Markets Rangebound Ahead of Jackson Hole

August 25, 2021
  • The U.S. 2-year auction yesterday saw very strong demand; Pelosi struck a deal with moderate Democrats that will allow the two infrastructure packages to move forward; Brazil reports mid-August IPCA inflation and July current account data
  • German August IFO business climate survey came in soft; Hungary hiked rates by 30 bp as expected to 1.50% and also started tapering
  • Reports suggest Prime Minister Suga will expand a state of emergency to eight more prefectures as virus numbers worsen; Chinese assets received a boost overnight from extra PBOC cash injections

The dollar is getting some traction after three straight down days. Still, most major currencies remain within recent trading ranges ahead of Jackson Hole. DXY continues to find support just below 93. The euro remains heavy near $1.1750, while sterling is having trouble trading above $1.3750. USD/JPY also remains heavy and has so far been unable to mount a challenge to the 110 area despite the risk-on backdrop this week. While we remain positive on the dollar, this period of consolidation is likely to persist ahead of Jackson Hole.

AMERICAS

The U.S. 2-year auction yesterday saw very strong demand. Indirect bidders took 60.5% of the $60 bln offered vs. 52.8% previously, the most since 2009, while the bid-to-cover ratio was 2.65 vs. 2.47 previously. This sets the stage for the 5-year auction today and the 7-year auction tomorrow. The bond sales come even yields creep higher. The 10-year yield is trading near 1.30%, the highest since August 13. With 10-year breakeven rates around 2.32%, the real U.S. yield has risen to -1.02% and is near recent highs. If the U.S. data remain firm as we expect, allowing the Fed to move forward with tapering, then we see further upside for yields. Please see our Jackson Hole preview here. Durable goods orders (-0.3% m/m expected) will be reported.

House Speaker Pelosi struck a deal with moderate Democrats that will allow the two infrastructure packages to move forward. The compromise led to a 220-212 procedural vote yesterday afternoon that adopted the Senate’s $3.5 trln “human infrastructure” budget resolution. The Senate has already passed it 50-49 and so it goes the committees that will write the details of the framework into legislation. According to Representative Cuellar (D-TX), this sets up a later House vote on final passage of the $550 bln traditional infrastructure bill. The key to the deal was the House Rules Committee putting a September 27 deadline for the traditional infrastructure vote into writing. That, along with a commitment by Pelosi not to have the House vote on a “human infrastructure” bill that would not pass in the Senate, was enough to get the group of 10 centrist Democrats to support the plan.

Brazil reports mid-August IPCA inflation and July current account data. Inflation is expected at 9.24% y/y vs. 8.59% in mid-July. If so, it would be the highest since May 2016 and further above the 2.25-5.25% target range. Next COPOM meeting is September 22. After increasing the pace of tightening to 100 bp at the last meeting, COPOM promised another hike of the same magnitude at the next meeting, which would take the policy rate up to 6.25%. The most recent central bank survey shows that economists now expect the policy rate at 7.50% for end-2021 and end-2022, both up from 7.25% previously.

EUROPE/MIDDLE EAST/AFRICA

German August IFO business climate survey came in soft. The headline reading came in at 99.4 vs. 100.4 expected and a revised 100.7 (was 100.8) in July. The current assessment rose a full point to 101.4, but expectations fell a whopping 3.5 points from July and bodes ill for the economic outlook in Q4 and beyond. German September GfK consumer confidence will be reported Thursday, which is expected at -0.5 vs. -0.3 in August. France reports August business and manufacturing confidence Thursday and consumer confidence Friday. Similarly, Italy reports August manufacturing and consumer confidence Friday. All are expected to ease from July.

Hungary’s central bank (NBH) hiked rates by 30 bp as expected to 1.50% and also started tapering. The bank’s tightening cycle started in May with rates at 0.60%, establishing itself as the most hawkish in the region. It will also reduce its weekly QE purchases by HUF10 bln to HUF50 bln per week. This is consistent with the recent communication as inflation is expected to remain above the upper end of tolerance band (2-4%). We will get a better picture of extent of tightening in September when the next inflation report comes out, but for now there is no sign of wavering for the cycle. The forint remains one of the best performing currencies, but we suspect that the interest rate differential story is already fully priced in.

ASIA

Reports suggest Prime Minister Suga will expand a state of emergency to eight more prefectures as virus numbers worsen. In total, the restrictions will cover about nearly 70% of the population and nearly80% of the economy. The measures will go into effect Friday and is scheduled to remain in place until September 12, but there are clear risks that they will have to be extended. Bank of Japan board member Nakamura warned that “The current spread of infections is more than expected at the time of the July policy meeting. Downward pressure on the economy is going to continue for the time being.” That said, the BOJ is on hold for now as markets await the next fiscal package from Suga. Next BOJ meeting is September 21-22 and no change is expected then.

Chinese assets received a boost overnight from extra PBOC cash injections. Officials reacted to higher interbank rates by offering RMB50 bln in liquidity through its 7-day repo facility, adding the largest amount of liquidity since February. This led to the first lower close for the overnight rate (-6 bp) after four consecutive sessions of increases, netting out a move from 1.72% last Wednesday to 2.21% today. Chinese equity indices ended the day on a positive with the Shanghai Comp up 0.7%.

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