Overview

Today's US CPI is the focus but the bar to a Fed cut next month is low, and it could prove anti-climactic. The more moderate inflation reading creates more space for the central bank to respond to signs of a continued slowing of the US labor market and adopt less restrictive policy.

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The dollar is mixed as the North American session gets under way. The rate cut by the Reserve Bank of New Zealand, not a total surprise, but has seen fall 1%. A softer than expected UK CPI report is threatening to snap sterling's five-day advance. Firmer than expected Swedish inflation dampens talk of a 50 bp cut next week. This lifted the krona to the top of the G10 performers today. The euro set a new high since early January near $1.1030. A large set of options expire today slightly higher. Emerging market currencies are mostly firmer today, and the offshore yuan is at a six-day high.  News that Japanese Prime Minister Kishida will not see re-election had little market impact. 

Equities are mostly higher today. In the Asia Pacific region, China and Hong Kong were exceptions among the large bourses. Europe's Stoxx 600 is around 0.20% higher and is rising for the sixth session of the past seven. US index futures are little changed. Asia Pacific bonds rallied. In Europe, the low CPI readings saw 10-year Gilt yields drop four basis points, while the firmer CPI reading in Sweden saw its 10-year yield jump six basis points. Most of the benchmark yields in Europe are 1-2 bp higher. The 10-year US Treasury yield is flat near 3.84%. Gold remains firm near $2478. The record high was set last month around $2483. September WTI is pinned in the lower end of yesterday's range and holding above $78. The high set Monday was slightly above $80. 

Asia Pacific

In an otherwise quiet regional session, the Reserve Bank of New Zealand became the latest G10 central bank to begin its easing cycle. Even though swaps market favored a cut, economists leaned against it, the New Zealand dollar was sold on the news. The cash target rate now stands at 5.25% and the RBNZ sees it averaging 4.92% in Q4 and 4.36% in mid-2025. The economic calendar picks up tomorrow. Japan reports Q2 GDP, and everything is pointing to a recovery after the 0.7% quarter-over-quarter contraction in Q1. Consumption and business investment are expected to have rebounded. Net exports may have been a small drag, as was likely the inventory liquidation. Beijing appears to be downgrading the significance of the one-year Medium-Term Lending Facility Rate. It has brought the setting earlier, ostensibly distance it a bit from the setting of the loan prime rates (which will continue to be announced on the 20th of the month). It appears to be boosting the operational significance of the seven-day repo rate. The MLF rate will likely be left at 2.30%, after last month's reduction. The lending volume is expected to increase to CNY275 bln. This would be generous in the sense of providing more than the CNY103 bln that was expiring. China is also due to announce July real sector data. Retail sales are seen expanding sequentially, while industrial output slows marginally. The contraction in property investment may moderate but new and used home prices likely continue to fall. Australia's July employment report is due. Full-time employment jumped by 43.3k in June, following the 41.3k gain in May. In H1 24, Australia full-tome employment rose by an average of 34.4k a month, slightly better than H1 23. On the other hand, the unemployment has risen from 3.5% in June 2023 to 4.1% in June 2024, which partly reflects the increased participation rate (to 66.9% from 66.6%). 

The soft US PPI helped push US yields lower yesterday and this seemed to weigh on the dollar against the yen. However, unlike what we have experienced recently, the yen's strength was more a reflection of broad dollar weakness than unwinding carry trades. Currencies and other instruments, like US stocks, on the other side of the carry trades did well yesterday. The greenback traded inside Monday's range against the yen (~JPY146.50-JPY148.20) but broke down to JPY146.10 earlier today before recovering to trade back above JPY147. Options for $1.15 bln at JPY 146.25 expire today. The Australian dollar settled yesterday near $0.6635, meeting the (61.8%) retracement objective of the sell-off from $0.6800 a month ago (found slightly above $0.6625). The five-day moving average crossed above the 20-day moving average by 1/100 of a cent on Monday and made a clear break yesterday. The Australian dollar traded at a marginal new high today, a little above $0.6640. There are around A$350 mln in options that expire today at $0.6670, but the next important chart area is around $0.6700. The broadly weaker greenback and the yen's strength helped the yuan strengthen yesterday. The dollar fell to six-day lows near CNH7.1400. If support is meaningful, the CNH7.1260-CNH7.1400 may offer it in the near-term. The fact that the offshore yuan is trading firmer than the onshore yuan, or at least spending more time above it suggests that the selling pressure is easing. The PBOC set the dollar's reference rate at CNY7.1415 (CNY7.1479 yesterday)

