Dollar Supported by Rising T-Note Yields and Falling Stocks

The dollar index (DXY00) is up by +0.12% today.  Soaring T-note yields today have strengthened the dollar’s interest rate differentials and are pushing the dollar higher.  Also, today’s +2% rally in WTI crude oil to a 6-week high is raising inflation expectations and could potentially persuade the Fed to raise interest rates, a supportive factor for the dollar.  In addition, today’s stock slump has boosted liquidity demand for the dollar. 

The dollar fell back from its best level today on weaker-than-expected US economic news, including Aug ISM manufacturing, July construction spending, and July JOLTS job openings.

The US Aug ISM manufacturing index fell -1.0 to 54.6, weaker than expectations of 55.2.  The Aug ISM prices paid sub-index was unchanged at 71.1, stronger than expectations of a decline to 70.8.

US July construction spending fell -0.5% m/m, weaker than expectations of no change.

US July JOLTS job openings unexpectedly rose +89,000 to 7.271 million from a downward-revised 7.182 million in June, weaker than expectations of 7.313 million.

Hawkish comments today from Fed Governor Michael Barr were supportive of the dollar when he said, "If inflation appears not to be moderating sufficiently, then I think we should act decisively to raise interest rates."

The markets are discounting a 65% probability of a +25 bp rate hike at the next FOMC meeting on September 15-16.

EUR/USD (^EURUSD) is down by -0.11% today.  The euro is under pressure today from a stronger dollar. Also, today’s Eurozone economic news, which showed a downward revision to the Eurozone Aug S&P manufacturing PMI and an unexpected decline in German July retail sales by the most in 5 years, is bearish for the euro.

Euro losses are limited as today’s +2% rally in crude oil prices to a 6-week high raised inflation expectations and could prompt the ECB to tighten monetary policy, a supportive factor for the euro.  Also, today’s report on Eurozone Aug CPI, which rose the most in nearly 3 years, is hawkish for ECB policy and positive for the euro.   In addition, hawkish comments today from ECB Governing Council member Martin Kocher supported the euro when he said an ECB rate hike may be needed if the inflation outlook worsens.  Finally, today’s increase in the 10-year German Bund yield to a 15-year high of 3.364% strengthened the euro’s interest rate differentials. 

The Eurozone Aug CPI rose +3.3% y/y, right on expectations and the fastest pace of increase in nearly 3 years.  Aug core CPI rose +2.4% y/y, weaker than expectations of +2.5% y/y.

The Eurozone July unemployment rate was unchanged at 6.4%, showing a slightly weaker labor market than expectations of 6.3%.

The Eurozone Aug S&P manufacturing PMI was revised downward by -0.1 to 52.7 from the previously reported 52.8.

German July retail sales unexpectedly fell by -3.4% m/m, weaker than expectations of +0.5% m/m and the biggest decline in 5 years.

The UK Aug S&P manufacturing PMI was revised upward by +0.3 to 51.7 from the previously reported 51.5.

ECB Governing Council member Martin Kocher said, "Upside risks to inflation have increased again recently.  If this picture is confirmed in the ECB's new forecast, I believe another interest rate hike will be necessary in the near future."

The markets are discounting a 99% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.

USD/JPY (^USDJPY) is up by +0.14% today.  The yen tumbled to a 1-month low against the dollar today. Soaring T-note yields today are weighing on the yen.  Also, today’s 2% jump in crude oil prices to a 6-week high is negative for the Japanese economy and the yen, as Japan imports more than 90% of its energy. 

Yen losses are limited today after Japanese economic news showed the Japan Aug consumer confidence index rose more than expected to a 6-month high, and Japan Q2 capital spending rose more than expected.

The yen also continues to suffer from weak interest rate differentials, with the BOJ's current policy rate of 1.00%, well below the Fed's federal funds rate target range of 3.50%-3.75%.

The yen has underlying support from increased expectations of a BOJ rate hike in either September or October.  The government favors a rate hike to support the yen and prevent inflationary pressures stemming from the weak yen.  Finally, the yen has ongoing support from the recent coordinated US-Japan intervention and fears that further intervention might be forthcoming if the yen remains weak. The markets are discounting a 94% chance of a +25 bp BOJ rate hike at the September 18 policy meeting. 

The Japan Aug consumer confidence index rose +0.6 to a 6-month high of 35.5, stronger than expectations of 35.3.

Japan Q2 capital spending unexpectedly rose +1.6% y/y, stronger than expectations of a -0.3% y/y decline.  Q2 capital spending ex-software rose +3.6% y/y, stronger than expectations of +1.6% y/y.

The Japan Aug S&P manufacturing PMI was revised downward by -0.2 to 54.9 from the previously reported 55.1.

December COMEX gold (GCZ26) is down -59.50 (-1.33%) today, and December COMEX silver (SIZ26) is down -1.295 (-1.93%).

Precious metals are sharply lower today for a third consecutive session, posting 1.5-week lows. Today’s stronger dollar is undercutting metals prices.  Also, today’s surge in global bond yields is bearish for precious metals.  In addition, today’s +2% rally in crude oil prices to a 6-week high boosts inflation expectations and could persuade the world’s central banks to raise interest rates, a negative factor for precious metals.  Finally, precious metals are being weighed down by negative carryover from last Friday when hawkish comments from Fed Chair Warsh boosted the chance of a Fed rate hike at next month’s FOMC meeting to 75% from 36% before he spoke. 

Recent fund support for precious metals is bullish for prices, as long holdings in gold ETFs climbed to a 4.25-month high last Friday.  Long holdings in silver ETFs also rose to a 5-month high last Tuesday.

Strong central bank demand for gold is supportive of gold prices, following the Aug 7 news that bullion held in China's PBOC reserves rose by +640,000 ounces to 76.08 million troy ounces in July, the twenty-first consecutive month the PBOC boosted its gold reserves.