Dollar Still Rangebound Ahead of Yellen

Dollar (8)

  • The highlight for today is Fed Chair Yellen’s Jackson Hole speech at 10 AM ET
  • During the North American session, the US reports advanced trade and wholesale inventories for July, Q2 GDP revision, and University of Michigan sentiment
  • The UK reported Q2 GDP
  • Japan reported July inflation figures
  • Local press is reporting that South African President Zuma is planning a cabinet shuffle; Mexico reports July trade

The dollar is softer against the majors in narrow ranges ahead of Yellen’s speech. The dollar bloc is outperforming while sterling and the Norwegian krone are underperforming. EM currencies are mixed. ZAR, PLN, and IDR are outperforming while RUB, CNY, and TRY are underperforming. MSCI Asia Pacific was down 0.5%, with the Nikkei falling 1.2%. MSCI EM is up 0.1%, with Chinese markets falling 0.1%. Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a higher open. The 10-year UST yield is down 1 bp at 1.56%. Commodity prices are mixed, with oil down 0.5%, copper up 0.5%, and gold up 0.4%.

The highlight for today is Fed Chair Yellen’s Jackson Hole speech at 10 AM ET. Both Dudley and Fischer have already provided their general take on the economic outlook and prospects for a Fed hike this year. It seems unreasonable to expect Yellen to substantially deviate from their views.

Although a September hike seems unlikely, there is nothing to be gained from Yellen ruling it out. The Fed wants investors to know that every meeting is actionable, though there is no precedent for a move in November, the month of the US national election. According to the Fed funds futures, the market has upgraded the odds of a September hike to 32% currently from 18% on August 1 and 26% on August 5 after the US jobs data.

During the North American session, the US reports advanced trade and wholesale inventories for July, Q2 GDP revision, and University of Michigan sentiment. It’s worth noting that the Atlanta Fed’s GDPNow model now has Q3 SAAR growth tracking at 3.4%, down from 3.6% previously. The drop was due to weak existing home sales data reported this week.

The UK reported Q2 GDP. Headline GDP 0.6% q/q, as expected. Looking at the components, private consumption rose 0.9% q/q vs. 0.8% expected, GFCF (investment) rose 1.4% q/q vs. 0.4% expected, government spending fell -0.2% q/q vs. 0.3% expected, and exports rose 0.1% q/q vs. 0.7% expected. So far, the post-Brexit economic data have shown resilience and even outright strength. This should keep the BOE on hold next month.

German GfK consumer confidence was reported for September. It came in at 10.2 vs. 10.0 expected. Yesterday, German IFO confidence came in much weaker than expected for August. Elsewhere, France reported Q2 GDP. Growth came in as expected, flat q/q and up 1.4% y/y.

Japan reported July inflation figures. The national headline CPI was steady at -0.4% y/y, as expected, while core (excluding fresh food) came in at -0.5% y/y vs. -0.4% expected. Excluding food and energy, the inflation rate edged down to 0.3% y/y from 0.5% in June, the lowest since October 2013. Tokyo August headline inflation came in at -0.5% y/y vs. -0.4% expected, which suggests downside risks to the national CPI next month. Data overall have come in on the weak side recently, feeding market expectations that greater pressure will be on the BOJ for further easing.

Local press is reporting that South African President Zuma is planning a cabinet shuffle. Potential removals reportedly include the Ministers of Higher Education, Agriculture, Public Works, and Trade and Industry, as well as the Deputy Finance Minister. No mention of Finance. While such a move wouldn’t be surprising in light of the recent municipal election losses, investors could still get spooked in the current environment. Finance Minister Gordhan was not mentioned in the press report, but a recent poll by a major local bank showed that about half the respondents expect him to be eventually removed.

Mexico reports July trade. Exports have contracted y/y in 11 of the past 12 months, and the only exception was a 0.3% y/y gain in May. Petroleum exports have been weak, as one would expect, but non-petroleum exports have also been weak. Imports have also been contracting, and so deterioration in the trade and current account balances has been limited. While the sluggish economy is likely to keep Banco de Mexico on hold for the time being, much will depend on the peso.