Dollar Remains Under Pressure as U.S. Yields Fall Ahead of PPI

November 09, 2021
  • Fed officials are reinforcing last week’s decision to taper; U.S. inflation data will take center stage; U.S. 30-year TIPS yield is at an all-time low; Treasury will sell $39 bln of 10-year notes; Mexico reports October CPI
  • Germany reported weak September trade data and November ZEW survey; U.K. Prime Minister Johnson is coming under fire for his handling of a lobbying scandal involving a Tory MP
  • Japan reported weak September real cash earnings; Japan September current account data are worth discussing; Philippines posted a huge upside surprised for Q3 GDP; crypto currencies continue to extend their rally with both BTC and ETH at new all-time highs

The dollar remains under modest pressure ahead of PPI data. After trading at a new cycle high near 94.62 Friday, DXY is down for the third straight day just below 94. The euro is having trouble breaking back above $1.16 and remains heavy, while sterling is testing the $1.36 level as it continues to recover from the shock BOE hold last week. USD/JPY is trading at the lowest level since October 11. It has retraced nearly half of the October gain and a break below 112.30 would set up a test of the October 4 low near 110.80. We view this week’s price action as a corrective move ahead of the dollar’s next leg higher.


Fed officials are reinforcing last week’s decision to taper. Bullard said this is “one of the hottest” labor markets the Fed has seen, and that unemployment may be in the 3s in Q1 22. He added that he has two hikes penciled in for 2022 but that the Fed may have to take “sooner” action to control inflation. Lastly, Bullard said that if the Fed had to, it could end tapering somewhat sooner than the planned mid-2022. There are very hawkish comments from Bullard. He speaks again today, along with Powell, Daly, and Kashkari.

 Markets continue to price in Fed lift-off sooner than what the Fed wants. While many Fed officials have taken pains to stress that tapering does not translate to tightening sooner rather than later, Bullard is clearly not one of them. The market sees 40% odds of Q2 lift-off, down from over 55% last week, while odds of Q3 lift-off are nearly 95%, down slightly from being fully priced in previously.

U.S. inflation data will take center stage. October PPI will be reported, with both headline and core inflation are expected to remain steady at 8.6% y/y and 6.8% y/y, respectively. CPI will follow tomorrow. 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. 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.

U.S. 30-year TIPS yield is at an all-time low. At -0.508%, this clearly reflects increased concern about inflation. The 10-year breakeven inflation rate has also been rising to 2.62% currently. However, these are at odds with the low nominal yields on regular U.S. Treasury paper. The 2-year yield is trading near 0.41% vs. the 0.56% peak October 28, while the 10-year yield is trading near 1.46% vs. the 1.70% peak October 21. With growth strong and wages and inflation still rising, the case for lower nominal U.S. rates simply can’t be made.

The U.S. Treasury will sell $39 bln of 10-year notes. At the previous auction, indirect bidders took 71.1% while the bid/cover ratio was 2.58. Yesterday’s $56 bln sale of 3-year notes was mixed. Indirect bidders took 57.6% vs. 44.2% at the previous auction, while the bid/cover ratio was 2.33 vs. 2.36 previously. $25 bln of 30-year bonds will be sold tomorrow. Note that the $120 bln total is about $6 bln below the record levels seen in the past three quarterly refundings, as Treasury starts to pare its issuance from the elevated pandemic levels.

Mexico reports October CPI. Headline inflation is expected at 6.19% y/y vs. 6.0% in September. If so, it would be the highest since December 2017 and further above the 2-4% target range. Banco de Mexico meets Thursday 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%. Of note, swaps market is pricing in 250 bp of tightening over the next twelve months.


Germany reported weak September trade data and November ZEW survey. Exports fell -0.7% m/m vs. flat expected and a revised -0.8% (was -1.2%) in August, while imports rose 0.1% m/m vs. 0.5% expected and a revised 2.1% (was 3.5%) in August. Exports surely reflect global supply chain issues, but imports likely reflect softening domestic demand. ZEW survey was mixed, with expectations improving to 31.7 vs. 20.0 expected and 22.3 in October and current situation falling to 12.5 vs. 18.3 expected and 21.6 in October. German data have come in significantly weaker in recent weeks and this should really get the attention of eurozone policymakers. ECB’s Panetta, Lagarde, Knot, and Schnabel all speak today.

U.K. Prime Minister Johnson is coming under fire for his handling of a lobbying scandal involving a Tory MP. Johnson has seemingly been coated in Teflon his entire term but this may be the most serious crisis he’s had to deal with. The return of so-called Tory Sleaze has taken a toll on his popularity if the latest polls are correct. A YouGov survey shows the Tories with 36% support, only one point above opposition Labour, while an Observer survey shows the Tories with 37% support, also only one point above opposition Labour. Even conservative-leaning media outlets have been critical of Johnson.

What does this really mean for U.K. policy? A distracted government is the last thing the U.K. needs right now as virus numbers remain uncomfortable high and Brexit rears its ugly head again. Indeed, we are concerned that the Johnson government may unilaterally suspend the Northern Ireland Protocols (as widely rumored), as the EU makes a very juicy target that would perhaps take the focus off of Johnson. Obviously, that's not a good way to run policy but here we are.


Japan reported weak September real cash earnings. They were expected at -0.1% y/y but instead fell -0.6% vs. a 0.1% gain in August. This was the weakest reading since January and continues the steady drop from peak growth of 2.0% y/y in May. The loss of real earning power was not due to higher inflation, as is the case in most other countries right now. Rather, nominal cash earnings slowed to 0.2% y/y vs. 0.6% expected and actual in August. Consumption has been holding up fairly well in Japan but will be hard to sustain if labor earnings continue to weaken. Indeed, Prime Minister Kishida has made higher wages for the middle class an important focus of his economic policies, and this may be reflected in the upcoming fiscal package. Stay tuned.

Japan September current account data are worth discussing. An adjusted surplus of JPY763 bln was posted vs. JPY847 bln expected and a revised JPY880 bln (was JPY1.04 trln) in August. However, the investment flows will be of most interest. September data showed that Japan investors were net buyers of US bonds to the tune of JPY3.77 trln, the biggest monthly number since March 2020. This comes after two straight months of being net sellers. Japan investors were net sellers (-JPY46.4 bln) of Australian bonds for the fifth straight month and seven of the past eight months. Japan investors were net buyers of Canadian (JPY76.9 bln) and Italian (JPY83.0 bln) bonds in September and more than reversed August’s net selling.

Philippines posted a huge upside surprised for Q3 GDP. Growth came in at 7.1% y/y, well above the 4.9% expected, and included a 0.2 ppt upward revision to Q2 growth to 12.0% y/y. This is in part due to base effects from the large decline in 2020, but we note GDP grew a whopping 3.8% q/q vs. 1.4% expected and a revised -1.4% (was -1.3%) in Q2. The data still show that activity remained resilient in the face tightening mobility restrictions. Indeed, household consumption (by far the biggest component of GDP) rose 7.0%. The upside surprise isn’t likely to do much for the BSP, which we expect to keep rates on hold for the next several months at least.


Crypto currencies continue to extend their rally with both BTC and ETH at new all-time highs. Not much has changed in the broad narratives of increased institutional adoption and rapid growth in DeFi and other areas of blockchain-related investments such as NFTs. In particular, the gaming/metaverse space has seen surge of excitement after Facebook’s rebranding to Meta. Tokens such as MANA (Decentraland) and SAND (Sandbox) have been some of the greatest beneficiaries, along with gaming tokens like AXS (Axie Infinity).

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