US
USD recovered most of yesterday’s pullback. Fed funds futures price in 67% odds of a 25bps hike on September 16 and imply 60bps of tightening over the next twelve months. Pricing will remain elevated into the September meeting, with the August CPI on September 11 the decisive test. Today’s US data should keep a September hike firmly in play and underpin USD.
Global bond yields are rising to fresh highs, reflecting firmer crude oil prices and a higher expected path for major central banks’ policy rates. 30-Year Treasury yields have erased the drop that followed the August 19 US Department of the Treasury buyback announcement, while USD/JPY has largely retraced its post July 31 joint US-Japan intervention slump.
Treasury Secretary Scott Bessent defended the unscheduled buyback announcement as a signal, not an attempt to dictate market prices. His aim was to make sure market participants know that things aren’t a one-way trip, and that they’re “looking at fundamentals, and that the market does not dictate policy.” The same logic likely applies to the yen intervention. In effect, Bessent has placed a cap on longer-term Treasury yields and USD/JPY. Neither guarantees a reversal but both raise the cost of betting against Treasuries or JPY.
Bessent also pushed back against claims that rising Treasury yields reflected mounting concerns over US fiscal policy, noting the outperformance of US 10-year Treasuries relative to other major bond markets. However, relative outperformance does not make the fiscal risk disappear. Rising interest expense will ultimately push up the US Treasury term premium, leaving USD more vulnerable to periods of fiscal stress.
August ISM manufacturing index (3:00pm London, 10:00am New York). The headline index is expected at 55.2 vs. 55.6 in July consistent with resilient manufacturing activity. Importantly, the Prices Paid index is seen falling to a six-month low at 70.8 vs. 71.1 in July signaling diminishing upside inflation risk.
July Job Openings and Labor Turnover Survey (JOLTS) (3:00pm London, 10:00am New York). The JOLTS print is expected to reinforce the US labor market’s low hire, low fire backdrop.
Fed Governor Michael Barr speaks about economic outlook (2:05pm London, 9:05am New York). Watch for any echo of Chair Kevin Warsh’s message that the inflation fight is not over.
EUROZONE
EUR/USD is trading heavy just under 1.1600. Eurozone August CPI showed easing underlying inflation pressures. Headline CPI matched consensus at 3.3% y/y vs. 2.9% in July on higher energy prices. However, core inflation undershot at 2.4% y/y (consensus: 2.5%) vs. 2.5% in July while services inflation slowed to 3.0% y/y vs. 3.3% in July.
Above target Eurozone inflation and a firmer growth outlook give the ECB scope to raise rates. The swaps curve has virtually fully priced in a 25bps ECB rate hike to 2.50% on September 10 and a total of 75bps of tightening over the next twelve months. That’s EUR/USD supportive and makes fresh cyclical lows below 1.1400 unlikely.
ISRAEL
USD/ILS rallied above 3.0000 on broad USD strength. Bank of Israel (BOI) policy decision is today (2:00pm London, 9:00am New York). Analysts are evenly split between a follow-up cut and a pause. We expect BOI to deliver a third straight 25bps rate cut to 3.25% because Israel headline CPI inflation has been running below 2% since January.
Regardless, the AI/data-center spending boom should continue to fuel capital inflows into Israel’s large tech sector (roughly 20% of the GDP) and support the uptrend in ILS.
