Dollar Soft Ahead of CPI Data

August 10, 2023
  • Financial conditions are as loose as they were in March 2022; July CPI data will be the highlight; U.S. Treasury concludes its quarterly refunding; Mexico is expected to keep rates steady at 11.25%; Peru is expected to keep rates steady at 7.75%
  • The number of UK buy-to-let mortgages falling into arrears rose nearly 30% in Q2; Norway reported soft July CPI
  • Japan reported July PPI; strikes at three major LNG facilities in Australia could impact nearly 10% of global exports; India kept rates steady at 6.5%, as expected

The dollar is soft ahead of the CPI data. DXY is trading lower for the second straight day near 102.173 after two straight up days but remains on track to test the July high near 103.572. The euro is trading higher near $1.1025 but remains on track to test the July low near $1.0835. Sterling is trading higher near $1.2765 but remains on track to test the late June low near $1.2590. USD/JPY is trading higher near 143.80 and remains on track to test the June 30 high near 145. Despite the softish jobs data, we believe the relative fundamental story should continue 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. Today’s CPI data will be key for the dollar’s near-term direction.


The Chicago Fed's Financial Conditions Index suggest conditions are about as loose as they were in March 2022, when the Fed first started hiking. Because of this, we believe the markets continue to underestimate the Fed’s need to tighten. It’s really no wonder then that the U.S. economy remains so robust. The Atlanta Fed’s GDPNow model is currently tracking Q3 growth at 4.1% SAAR vs. 2.4% in Q2. Of course, that rate is likely to come down as the data come in but the momentum is undeniable. Next model update comes Tuesday.

Yet the Fed doves are in control of the narrative, at least for now. We note that while still in the minority, more and more private sector economists are calling for a soft landing. So too are more Fed officials. However, the Fed doves really need to acknowledge that financial conditions currently remain too loose to slow the economy and get inflation substantially lower. WIRP suggests odds of a hike September 20 are around 15% but we think this should be much higher. Those odds top out near 35% November 1 but should move higher if the data remain firm. Daly, Bostic, and Harker speak today.

July CPI data will be the highlight. Consensus sees headline and core both coming in at 0.2% m/m, same as in June. In y/y terms, headline is seen at 3.3% vs. 3.0% in June and core is seen falling a tick to 4.7%. Of note, the Cleveland Fed’s Nowcast model sees both headline and core coming in at 0.4% m/m while in y/y terms, headline is seen at 3.4% and core is seen at 4.9%. As such, we see some upside risks to the data. PPI will be reported tomorrow. Consensus sees headline and core both coming in at 0.2% m/m vs. 0.1% in June. In y/y terms, headline is seen at 0.7% vs. 0.1% in June and core is seen falling a tick to 2.3%.

The U.S. Treasury concludes its quarterly refunding. The total of $103 bln will be sold and saw the first increase in over two years. It concludes today with a $23 bln sale of 30-year bonds. At the previous auction, indirect bidders took 69.0% and the bid to cover ratio was 2.43. Yesterday, it sold $38 bln of 10-year notes at a yield of 3.999% vs. 3.857% at the previous auction. Like the 3-year auction Tuesday, demand was solid as indirect bidders took 72.2% vs. 67.7% at the previous auction and the bid to cover ratio was 2.56 vs. 2.53 at the previous auction. So far, it appears that the market is willing and able to absorb the extra UST supply, at least for now.

Other minor data will be reported. Weekly jobless claims and July budget statement will be reported. Initial claims are expected at 230k vs. 227k last week, while continuing claims are expected at 1.707 mln vs. 1.700 mln last week. While many are hailing the 187k jobs number last Friday as signs of a cooling labor market, the 3.5% unemployment rate says otherwise.

Banco de Mexico is expected to keep rates steady at 11.25%. However, forward guidance will be key. Yesterday, July headline CPI came in as expected at 4.79% y/y vs. 5.06% in June while core came in two ticks lower than expected at 6.64% y/y vs. 6.89% in June. Headline was the lowest since March 2021 but still above the 2-4% target range. At the last meeting June 22, the bank kept rates steady and officials said rates would remain steady for 2-3 meetings. That suggests no change at the September 28 meeting either and leaves the November 9 meeting as the earliest we can expect to see easing. The swaps market is pricing in no easing over the next three months followed by a cautious 25 bp of easing over the subsequent three months.

Peru central bank is expected to keep rates steady at 7.75%. At the last policy meeting July 13, the bank left rates steady and said “We forecast that annual inflation will remain on its downward trend over the next months, being close to the target range at the end of the year and within the range at the start of 2024.” Inflation came in at 5.88% y/y in July, the lowest since January 2022. Bloomberg consensus sees the start of the easing cycle with a 25 bp cut in Q3. Next policy meeting after this one is September 14 and the bank will have the August CPI data in hand. If disinflation continues, a 25 bp cut then is possible.


The number of UK buy-to-let mortgages falling into arrears rose nearly 30% in Q2. According to industry group U.K. Finance, 8,980 buy-to-let mortgages fell into arrears of 2.5% or more of the outstanding balance in Q2, up from 7,030 in Q1. Within that, almost 1,900 mortgages were in arrears of 10% of the total balance while lenders took possession of 440 buy-to-let properties in Q2 vs. 410 in Q1. Of note, nearly 82k primary homeowner mortgages fell into arrears in Q2, up only 7% from Q1. These readings show just how much the tightening cycle is impacting household budgets via higher mortgage payments.

Yet the Bank of England will continue to hike. WIRP suggests 80% odds of a 25 bp hike September 21, while a 25 bp hike in Q1 is nearly priced in. This would see the bank rate peak near 5.75% vs. 6.5% at the start of last month. The first cut is seen in August 2024, meaning little relief for mortgage rates for a year.

Norway reported soft July CPI. Headline came in at 5.4% y/y vs. 5.9% expected and 6.4% in June, while underlying came in as expected at 6.4% y/y vs. 7.0% in June. Headline was the lowest since April 2022 but still well above the 2% target. Norges Bank meets next Thursday and is expected to hike rates 25 bp to 4.0%. At the last meeting June 22, the bank delivered a hawkish surprise and hiked rates 50 bp to 3.75% vs. 25 bp expected and said rates will “most likely be raised further in August.” Updated macro forecasts were released and the expected rate path was shifted higher to a peak of 4.25% this year. The swaps market sees a more dovish path and is pricing in a peak policy rate peak near 4.0% over the next six months.


Japan reported July PPI. It came in a ticker higher than expected at 3.6% y/y vs. a revised 4.3% (was 4.1%) in June. However, it was still the lowest since March 2021 and bodes well for CPI going forward. July national CPI will be reported next Friday. Headline is expected to remain steady at 3.3% y/y, while core (ex-fresh food) is expected to fall two ticks to 3.1% y/y. Core ex-energy is expected to pick up a tick to 4.3% y/y, underscoring that much of the recent improvement in inflation has been from energy.

Planned strikes at three major liquefied natural gas facilities in Australia could impact nearly 10% of global exports. Workers at Chevron and Woodside Energy Group LNG facilities in Australia voted to approve strike action at several operations that could begin as soon as next week. Of note, Australia is the top exporters of LNG with 21% of the total, followed closely by Qatar (20%) and the U.S. (19%). Australian shipments of LNG go mostly to Japan, China, and Korea. While Europe is not a major importer of Australian LNG, any supply disruptions Down Under will have global ripple effects. Indeed, European prices have spiked this week on the strike news.

Reserve Bank of India kept rates steady at 6.5%, as expected. Like the last policy meeting June 8, the vote to hold was unanimous and the bank kept its bias towards “removal of accommodation” by a 5-1 vote. Governor Das stressed that ““The MPC is prepared to act if the situation so warrants. Bringing headline inflation within the tolerance band is not enough. We need to remain firmly focused on bringing inflation within the 4% target.” While the reserve requirement ratio was also left unchanged, Das asked banks to set aside more cash temporarily in an effort to address a temporary surge in banking system liquidity as the RBI is requiring holders of INR2000 bills to deposit them with banks by September 30. The swaps market is pricing in 25 bp of tightening over the next six months.

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