into further dollar strength.


U.S. yields continue to rise. The 10-year yield traded near 4.51%, the highest since November 2007. The June 2007 high near 5.32% is the next major chart point. Elsewhere, the 30-year yield traded near 4.59%, the highest since April 2011 and on track to test the February 2011 high near 4.79% and the March 2010 high near 4.80%. The short end is also participating in this move higher, as the 2-year yield traded near 5.20%, the highest since July 2006 and nearing a test of the June 2006 high near 5.28%. The real U.S. 10-year yield broke above 2% to trade near 2.11%, a level it hasn’t seen since December 2008. Interest rate differentials should continue to move in the dollar’s favor.

Fed officials will spread the hawkish message that emerged from this week’s FOMC. Cook, Daly, and Kashkari speak today. Cook is considered one of the moderates, while Daly and Kashkari have emerged as two of the leading hawks. Of note, former Fed official Bullard is in favor of further tightening when he said “I think that may be a good thing to do as insurance to make sure that core inflation especially continues to come down at an appropriate pace so the committee can get back to 2% inflation in a reasonable time frame.” While the views of former central bank officials erode over time, Bullard’s exit is quite recent and so his likely reflect current Fed thinking.

Preliminary S&P Global September PMI readings will be the data highlight. Headline manufacturing is expected at 48.2 vs. 47.9 in August, services is expected at 50.7 vs. 50.5 in August, and the composite is expected at 50.4 vs. 50.2 in August. The ISM PMIs are much more widely followed and have been coming in much stronger than the S&P Global readings.

Weekly jobless claims are worth discussing. That’s because initial claims are for the BLS week containing the 12th of the month, and came in at 201k vs. 225k expected and a revised 221k (was 220k) last week. This was the lowest since late January while the 4-week moving average fell to 217k, the lowest since the February BLS survey week. NFP that month came in at 311k vs. 225k expected. Current Bloomberg consensus for September NFP is 150k while its whisper number is 172k. We think that despite the various strikes, the labor market remains very tight. Elsewhere, continuing claims are reported with a one-week lag and so next week’s reading will be for the BLS survey week. These came in at 1.662 mln vs. 1.692 mln expected and a revised 1.683 mln (was 1.688 mln) last week.

Canada reports July retail sales. Headline is expected at 0.4% m/m vs. 0.1% in June, while sales ex-auto are expected at 0.5% m/m vs. -0.8% in June. The economy is proving to be very resilient and inflation remains very persistent. This has reignited BOC tightening expectations. WIRP suggests nearly 50% odds of a hike October 25, rising to 75% December 6 and fully priced in for January 24.

Chile central bank releases its minutes. At the September 5 meeting, the bank cut rates 75 bp to 9.5% and said “In the short term the MPR will continue on the path outlined in the previous meeting. The magnitude and timing of the process of MPR reductions will take into account the evolution of the macroeconomic scenario and its implications for the inflation trajectory.” At the previous meeting July 28, the bank started the easing cycle with a 100 bp cut to 10.25% and said the policy rate should end the year between 7.75-8.0%. With meetings October 26 and December 19, that implies two more 75 bp cuts. However, the swaps market is pricing in a year-end rate near 8.5%.


ECB Chief Economist Lane is clearly part of the peak camp. He implied that interest rates have reached a level that will get inflation back to target if held there for a sufficient amount of time, noting “Our future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary.” Lane also stressed that “a significant portion of the tightening from our past rate hikes is still in the pipeline.” Despite a few hawkish holdouts, we think the discussion at the ECB has clearly shifted from how high to how long. WIRP suggests less than 10% odds of a hike October 26, then rising to top out near 25% December 14. The first cut is still seen around mid-2024. Lane speaks again today. Guindos also speaks.

Preliminary eurozone September PMI readings were mixed. Headline manufacturing came in at 43.4 vs. 44.0 expected and 43.5 in August, services came in at 48.4 vs. 47.6 and 47.9 in August, and the composite came in at 47.1 vs. 46.5 expected and 46.7 in August. This was the first time that the composite PMI rose since April but remains well below the key 50 boom/bust level. Looking at the country breakdown, the German composite rose to 46.2 vs. 44.7 expected and 44.6 in August while the French composite plunged to 43.5 vs. 46.0 expected and actual in August. No wonder French politicians have started complaining about tight ECB policy. Italy and Spain won’t report until the final September readings due out in early October.

