Market Briefing: Tightening Financial Conditions Induce Caution In Currency Markets
Pondering the unbearable weight of massive rate increases, market participants are downgrading economic growth prospects this morning, lifting the dollar and sending the yield curve deeper into inverted territory. Short-term curves are flattening and the difference between 2- and 30-year Treasury rates — often seen as a measure of long-term growth expectations — has reached levels not seen since 2000 as Tuesday’s inflation data drives investors to ramp up bets on a policy-induced slowdown.
American producers cut prices again in August, suggesting that consumer inflation could drop in the months ahead. The producer-price index, released yesterday by the Bureau of Labor Statistics, fell -0.1 percent in August after dropping -0.4 percent in the prior month.
A potentially-crippling (and highly inflationary) rail strike has likely been averted. The White House last night announced a tentative agreement with rail-worker unions that would see workers stay on the job in exchange for better pay, improved working conditions, and health care benefits. The risk of a shutdown had roiled markets, with grain and energy prices exhibiting high volatility ahead of tomorrow’s deadline.
Investors increased bets on jumbo-sized moves from the European Central Bank after a volley of hawkish comments from monetary policymakers over the last day. In a range of interviews and speeches, Messrs Holzmann, de Guindos, Lane, Makhlouf, and Villeroy de Galhau all signalled a desire to push European rates toward neutral — estimated at somewhere around 2 percent — by year end, helping the common currency recover after slipping below parity earlier in the week.
The offshore Chinese renminbi fell below the 7 mark against the dollar for the first time since the height of the pandemic, with increasingly-negative interest differentials offsetting fears of official intervention in markets. Onshore rates have fallen as coronavirus lockdowns have forced a broad swath of the economy into a slowdown, and capital outflows are picking up steam as domestic and foreign investors seek opportunities outside an increasingly-draconian political system. But the People’s Bank of China had previously made half-hearted attempts to slow the currency’s decline, and many expect those efforts to increase in the weeks ahead.
Japan’s trade deficit hit record levels last month, as soaring food and energy prices - exacerbated by a weak currency - saw imports outpace exports. With many traders on intervention watch, reaction in currency markets was muted when data was released last night showing the imbalance amounting to 2.82 trillion yen in August. The dollar-yen exchange rate is holding near the 143 mark.
Economists expect headline US retail sales to flatline on a month-over-month basis, but the “control group” measure - which excludes auto dealers, gas stations, and building supply stores - is seen posting strong growth as falling energy prices free up consumer spending.
Applications for unemployment benefits are expected to rise slightly, with initial claims climbing to 226,000 in the week ended September 10, up from 222,000 in the prior week. Labour market conditions remain remarkably tight, giving the Federal Reserve room to tighten rates without triggering a sharp rise in unemployment.
Canadian housing starts probably slipped to 265,000 in August from 275,000 the month before as higher interest rates slowed real estate activity.
KARL SCHAMOTTA, CHIEF MARKET STRATEGIST
USD Weekly Jobless Claims
USD Retail Sales, August
CAD Existing Home Sales, August
CAD Housing Starts, August
USD University of Michigan Sentiment, September (Preliminary)
USD Baker Hughes Weekly Rig Count
EUR European Central Bank Speech, Rehn