US
USD is down against all major currencies, global stocks and bonds are up, while the rally in crude oil prices stalled. Longer term Treasury yields edged a bit lower after yesterday’s rise with 30-year yields modestly below Wednesday’s buyback announcement levels.
Yesterday, Treasury Secretary Scott Bessent warned the buyback operation could be larger than the $4bn announced, while touting the “big toolkit” at his disposal to tame the Treasury market. Bessent also attempted to ease concerns over US fiscal policy noting the White House would announce at the end of this week or early next week “an increased focus on fiscal consolidation.”
The Congressional Budget Office (CBO) offers little evidence of fiscal consolidation, projecting historically large budget deficits and debt rising to a record 120% of GDP by 2036. Without credible spending cuts or revenue increases, the White House plan risks being little more than putting lipstick on a pig.
Regardless, the boost to the Treasury’s buyback operation and the threat of more measures should help cap long-end Treasury yields. But the relief comes with a credibility cost that translates to a weaker USD. The Treasury’s intervention blurs the lines between improving market functioning and suppressing borrowing costs to contain fiscal stress.
The US August PMI will test whether the US growth advantage relative to other major economies remains intact (2:45pm London, 9:45am New York). If so, the data can offer USD some near-term support, while signs the US growth edge is narrowing would deepen its losses.
EUROZONE
EUR/USD is firmer on broad USD weakness and encouraging Eurozone economic activity. The Eurozone August PMI was stronger than anticipated. The composite PMI increased to a nine-month high at 52.1 (consensus: 51.7, prior: 52.0) reflecting a solid and accelerated rise in manufacturing activity. The pace of expansion in services activity was unchanged from July.
The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% at the next September 10 meeting and a total of 60bps of tightening over the next twelve months. That’s reasonable and would leave the policy rate near the top of the ECB’s estimated neutral range (1.75%-3.00%).
UK
GBP/USD is firmer on broad USD weakness. Today’s UK set of economic data was mixed. Retail sales declined in July, partly reversing the previous two months’ strong gains. Total retail sales volumes fell -0.5% m/m vs. 0.7% in June (revised down from 1.0%). Excluding automotive fuel, retail sales fell more than expected by -0.9% m/m (consensus: -0.5%) vs. 0.9% in June (revised down from 1.1%).
UK August PMI surprised to the upside. The composite PMI increased to a four-month high at 52.5 (consensus: 51.6, prior: 52.2) reflecting a sustained turnaround in service sector activity which offset a slowdown in manufacturing production growth.
The swaps curve continues to fully price-in 50bps of BOE rate hikes in the next twelve months. That’s too aggressive in our view given the UK’s negative output gap, and leaves rate-hike expectations vulnerable to a dovish repricing. However, the UK’s favorable growth-inflation mix offers GBP good support.
JAPAN
USD/JPY is testing key support at its 200-day moving average (158.34). Japan private sector growth strengthens to a six-month high in August. The composite PMI improved to 53.4 vs. 52.7 in July driven by increases in both manufacturing and services output.
Japan July CPI rose in line with consensus. Headline CPI increased to 1.9% y/y vs. 1.6% in June, core CPI ex. fresh food increased to 1.8% y/y vs. 1.6% in June, and core CPI ex. fresh food & energy increased to 1.9% y/y vs. 1.7% in June. Both measures of core CPI are tracking below the BOJ’s 2026 forecast of 2.5%.
The swaps curve price in 82% odds of a 25bps Bank of Japan (BOJ) rate hike to 1.25% at the next September 18 meeting. A total of 75bps of tightening is priced in over the next twelve months. We doubt the BOJ can tighten more aggressively than is currently implied by given that underlying inflation pressures remain contained and private consumption activity was flat over Q2.
Nonetheless, USD/JPY can still grind lower because the risk is skewed towards a dovish Fed repricing. The US labor market is in balance, wage growth is consistent with the Fed’s 2% inflation target, and Fed policy is restrictive.