Bank of England delivered a dovish hold. It kept the policy rate steady at 5.25% by a 5-4 vote. The dissents wanted to hike 25 bp and were made up of Deputy Governor Cunliffe and external members Greene, Haskel, and Mann. The bank said further tightening may be required if inflation persists, adding that policy must be restrictive enough for a “sufficiently long” period of time. The statement noted that BOE policymakers saw the September PMI readings that were just released today, and that underlying growth in H2 will be weaker than the 0.25% seen in August. Updated macro forecasts will be released at the November 2 meeting. Overall, the message was very dovish as the bank didn't even try to signal a November hike.

The BOE also announced an acceleration of Quantitative Tightening. It will increase the annual pace next year to GBP100 bln vs. GBP80 bln currently. This has no bearing on the dovish BOE narrative that’s taken hold.

Governor Bailey said that good news on inflation prompted the pause. He stressed that it’s premature to start talking about rate cuts but later added that he won’t predict what happens next with interest rates. Bailey also the bank expects a “noticeable drop” in inflation in November, adding it’s good news that inflation is coming down. Sure, it's possible it hikes in November but if inflation continues to fall as Bailey expects, we may already have seen the end of tightening cycle. WIRP suggests 35% odds of a November hike, rising to top out near 65% in Q1.

Preliminary U.K. September PMI readings came in soft. Headline manufacturing came in at 44.2 vs. 43.2 expected and 43.0 in August, services came in at 47.2 vs. 49.4 expected and 49.5 in August, and the composite came in at 46.8 vs. 48.7 expected and 48.6 in August. This was the fifth straight drop in the composite to the lowest since January 2021. S&P Global noted an “abrupt turnaround” in the jobs market, with cuts seen at the fastest rate since October 2009 (excluding the pandemic era lockdowns). No wonder the BOE held rates after seeing this yesterday, as it’s clear to us that the economy is slipping into recession.

U.K. reported August retail sales. Headline sales came in a tick lower than expected at 0.4% m/m vs. a revised -1.1% (was -1.2%) in July, while sales ex-auto fuel came in a tick lower than expected at 0.6% m/m vs. -1.4% in July. The y/y rates improved to -1.4% for both. With unemployment rising , we do not expect this bounce in consumption to persist.

U.K. CBI reported its September industrial trends survey. Total orders came in at -18 vs. -17 expected and -15 in August, while selling prices came bin at 14 vs. 8 in August. Its distributive trades survey will be reported this coming Monday.


Two-day Bank of Japan meeting ended with a dovish hold. Governor Ueda said that “Because we aren’t in a state where inflation accompanied by wage growth - sustainable and stable inflation - is in sight, we’re patiently continuing with monetary easing under the current framework.” When asked about his recent comments on wage growth that some saw as signaling a policy shift, he said that he was merely signaling that all policy options remain open, stressing that “If I were to say as a governor that there’s absolutely no chance we could see that possibility by the end of the year, it would in a way create a strong impediment for our discussions. Saying that would create a risk.” To underscore his dovishness, Ueda said the risks of undershooting the 2% target are greater than overshooting it and sees inflation continuing to fall from current levels. Updated macro forecasts won’t come until the October 30-31 meeting.

August national CPI was reported ahead of the decision. Headline came in two ticks higher than expected at 3.2% y/y vs. 3.3% in July, while core (ex-fresh food) came in a tick higher than expected at 3.1% y/y vs. 3.1% in July. Core remains the lowest since March but still well above the 2% target. Core ex-energy remained steady as expected at the cycle high of 4.3% y/y, which shows how energy subsidies have helped pushed down headline inflation while underlying price pressures remain strong. September Tokyo CPI will be reported next Friday and is expected to show further modest easing of all three key inflation gauges.

Preliminary Japan September PMI readings came in soft. Manufacturing came in at 48.6 vs. 49.6 in August, services came in at 53.3 vs. 54.3 in August, and the composite came in at 51.8 vs. 52.6 in August. The composite PMI had risen two straight months but has now fallen to the lowest since February and lines up with other signs that suggest the economy is softening. This is another reason why we think the BOJ is likely to remain on hold in October as well.

Preliminary Australia September PMI readings came in firm. Manufacturing came in at 48.2 vs. 49.6 in August, services came in at 50.5 vs. 47.8 in August, and the composite came in at 50.5 vs. 47.8 in August. This was the first rise in the composite PMI since April and is the first time above the key 50 level since June. Stabilization in China’s economy is likely a factor in the improvement but faithful readers will know that we remain skeptical that the mainland has bottomed. As such, this move above 50 for Australia’s PMI is unlikely to be sustained. Next RBA meeting is October 3 and no change is expected. WIRP suggests 25% odds of a hike November 7, rising to top out near 85% in Q1.

New Zealand reported August trade data. Both exports and imports improved y/y to -5.6% and -8.1%, respectively. Exports have been sinking due to the slowdown in mainland China.

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