Dollar Softens Ahead of PPI

October 14, 2021
  • September inflation readings remain in focus; Treasury concluded its coupon issuance this week with a successful 30-year auction; FOMC minutes were released; initial claims data are expected to show continued improvement in the labor market; Chile surprised yesterday with a hefty 125 bp hike to 2.75%
  • ECB asset purchases are all over the place; Turkish President Erdogan doubled down on his pressure for lower interest rates by firing three central bank officials
  • Japan’s lower house of parliament was dissolved and elections were called for October 31; Australia reported weak September jobs data; China inflation data were mixed; Singapore became the latest to deliver a hawkish surprise

The dollar is softer ahead of PPI data. DXY is down for the second straight day and trading back below 94. U.S rates are edging lower despite FOMC minutes showing imminent tapering (see below). USD/JPY has held up, trading near 113.50 and just below this week’s multi-year high near 113.80. Elsewhere, the euro is trading back above $1.16 but further gains may be difficult as the ECB continues to send dovish signals. Sterling continues to hold up relatively better and is trading back above $1.37 for the first time since late September, sending the EUR/GBP lower to test the August low near .8450. If U.S. data point to rising price pressures and continued strength in the economy, rates and the dollar should resume their moves higher.


September inflation readings remain in focus. PPI will be reported, with headline expected to pick up nearly half a point to 8.7% y/y and core expected to pick up nearly half a point to 7.1% y/y. A rise in PPI inflation would be particularly troublesome, as reports suggest firms are finding it easy to pass through higher costs to consumers, which implies upside risks for CPI in the coming months. Yesterday, headline CPI inflation picked up a tick to 5.4% y/y vs. 5.3% expected while core remained steady at 4.0% y/y.

U.S. yields first spiked higher after the CPI print but then fell back. The two-year yield rose as high as 0.39% but stands at 0.35% now, while the 10-year rose as high as 1.60% but stands at 1.53% now. Note that inflation expectations have been rising steadily in recent days, with the 10-year breakeven rate of 2.53% the highest since May and threatening that month’s cycle high near 2.60%. The combination of falling nominal yields and rising inflation expectations has led to a drop in the real 10-year yield to -1.0%, the lowest since mid-September.

The U.S. Treasury concluded its coupon issuance this week with a successful 30-year auction. $24 bln of 20-year bonds were sold yesterday, with indirect bidders taking 70.5% vs. 69.7% at the previous auction and the bid-cover ratio falling to 2.36 from 2.49 previously. This follows a weak 3-year auction and a strong 10-year auction Tuesday. From what we can tell, foreign demand for the long end remains solid at current yields.

FOMC minutes were released. At the September meeting, the Fed said that tapering “may soon be warranted” as the economy and employment have continued to strengthen. The minutes give a few more details of what markets might expect. Tapering is likely to start in mid-November or mid-December, with several possible paths. The one that was detailed called for monthly tapering of $10 bln in USTs and $5 bln in MBS. With the Fed currently buying $80 bln and $40 bln each month, respectively, this path would end QE around mid-2022. Fed officials were disappointed in the progress in the labor market, even though it is clearly ready to say that there has been enough to meet the “substantial further progress” metric to begin tapering. Bullard, Bostic, Barkin, Daly, and Harker all speak today.

Initial claims data are expected to show continued improvement in the labor market. Initial claims are expected at 320k vs. 326k previously while continuing claims are expected at 2.670 mln vs. 2.714 mln previously. Of note, next week’s initial claims data will be for the BLS survey week containing the 12th of the month. Canada reports August manufacturing sales, which are expected to rise 0.3% m/m vs. -1.5% in July.

Chile’s central bank surprised yesterday with a hefty 125 bp hike to 2.75% and announced the end of its dollar purchases. Markets expected a 100 bp move. As discussed in our EM Central Bank Update, we expect the hawkish surprises to continue as countries face growing inflation pressures and the benefits of front-loading the tightening cycles become more attractive. This is exactly what Chile did. It will also stop its build-up of FX reserves as market conditions have normalized and enough foreign currency has been accumulated. The peso appreciated 0.8% yesterday and is likely to build on those gains today.


ECB asset purchases are all over the place. Net purchases for the week ending October 8 came in at EUR18.8 bln, up sharply from only EUR8.2 bln for the week ending October 1. Markets are left trying to figure out the new “modest” pace of asset purchases but so far, the ECB hasn’t sent a clear signal and so it may take several more weeks to determine. Next policy meeting October 28 is likely to be contentious and so no decision on QE is expected until the December meeting. ECB’s Elderson speaks today.

Turkish President Erdogan doubled down on his pressure for lower interest rates by firing three central bank officials, sending the lira to fresh record lows. These officials (two Deputy Governors and one MPC member) were against the decision to cut rates 100 bp to 18.0% at the last meeting September 23. The bank meets October 21 and another rate cut then seems assured now. There is not a lot more we can say about this, beyond reminding readers that aside from unfavorable fundamentals, Turkish assets will continue to command a geopolitical risk premium. The lira depreciated nearly 2% so far this week and CDS prices continue trending higher.


Japan’s lower house of parliament was dissolved and elections were called for October 31. The move had been widely expected and the vote will be key in determining whether new Prime Minister Kishida will have any staying power. He said he wants his ruling LDP to maintain a majority in the 465-seat Diet, something that seems assured since the party and its junior coalition partner Komeito currently hold more than 300 seats. That said, recent polls show Kishida with the lowest approval ratings for a new leader since the Great Financial Crisis. Keep an eye out for the long-awaited fiscal package as the LDP tries to shore up its support ahead of the vote.

Australia reported weak September jobs data. There was a -138.0k drop vs. -110k expected and -146.3k in August, as the lockdowns continue to bite. The mix was favorable, however, as -164.7k part-time jobs were lost, offset by a 26.7k gain in full-time jobs. Unemployment rose a tick to 4.6% vs. 4.8% expected but still further above the 4% area where the RBA sees wage pressures forming. We expect the RBA to remain in dovish mode for now, with rates unlikely to rise until 2024 at the earliest. Next RBA meeting is November 1 and no change is expected then.

China inflation data were mixed. September CPI came in a touch below expectations at 0.7% y/y while PPI came in slightly above at 10.7% y/y. The PPI figure was the largest print since 1996, with strong acceleration in gate prices, especially in the mining industry. This highlights the divergent forces at play in the Chinese economy and underscores our view that policy makers will continue to provide stimulus, albeit not as much through the usual bank lending channel. We expect more RRR cuts and direct fiscal measures to support targeted sectors, trying not to aggravate the financial system risks.

The Monetary Authority of Singapore became the latest to deliver a hawkish surprise. It moved away from its neutral stance and tightened monetary policy by “slightly” increasing the slope of the S$NEER path. Previously, the slop was flat and the MAS left the width and center of the band unchanged. The MAS now joins the BOK in the small group of central banks in Asia to shift its focus from growth to inflation. The MAS expects the recovery to be “above-trend” in the next quarters. Singapore also reported advance Q3 GDP data. Growth came in at 0.8% q/q vs. 1.1% expected and a revised -1.4% (was -1.8%) in Q2.

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