Dollar Firm Ahead of CPI Data

July 13, 2021
  • U.S. inflation readings will come into focus; we believe that the continued low rate environment will give the Fed more confidence to taper; U.S. Treasury issuance continues
  • Details of ECB asset purchases for the week ending July 9 will be reported; analysts are left pondering what the ECB might do at the July 22 meeting after Lagarde’s bombshell announcement; Czech Republic reported softer June CPI; social unrest in South Africa got worse yesterday but seems to have subsided this morning
  • Japan Prime Minister Suga’s support slid to a record low; Australia June NAB business survey was soft; RBNZ meets tomorrow and is expected to keep rates steady at 0.25%; China’s June trade figures surprised materially on the upside

The dollar continues to gain traction ahead of CPI data. DXY is up for the second straight day after two straight down days to end last week and has recouped nearly half of its losses from the July 7 peak near 92.845. A break above 92.554 is needed to set up a test of that high. The euro remains heavy after the ECB’s dovish tilt and a break below $1.1820 is needed to set up a test of the July 7 low near $1.1780. Sterling is holding up a bit better but we think growing concerns about the reopening will eventually push it lower to the July 8 low near $1.3740. USD/JPY remains bid above 110 but is still subject to downside risks if market sentiment tumbles again.

AMERICAS

U.S. inflation readings will come into focus. CPI will be reported first today. Headline inflation is expected to fall a tick to 4.9% y/y, while core inflation is expected to pick up a couple of ticks to 4.0% y/y. If so, the core reading would be the highest since December 1991. This will be followed by PPI data tomorrow, where headline inflation is expected to rise a tick to 6.7% y/y and core inflation is expected to pick up three ticks to 5.1% y/y. Yet inflation expectations remain low, with the 10-yrear breakeven rate around 2.33% and the 30-year breakeven rate around 2.27%, both down from the May peaks of 2.59% and 2.41%, respectively. June budget statement will also be released today, where a deficit of -$192 bln is expected.

We believe that the continued low rate environment will give the Fed more confidence to taper. For now, a taper tantrum has been avoided despite clear signals that tapering is likely coming sooner rather than later. Bullard yesterday said "I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures." We concur. However, not all on the FOMC feel the same way yet. Regarding tapering, Barkin said "if the labor market can clear relatively quickly, then maybe it can happen sooner, but if it takes longer for the labor market to reopen, it goes a little later." The debate is ongoing and so we do not expect anything concrete to emerge from the July 27-28 FOMC meeting. Taper talk will continue and perhaps make it into the official statement. However, any timetable is unlikely to be unveiled until either the August Jackson Hole Symposium or the September 21-22 FOMC meeting.

U.S. Treasury issuance continues. Treasury will auction $24 bln of 30-year bonds today. Keep an eye on the demand metrics. At the previous auctions, indirect bidders (the proxy for foreign demand) accounted for 64.0% and the bid-to-cover ratio was 2.29, respectively. Yesterday’s auctions saw solid demand. A total of $58 bln and $38 bln of 3- and 10-year notes were sold. Indirect bidders took 53.2% vs. 54.2% previously for the 3-year and took 63.5% vs. 65.0% previously for the 10-year. Bid-to-cover ratios were 2.41 vs. 2.47 previously and 2.39 vs. 2.58 previously for the two issues, respectively. It appears investor appetite for USTs remains healthy even though yields are materially lower than the last auctions in late June.

EUROPE/MIDDLE EAST/AFRICA

Details of ECB asset purchases for the week ending July 9 will be reported. Net purchases were reported yesterday at EUR22.1 bln vs. EUR15.7 bln for the week ending July 2 and EUR24.3 bln for the week ending June 25. Redemptions and gross purchases will be reported today. The ECB has been aiming for net weekly purchases of around EUR20 bln since the accelerated pace began in March, but there have clearly been a couple of outliers on both sides. PEPP is still due to end March 2022, though it’s clear that further stimulus is of some sort is in the pipeline.

