Dollar Bid as U.S. Yields Rise Ahead of CPI

November 10, 2021
  • Fed officials continue to tilt hawkish; U.S, rates are reversing yesterday’s Brainard-related fall; U.S. inflation data will remain in the spotlight; Treasury will sell $25 bln of 30-year bonds; Brazil reports October IPCA inflation; Mexico October CPI came in above expectations
  • German officials are getting increasingly concerned about inflation; the debate comes at a particularly delicate moment for Germany as coalition talks continue; Italy reported September IP
  • China’s data overnight came in again on the strong side, with higher inflation and credit growth still robust; Thailand kept rates on hold at 0.50% as widely expected

The dollar is firming as U.S. rates rise ahead of CPI data. DXY is up for the first day after three straight down day, trading just below 94.30 and likely to test last week’s high near 94.62. The euro was unable to break back above $1.16 and remains heavy, trading near $1.1550. Similarly, sterling was unable to break above $1.36 and has since reversed and is testing $1.35. USD/JPY is bid near 113.25 after trading yesterday at the lowest level since October 11 near 112.75. We viewed this week’s dollar weakness as a corrective move ahead of the dollar’s next leg higher.


Fed officials continue to tilt hawkish. Yesterday, Bullard warned of anecdotal evidence that U.S. are having no problem passing on higher input and labor costs on to consumers. He noted that “This sounds like an inflationary process that has gotten started in the last six to eight months. That development is concerning.” Yet Bullard admitted that “We are not even really contemplating adjusting the policy rate right now” since the Fed just announced tapering last week. Bullard repeated that his forecast includes two interest rate hikes in 2022. Elsewhere, Kashkari said that he is keeping an “open mind” with regards to the Fed’s monetary policy stance . He admitted that prices have been elevated longer than he expected. Coming from uber-dove Kashkari, these comments are noteworthy. That is, inflation has been running so unexpectedly hot that even Kashkari is open to the notion of rate hikes.

U.S, rates are reversing yesterday’s Brainard-related fall. News that President Biden has interviewed her for Fed Chair raised speculation of how a Brainard-led Fed would be different than the current one led by Powell. Many seem to feel that Brainard would be more dovish, but we don’t think there is anyone that could much more dovish than Powell. He has kept rates lower for longer than any past Fed Chair has in the face of such persistent price pressures. Yes, the Fed announced the start of tapering but rate hikes are far, far away. We have also seen some commentary to the effect that Biden should appoint a Democrat to the post. We wholeheartedly disagree, as the post of Fed Chair is meant to be above politics.

U.S. inflation data will remain in the spotlight. CPI will be reported and headline is expected at 5.9% y/y vs. 5.4% in September, while core is expected at 4.3% y/y vs. 4.0% in September. Both would be new cycle highs. Yesterday, October PPI came in as expected, with both headline and core inflation remaining steady at 8.6% y/y and 6.8% y/y, respectively. The m/m gains for both headline and core PPI have picked up again, meaning inflation isn't going away yet. Base effects from November and December 2020 are low and so we can expect further acceleration in the y/y rates for most of these inflation measures. The Fed’s preferred measure of inflation (core PCE deflator) won’t be reported until November 24 but seems likely to accelerate from 3.6% y/y in September. Weekly jobless claims will be reported a day early on due to the Veterans’ Day holiday tomorrow. Initial claims are expected at 260k vs. 269k the previous week, while continuing clams are expected at 2.05 mln vs. 2.105 mln previously. Wholesale inventories and trade sales along with the October budget statement will also be reported.

The U.S. Treasury will sell $25 bln of 30-year bonds. This closes out this week’s $120 bln quarterly refunding. At the previous 30-year auction, indirect bidders took 70.5% while the bid/cover ratio was 2.36. Yesterday, $39 bln of 10-year notes were sold. Indirect bidders took 71.0% vs. 71.1% at the previous auction, while the bid/cover ratio was 2.35 vs. 2.58 previously. On Monday, $56 bln of 3-year notes were sold. Indirect bidders took 57.6% vs. 44.2% at the previous auction, while the bid/cover ratio was 2.33 vs. 2.36 previously. So far, it seems that low yields have not deterred foreign investors from participating in these auctions.

