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Dollar recovers on rest-of-world weakness

Investor demand for US assets continues to grow at an untrammelled pace this morning as signs of softness emerge in other areas of the global economy.

Ten-year Treasury yields are down roughly six basis points to 4.26 percent, but benchmark rates are declining much more rapidly in the UK and euro area after a series of purchasing manager surveys pointed to wider weakness and diminished the case for further monetary tightening. The dollar is stronger against all of its major rivals – with the Japanese yen marking the lone exception.

US equity futures are higher ahead of an earnings release from current market darling Nvidia Corp. – chipmaker to the artificial intelligence sector – which is expected to show stronger-than-forecast results for the second quarter. Volatility could ensue in the event of a meaningful departure from expectations, with global risk appetite sensitive to changes in the Nasdaq index.

North America

Purchasing manager survey data, due for release at 9:45, is expected to show US factory activity remaining in a modest contraction even as the far more important services sector continues to expand.
Markets expect S&P Global’s preliminary manufacturing index for August to hold at 49.0, unchanged from late July, while the services index is seen moving up to 52.5 from 52.3.

Republican Party presidential candidates will face off in a debate this evening, with the front runner – Donald Trump – notably absent. Former Vice President Mike Pence, Florida Governor Ron DeSantis, former Ambassador to the UN Nikki Haley and five others are unlikely to discuss issues of economic policy substance, instead focusing on positioning around Mr. Trump’s criminal indictments and abortion issues. Market implications should be minimal.

Jerome Powell’s speech at Jackson Hole, scheduled for 10:05 am on Friday, remains the most obvious event risk on the economic calendar. If he discusses current policy settings at all, we expect him to downplay the importance of near-term policy decisions as he delivers a “higher for longer” message that contemplates few, if any rate cuts in 2024. Markets will, of course, take this with a grain of salt – he used a similar platform in 2020 to argue that rates would remain low for a prolonged period of time, and in 2021 to suggest that inflation pressures would soon subside.

Canadian retail sales, out at 8:30, are expected to show receipts relatively unchanged in June – as per Statistics Canada’s earlier estimate – with a modest increase coming in July. Evidence of a slowdown in spending has been difficult to see in the data, but savings rates have plunged as disposable income growth has fallen back and interest costs have risen, suggesting that household consumption could be running on fumes.

The loonie remains tightly rangebound, failing to break above its 200-day moving average against the dollar at 1.3450, or below the 1.3585 level hit in early June.

Household savings rate, %


British and European yields slipped this morning after a raft of purchasing manager surveys pointed to a widening deterioration in the services side of the economy.

Data collected by S&P Global showed the euro area moving further toward recession, with the flash index falling to 47 in early August – below the 50 level that marks the difference between expansion and contraction, and well below market expectations. Services activity shrank, surprising investors who had expected continued resilience, and the two biggest economies – Germany and France – saw particularly severe declines, with hiring cooling and export demand coming under pressure.

The euro is challenging round-number support around the 1.08 handle, with a break below likely to open up further downside. We expect European Central Bank President Christine Lagarde to express a more cautious outlook in remarks at Friday’s meeting in Jackson Hole, further lowering market-implied odds on a rate hike at the September meeting.

Market-implied change in European Central Bank policy rate, %

The UK composite purchasing manager index tumbled sharply, falling from 50.8 to 47.9 in August – a 31-month low – with services activity falling at the fastest pace since the pandemic shuttered major areas of the economy. Markets had expected the index to remain in expansionary territory, and are now moving to downgrade the likelihood of rate hikes beyond the Bank of England’s September meeting. We think growth will slow further in coming months, negating the need for tighter policy and putting downward pressure on the pound.

Asia Pacific

The onshore Chinese renminbi is clinging to the 7.30 mark against the dollar, with market participants labouring under the belief that policymakers have drawn a line in the sand at these levels. We expect further declines in the near term, but a series of support actions in recent days – including setting fix levels well above market expectations, encouraging state-owned banks to buy yuan, and threatening to investigate short sellers – have cooled demand for bets against the currency, and seem designed to slow-walk a fundamentally-driven fall in the exchange rate.

The Bank of Japan is sticking to the sidelines, letting ten-year government bond yields hold near 0.67 percent, suggesting – to some – that officials are waiting for a break above 0.70 percent before launching another round of buying. We’re not sure the obsession – so prevalent in markets – with round numbers is mirrored at the central bank, but it does appear that policymakers are generally comfortable with rates pushing higher at a gradual pace as long as growth holds up and inflation pressures remain elevated.

The growing likelihood of currency intervention in both the yuan and the yen has led to fears of a selloff in US debt that exacerbates the recent rise in Treasury yields. There may be a grain of truth to this – there are signs of a rotation in demand out of the short end of the curve – but the threat of a global buyers’ strike looks overstated. The share of Treasuries held by China, Japan, and the biggest intermediary financial centres (potentially used to obfuscate China’s reserve accumulation) peaked at 27.5 percent in September 2011, and has fallen since, dropping to 12.5 percent in July without inflicting any obvious damage on the world’s biggest and most liquid debt market.

Major holders of US public debt, billions USD

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