Europe

The UK's July CPI was softer than expected and this weighs on sterling. The headline CPI fell by 0.2%, but given the 0.4% drop in July 2023, the year-over-year rate firmed to 2.2% from 2.0%. In the last three months, UK headline CPI rose at an annualized rate of 0.8%, which is less than half of the annualized paced in Q1 24. Core inflation ticked down to 3.3% from 3.5%. It has not risen since last May when it peaked at 7.1%. Service inflation slowed to 5.2% from 5.7%. It is the lowest since June 2022. The swaps market upgraded the probability of a BOE rate cut next month to about 43% from 36% yesterday, after delivering its first rate cut in a close vote on August 1. A November cut remains fully discounted. The odds of another cut in December have returned to nearly 100%, as it was on August 2, from less than 75% yesterday. Tomorrow, the UK reports Q2 GDP and details for June. The median forecast in Bloomberg's survey sees the economy stagnating in June (grow 0.4% in May after a flat April). 

Yesterday was a good day for the euro. After initially being disappointed with the weak German ZEW survey, traders bought the euro on the dip (~$1.0915) and took it up to $1.10. It settled a slightly below $1.0995, for what appears to be its second best close of the year. The US two-year premium over Germany narrowed a few basis points to below 160 bp, where it remains today. The euro gains were extended to about $1.1030 so far today. Options for 1.6 bln euros at $1.1035 expire today and another batch of almost 1.5 bln euros at $1.10 expire Friday. Sterling's five-day advance is under threat. Its 0.70% rally yesterday was the most in three months, and the surge carried it through the (50%) retracement of the roughly 3 3/4-cent drop from July 17 through August 8. That retracement was near $1.2855. Sterling found initial support near $1.2820 today, but the intraday momentum indicators warn that the low may not be in place. The next chart support is in the $1.2780-$1.2800 area. 

America

The focus is squarely on the US July CPI today. The July PPI, reported yesterday, was a little softer than expected with a 0.1% gain in the headline (2.2% year-over-year from a revised 2.7% in June) and a flat core reading (2.4% year-over-year from 3.0% in June). The median forecast in Bloomberg's survey projects a 0.2% rise in both in the headline and core CPI. The year-over-year pace may be flat at 3.0% for the headline, depending on rounding, while the core rate may tick lower to 3.2% from 3.3%. A 0.2% increase in the headline rate would translate to less than a 0.5% annualized rate over the last three months, down from 2.0% in the same year-ago period. Favorable base effects in August and September, when the headline CPI rose by 0.5% and 0.4%, respectively, in 2023 suggests the year-over-year pace will slow. The Fed will have August's CPI in hand (September 11) before it meets again (September 17-18). A 0.2% increase in the core CPI would put the three-month annualized rate at 2.0% down from 2.4% in the previous three months and 3.2% in the comparable 20023 period. The bar to a quarter-point cut in September seems low. We suspect it will take an exceptionally disappointing August jobs report to put a 50 bp cut truly on the table. 

The broad setback in the US dollar and the risk-on mood helped lift the Canadian dollar yesterday after its six-day run ended with a minor loss on Monday. The greenback posted its lowest settlement since July 18. Like yesterday, today the US dollar approached but could not take out CAD1.3700, where options for about $500 mln expire today. Momentum indicators give scope for additional near-term US dollar losses, but the downside may be limited (~CAD1.3660-75?) before a consolidative/corrective phase. The dollar consolidated against the Mexican peso yesterday, giving by about 0.25% after gaining almost 1.30% on Monday. Even with last week's rate cut, Mexico's rates are still attractive, but the currency volatility makes it less so, especially for a market segment that may be reluctant to jump back into carry trades. From mid-July through early August, the dollar soared almost 15% against the peso. It has given back around 6% so far. The dollar is trading with a softer bias today and found initial support near MXN18.82. The recent low was near MXN18.77. Broad consolidation looks likely (~MXN18.60-MXN19.20?). 

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