Brazil reports October IPCA inflation. Headline inflation is expected at 10.48% y/y vs. 10.25% in September. If so, it would be the highest since January 2016 and further above the 2.25-5.25% target range. Of note, the target range falls to 2-5% in 2022. Next COPOM meeting is December 8 and the central bank hinted at another 150 bp hike then that would take the policy rate up to 9.25%. However, market were disappointed with the last 150 bp hike and is looking for something bigger, with CDIs pricing in a 200 bp hike to 9.75%.

 Mexico October CPI came in a bit above expectations. Headline inflation came in at 6.24% y/y, the highest since 2017, while core came in at 5.19% y/y. Both measures remain above the 2-4% target range. Pressure is coming from the consumer goods side and energy prices, with some of this caused by seasonal adjustments in electricity tariffs. The data ensure the tightening cycle will continue, as we and markets expect. Banco de Mexico meets tomorrow and is expected to hike rates 25 bp to 5.0%. A small handful of analysts look for a 50 bp hike to 5.25%, but we think the bank will stick to 25 bp increments for the time being. Of note, swaps market is pricing in 250 bp of tightening over the next twelve months, which strikes us as a tad too aggressive.


German officials are getting increasingly concerned about inflation. It appears that Chancellor Merkel’s council of economic advisors has urged the ECB to come up with a strategy soon for exiting current ultra-loose policy. They suggested a more Fed-like approach, setting quantitative metrics for policy as well as some sort of Dot Plots that portray its interest rate projections. The council sees German inflation averaging 3.1% this year and 2.6% next year, and warned that temporary factors could lead to higher inflation that is longer-lasting. Lastly, the council warned that “Increasing inflation risks and the growing dependence of public finances on low interest rates in some member states could become a dilemma for monetary policy,”

 The debate comes at a particularly delicate moment for Germany as coalition talks continue. In turn, the next government will be tasked with choosing a replacement for Bundesbank President Weidmann, who is stepping down. We suspect the council is sending a not-too-subtle signal that Weidmann’s replacement should be suitably hawkish. However, Germany is just one part of the eurozone (albeit the largest) and ECB decisions will continue to be led by Madame Lagarde. With the economic data in Germany softening even as virus numbers are rising, a hawkish Bundesbank will surely seem out of step with the need to maintain accommodative policy.

Italy reported September IP. It was expected at -0.1% m/m but instead rose 0.1% vs. a revised -0.3% (was -0.2%) in August. Eurozone reports September IP Friday and is expected at -0.5% m/m vs. -1.6% in August. Last week, German and French IP readings came in much weaker than expected and suggest some downside risks to the headline eurozone number.


China’s data overnight came in again on the strong side, with higher inflation and credit growth still robust. CPI at 1.5% y/y and PPI at 13.5% y/y were both higher than expected. The data suggest increasing passthrough to consumers from the producer side, with huge price increases in the mining industry (+66.5) and more generally in gate prices (+17.39%). CPI inflation is the highest since September 2020. On the credit side, aggregate financing came in a bit below expectations at RMB1.59 bln, but new loans surprised on the upside at RMB826 mln. Both are down significantly from September but the good news here is that mortgage lending is not accelerating or falling too much, while corporate lending was on the strong side. M2 growth also accelerated from 8.3% y/y to 8.7%.

Bank of Thailand kept rates on hold at 0.50% as widely expected. There is nothing in the statement to suggest that rates will change in the foreseeable future. The decision was unanimous, and risks seem roughly balanced for Thailand’s economic outlook. The BOT projects GDP at 0.7% for this year and 3.9% for the next, and CPI to remain comfortably within the 1-3% target range. Macro forecasts will be updated at the next policy meeting December 22, and Assistant Governor Piti noted that its inflation forecasts may be raised “slightly” but not by enough to impact monetary policy.

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