The dollar index (DXY00) on Friday fell slightly by -0.05% in lackluster trading. The dollar was undercut by Friday's -5.1 bp decline in the 10-year T-note yield to 4.190%, which followed the dovish US PCE deflator report, the Fed's preferred inflation measure.
Friday's PCE deflator report was close to expectations and supported the case for a FOMC rate cut in September. On a month-on-month basis, the June PCE deflator report of +0.1% m/m (headline) and +0.2% (core) was exactly in line with market expectations. On a year-on-year basis, the June PCE deflator of +2.5% y/y was in line with market expectations, fell from +2.6% in May, and matched the 3-1/4 year low of +2.5% posted earlier this year. The June core PCE deflator of +2.6% y/y was slightly stronger than expectations of +2.5% and was unchanged from May's 3-1/4 year low of +2.6%.
The fact that both the headline and core PCE deflators were at 3-1/4 year lows in June was a dovish factor for Fed policy. Also, the nominal deflator rose by only +1.5%, and the core deflator rose by +2.3%, on a 3-month annualized basis.
However, the headline deflator of +2.5% y/y and the core deflator of +2.6% y/y were still above the Fed's +2.0% inflation target, which means it might be premature for the Fed to declare success in meeting its inflation target. That suggests that the market is correct in predicting that the FOMC, at its meeting next week, will leave rates unchanged but will hint that a rate cut is likely at its next meeting in September.
In other US economic news, June US personal spending was in line with market expectations at +0.3% m/m, down from May's revised +0.4% (preliminary +0.3%). However, the June US personal income report of +0.2% m/m was weaker than expectations of +0.4% and was down from May's revised report of +0.4% m/m (preliminary +0.5%). Those reports suggested that US consumer spending is still holding up even as consumer finances deteriorate with less income.
Friday's final-July University of Michigan US consumer sentiment index was revised upward by +0.4 points to 66.4 from the preliminary-July level of 66.0, which was slightly weaker than expectations for a +0.5 point upward revision to 66.5. The July level of 66.4 was an 8-month low and was down by -1.8 points from June's 68.2.
The markets are discounting the chances for a -25 bp rate cut at 5% for next week's July 30-31 FOMC meeting, and 100% for the following meeting on Sep 17-18 if the FOMC does not cut rates next week.
EUR/USD (^EURUSD) rose slightly by +0.12% on dollar weakness. However, the euro was undercut during the week by the rise in the market odds for an ECB rate cut at its next meeting in September to the current level of 90% from 75% on Monday.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 90% for the September 12 meeting.
USD/JPY (^USDJPY) on Friday fell -0.13%. The yen rallied sharply during the week on short-covering, a mass exodus from carry trades, and the rise in the market odds for a BOJ rate hike at next week's meeting to the current level of 68% from 38% on Monday. Ruling LDP Secretary-Genera Motegi this week called for higher interest rates to combat yen weakness, joining the view of Minister for Digital Transformation Kono and illustrating political support for higher interest rates and a yen recovery.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 68% for next week's July 31 meeting and 100% for the September 20 meeting if there is no rate hike at the July 31 meeting.
August gold (GCQ24) on Friday closed up +27.50 (+1.17%), and September silver (SIU24) closed up +0.045 (+0.16%). Gold saw support from Friday's dovish US PCE deflator report and the decline in T-note yields. Silver prices were undercut during the week by the recent theme that the global economy is weakening.
Gold on Friday had underlying support from the slightly lower dollar and this week's increased hopes for Fed and ECB rate cuts in September. Gold also has support after long gold holdings in ETFs rose to a 4-month high of 2,562 metric tons on Friday.
More Precious Metal News from Barchart
- Dollar Slightly Lower as T-note Yields Fall After Dovish US Deflator
- Dollar Slightly Lower as T-note Yields Fall
- Dollar Slightly Lower as T-note Yields Fall
- Dollar Slightly Lower on Weak US Economic Reports
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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