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Markets flat-line into US inflation report

Currency traders are so bored, they’re working just to pass the time this morning. Foreign exchange market ranges remain remarkably tight ahead of tomorrow’s US consumer inflation report, equity futures are pointing toward an incrementally-softer open, and Treasury yields are inching lower into what could be a news-light trading day.

The pound is holding below the psychologically-important 1.25 threshold against the dollar after British wage growth stayed hot in the three months through July – making a compelling case for more Bank of England tightening – even as the broader labour market showed signs of easing, suggesting that a growth slowdown is ahead. Numbers released by the Office for National Statistics this morning showed average earnings excluding bonuses rising 7.8 percent year-over-year, while private sector pay packets climbed 8.1 percent. The unemployment rate ticked up to 4.3 percent and the number of vacant positions slipped below 1 million for the first time in two years. 

In a speech given yesterday, Monetary Policy Committee uberhawk Catherine Mann said “I would rather err on the side of over-tightening. But, if I am wrong, and inflation decelerates more quickly and activity deteriorates more significantly, I will not hesitate to cut rates”. Markets are currently assigning circa-80-percent odds to another rate hike on September 22, and at least one additional move is considered possible in the following months.

Yesterday’s verbal intervention from the People’s Bank of China succeeded in pushing the yuan higher in onshore markets, but the offshore exchange rate is holding below the 7.30 level initially breached in mid August. Signs of economic stabilization in data out later in the week – retail sales, industrial production, and fixed asset investment – could help narrow yield differentials slightly, but the gap between US and Chinese rates remains vast, meaning that the fundamental forces arrayed against the currency are still quite powerful.  

And the yen is struggling to hold gains achieved after Governor Ueda suggested that the Bank of Japan would consider lifting rates into positive territory if policymakers become confident that wages and prices are rising sustainably. Government bond yields are holding near ten-year highs, but remain far enough below their advanced-economy equivalents to provide speculators with ample fuel for carry trades and keep yield-seeking Japanese institutions shopping in global markets. 

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