Dollar Suffers Biggest Weekly Drop Since February, Pushing Global Markets Higher

In commodities, the oil market is languishing around yesterday’s lows after the previous sessions losses of over 2%,. Brent and WTI are both set for gains of over 1.5% this week, as weather reports remain in focus, with Hurricane Florence set to make landfall in North Carolina today. In the metals scope, gold is currently benefitting from a softer USD and is currently up 0.5% on the day. LME copper has remained stable around two week highs as traders remain wary of trade talks, after US President Trump said the US “are under no pressure to make a deal with China, they are under pressure to make a deal with us” in Thursday’s session.

Looking at the day ahead, the main highlight is probably the August retail sales report which is expected to show a +0.5% mom ex auto and gas print and +0.4% control group reading. Also due is the August import price index reading, August industrial production, July business inventories and finally a first look at the September University of Michigan consumer sentiment print. Away from that, the BoE’s Carney is due to speak again today, this time in Dublin at 11am BST while the ECB’s Nowotny also speaks this morning on a panel in Vienna. In the afternoon the Fed’s Evans (2pm BST) and Rosengren (3pm BST) are scheduled to make remarks.

US Event Calendar

  • 8:30am: Retail Sales Advance MoM, est. 0.4%, prior 0.5%; Retail Sales Ex Auto MoM, est. 0.5%, prior 0.6%
  • 8:30am: Import Price Index MoM, est. -0.2%, prior 0.0%; Export Price Index MoM, est. 0.0%, prior -0.5%
  • 9:15am: Industrial Production MoM, est. 0.3%, prior 0.1%; Capacity Utilization, est. 78.2%, prior 78.1%
  • 10am: Business Inventories, est. 0.55%, prior 0.1%
  • 10am: U. of Mich. Sentiment, est. 96.6, prior 96.2; Current Conditions, prior 110.3; Expectations, prior 87.1

DB's Jim Reid concludes the overnight wrap

Ten years ago tomorrow will be the anniversary of the Lehman default and I think that the biggest proof that we’re still in the long shadow of the GFC is the fact that around 25% of the global economy still operates under negative policy rates.

So it was apt in this anniversary week that yesterday saw an ECB that continued to flag that rates will be on hold in negative territory through next summer at least. Their policy meeting was pretty much as expected. Further details below but in reading Mark Wall’s review last night ( link ) what struck me from his analysis is that the recent revival in wage inflation in Europe is looking sustained. Although good news, if this continues life gets a bit more complicated for the ECB if an internal crisis hits (e.g. Italy) because they may not have the cover of ultralow inflation to intervene as aggressively as they have done in the past. Anyway, a story for another day, especially as US CPI disappointed yesterday.

Before that the biggest story of an eventful day was the larger than expected rate hike out of Turkey which saw the Lira trade in an 8.52% intraday range (closed +4.32%) which was pretty impressive as the range throughout the whole of September prior to yesterday was ‘only’ 6.69%. The 625bp hike in the one week repo rate to 24% completely smashed the consensus expectation for 21% and in fact was also higher than forecasts predicted by 21 of the 22 surveyed in Bloomberg. The overnight and late liquidity window lending rate were also hiked by 625bps to 25.5% and 27% respectively which meant the Bank kept the symmetric corridor framework while the CBT also announced the Bank’s decision to start funding banks again from the one-week repo rate, as opposed to overnight lending facilities, which therefore means the effective rate will reach 24%. For our Turkey Chief Economist, Kubilay Ozturk, yesterday’s move was in his view a strong signal about the authorities’ determination to address the ongoing currency and confidence crisis before it turns into something costlier. The path for macro stabilization has kicked off but with plenty of potential headwinds still ahead and an economy that is deteriorating sharply due to these actions.

However, for yesterday this was seen as overwhelmingly positive, especially after President Erdogan’s comments earlier in the session caused the Lira to depreciate as much as -3.20%. Erdogan instituted a decree that will force most Turkish entities to stop using foreign currencies to lend or borrow. The measure could de-incentivize dollarization over the medium term, but since it was paired with market unfriendly-comments, e.g. repetition of Erdogan’s assertion that higher interest rates cause inflation, the market took it negatively. After its steep depreciation, the Lira then rallied after the rate hikes to close 7.55% off the intraday lows.

The second big surprise of the day came with the August CPI report in the US where, at an unrounded +0.0818% mom, the core reading came in with decent daylight under the +0.20% consensus. As a result, the annual rate dipped two-tenths to +2.2% yoy and back to levels last seen in May. The details revealed that a big drop in apparel inflation – the largest since the 1940s – was a big contributor to the soft print while medical services inflation also fell by the second most since 1975. As a result, the 3-month and 6-month annualized readings are now down to +1.96% and +1.88% respectively. Our economist believe one-offs can explain some of the softness but not all of it. One to watch going forward.

Markets generally liked the news flow yesterday with the S&P 500 closing +0.53% while the NASDAQ and DOW climbed +0.75% and +0.57% respectively. Apple (+2.42%) rose after its refreshed product launch and I’m still undecided as to whether I’m going to join the online queue at 8.01am this morning!! Elsewhere the VIX (-0.77pts) closed back under 13 for the first time since last month. The Dollar index closed down a reasonably modest -0.30% while 10y Treasury yields finished 0.9bps higher at 2.972% after trading as low as 2.943% post-CPI. In Europe equity markets underperformed (Stoxx600 -0.15%) and Italy  lagged (-0.56%) while bonds finished broadly flat to a couple basis points higher. EM FX did rally to the tune of +0.60% helped by that move in TRY (+4.32%).

This morning in Asia markets are for the most part feeding off that positive tone on Wall Street last night. The Nikkei (+0.95%), Hang Seng (+0.81%), Kospi (+1.23%) and ASX (+0.64%) are all firmer although bourses in China are more flat to slightly down. That follows the latest August activity indicators in China which were slightly mixed. Retail sales printed at a slightly better than expected +9.0% yoy (vs. +8.8% expected), industrial production was in line at +6.1% yoy although fixed asset investment did miss (+5.3% yoy vs. +5.6% expected).

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