Navigating Temporary and Contrasting Drivers: US CPI Anticipation Amidst Economic Signals
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FX Daily: Temporary and contrasting drivers
Short-term drivers of market sentiment are piling up ahead of tomorrow’s US CPI. Some clarification from the Italian government on the bank windfall tax is pairing with welcoming signs from yesterday’s UST 3-year auction to help sentiment and offset deflationary news from China. Today, all eyes will be on the $38bn 10-year UST auction.
USD: Treasury auctions in focus
Headlines about the Chinese economy are centre stage amid the lack of market-moving US data releases before tomorrow’s July inflation report. The plunge in Chinese exports reported yesterday was followed by a widely-anticipated fall into deflationary territory overnight: June CPI contracted by 0.3% (consensus was -0.4%), and PPI failed to ease back substantially (-4.4% from 5.4% in June). It is the first time since the pandemic peak that both CPI and PPI have contracted.
Evidence of combined consumer and producer price deflation undoubtedly endorse the notion of a broad-based economic slowdown in China, but a big chunk of the China growth re-rating appears to have already hit markets and we are actually observing little spill-over of today’s numbers as investors tentatively re-enter high-beta positions after yesterday’s risk-off unwinding.
The dollar had found substantial demand at the start of this week, but the prevalence of temporary drivers while Fed-related pricing has been put on hold ahead of key data releases continues to prevent a sustainable dislocation from recent ranges.
What may have helped to throw some cold water on the dollar rally yesterday was the result of the 3-year US Treasury note auction, which resulted in a slightly lower yield than pre-auction trading, a welcoming sign given recent concerns of dwindling demand for bonds. Today’s $38bn auction of 10-year notes and tomorrow’s $23bn of 30-year notes, which are both larger by $2-3bn than the previous corresponding offering, will be watched quite closely.
Today’s 10Y UST auction is likely the only real highlight given a very light US calendar and no scheduled Fed speakers. Should we see more welcoming signs from today's Treasury debt sale, the dollar can keep paring recent gains into tomorrow’s pivotal CPI read.
