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US exceptionalism trade regains momentum

A bruising week for global Wall Street continues this morning, with the dollar holding steady and major indices paring gains into the North American open. Ten-year Treasury yields are inching slightly lower after climbing to a 16-year high in yesterday’s session, paying more than 4.5 percent at one point. The moves came after the Federal Reserve on Wednesday issued forecasts showing rate cuts happening at a slower and more incremental pace than markets had previously anticipated, and after another weekly claims report beat expectations, suggesting that labour markets remain far from cooling. The number of initial applications for unemployment benefits fell to the fewest since January last week, with absolute numbers close to those last reached in the 1960’s – near record lows in population-adjusted terms.

Asian and European trading hours were busy:

In a widely-expected decision, the Bank of Japan left its policy settings unchanged, providing no evidence of an imminent shift away from its loose-money framework. An inflation report earlier in the day showed consumer prices excluding fresh food rising 3.1 percent from the year prior in August, with the closely-watched core index climbing 4.3 percent – a pace well above the Bank’s target, but also one driven by rising import costs, not surging domestic demand. Governor Ueda said “Because we aren’t in a state where inflation accompanied by wage growth – sustainable and stable inflation – is in sight, we’re patiently continuing with monetary easing under the current framework”.

Price action in the yen remains jittery, with the clear and present danger of currency intervention making traders wary of pushing the exchange rate beyond the 150 mark against the dollar. We note that last year’s intervention efforts began in thin liquidity conditions on a Friday night, but rumours of “rate checks” by the Bank helped foreshadow that move – and we’re not hearing anything similar at this time.

Survey data showed the euro area staying on course toward a third-quarter contraction, reinforcing bets on a plateau in interest rates near current levels. The S&P Global Composite Purchasing Managers’ Index inched up to 47.1 in September from August’s 33-month low at 46.7, but remained well below the 50 level that separates positive from negative growth – meaning that although the rate of descent is slowing, the economy is still shrinking. Bloc-wide price pressures faded, the German manufacturing sector remained mired in a deep downturn, and French activity levels came in well below estimates. The euro fell roughly 0.4 percent over the session, but stayed above the 1.06 mark against the dollar as technical resistance emerged.

Numbers from the UK were arguably even more depressing, suggesting that yesterday’s decision to hold rates at the Bank of England was the right one. Retail sales slumped 1.4 percent year-over-year in August, and the flash Composite Purchasing Managers’ Index dropped to 46.8 in early September from 48.6 in the prior month, suggesting that the economy could disappoint the Bank’s already-lower 0.1-percent growth forecast in the third quarter. Markets are still assigning close to coin-toss odds to a final rate increase by year end, but we’re increasingly convinced the hiking cycle is done, with the pound left to grapple with stagflationary risks without the tailwind provided by improving rate differentials. The exchange rate is pushing toward the 1.22 mark, and could move lower in the absence of a broader dollar reversal in the days ahead.


The Canadian dollar is marking time ahead of a July retail sales report that is expected to show demand remaining relatively robust through the summer months. Few, if any, market participants expect consumer spending to remain strong through the autumn months, but the data could help put a floor under the beleaguered loonie for now.

Bottom line: With speculative positioning on the greenback nearing neutral territory, real yield differentials are playing a supportive role, and global central banks on the cusp of reversing gear, the dollar freight train is showing no signs of losing momentum. We don’t recommend laying on the tracks.

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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