Analysts are left pondering what the ECB might do at the July 22 meeting after Lagarde’s bombshell announcement. We suspect many at the ECB are in the same boat. We will be writing a preview early next week but suffice to say that risks are high that the forward guidance will be materially altered and further stimulus is likely to be announced for 2022, when the current PEPP is scheduled to end. The strategy review was relatively tame, but has offered Madame Lagarde’s an opportunity for her “whatever it takes” moment. Of course, one by-product of a more dovish ECB is a weaker euro and that is not lost on either Lagarde or the markets.

Czech Republic reported softer June CPI. Inflation eased to 2.8% y/y vs. 2.9% in May and is the second straight month of deceleration, moving back within the 1-3% target range. At the last meeting June 23, the Czech National Bank started the tightening cycle and delivered the expected 25 bp hike to 0.5%. Governor Rusnok said then that rates will continue rising in H2 and warned that hikes are possible at “every coming meeting” even as he hoped that wouldn’t be necessary. Bloomberg consensus sees the policy rate at 0.75% by year-end, rising to 1.5% by end-2022. Next policy meeting is August 5 and no change is likely so soon in light of the modestly improved CPI data.

The social unrest in South Africa got worse yesterday but seems to have subsided this morning. The riots were ostensibly triggered by the imprisonment of former President Jacob Zuma, but it was surely also motivated by extended lockdowns that have taken a toll on the economy and the social fabric. Violence spread to a few regions, with looting and trade routes shutting down. The army has been deployed and reports from early this morning suggests it seems to have helped. Still, this event can’t be too surprising given the country’s fragile starting point going into the pandemic with a weak economic backdrop, chronically high unemployment, and a politically divided population. The rand has depreciated about 1.5% against the dollar this week.

ASIA

Japan Prime Minister Suga’s support slid to a record low days ahead of the Olympics. NHK poll shows 33% support Suga’s cabinet, down 4 ppt from the previous month. The poll was taken between July 9-11. A separate Yomiuri poll shows 37% support for Suga, with only 28% support in Tokyo, where half of the respondents said the games should be canceled. This pretty much erases the modest gains that Suga has made in recent months. He first faces a leadership vote in the Liberal Democratic Party in September. A general election must then be held before late October. As we have written countless times, his falling popularity should lead to another fiscal package over the summer.

Australia June NAB business survey was soft. Business conditions fell to 24 from a revised 36 (was 37) in May, while business confidence fell to 11 from 20 in May. July Westpac consumer confidence will be reported tomorrow. Renewed lockdowns that began in June and are stretching into July are likely to hurt business sentiment further. No wonder the government just pledged additional financial support for firms and households, including up to AUD10k a week to businesses that have lost more than 30% of revenue. The increased support will be given whenever lockdowns enter a fourth week in any state or territory. The delta variant continues to spread in Sydney and so the lockdown is likely to be maintained for most of this month.

RBNZ meets tomorrow and is expected to keep rates steady at 0.25%. However, there are growing calls that the RBNZ will move forward lift-off expectations this week. Can it deliver two hawkish surprises in a row? At the last meeting May 26, the bank caught markets off guard by projecting the first rate hike in H2 2022. The bank saw the average OCR rising to 0.67% by end-2022, implying 1-2 hikes, and then to 1.78% by mid-2024, the end of the forecast period. Of note, there will not be any new forecasts or projections until the August 18 meeting. The four biggest Kiwi banks now look for RBNZ to hint at lift-off by end-2021. NZD tends to gain on RBNZ decision days. It has gained the last four straight and eight of the past nine dating back to March 2020.

China’s June trade figures surprised materially on the upside. Exports rose 32.2% y/y vs. 23.0% expected and 27.9% in May, while imports rose 36.7% y/y vs. 29.5% expected and 51.1% in May. The trade balance rose to $51.5 bln, the third month above its 5-year average. The upturn in exports came in part from the textiles and medical equipment sectors, along with the usual demand from work-from-home goods. Raw materials accounted for much of the surprise on the import side. This should allay any concerns that China’s latest easing move (the 50 bp RRR cut) was meant to preempt a much-deeper-than-expected economic slowdown. Indeed, a PBOC official said overnight that the cut should be seen as a “standard liquidity operation.” June retail sales, IP, and Q2 GDP will be reported Thursday.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2021. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction