- Dollar extends rally, hits more than 4-month high ahead of crucial US CPI data
- Euro and yen can’t catch a break, riskier currencies slip too
- Tech stocks take a tumble but Senate’s infrastructure bill nudges Dow and S&P to record
Dollar charges ahead; will CPI data fuel or dent rally?
The post-NFP boost for the US dollar and Treasury yields showed no sign of abating on Wednesday as investors continued to ramp up their bets that the Federal Reserve will soon announce plans to taper its massive asset purchase program. Shifting expectations that policymakers will opt for an early fall rather than end-of-year tapering timeline following the robust jobs data have propelled yields higher.
The 10-year yield reached 1.36% early on Wednesday while the 30-year yield crossed above 2% for the first time in a month. Rising US yield spreads have lifted the greenback above the July peak of 93.19 against a basket of currencies. At this rate, the dollar index could soon surpass its 2021 high of 93.44.
However, key inflation data is due later today in the form of the consumer price index for July. The annual rate of CPI is expected to moderate slightly to 5.3%. If the slowdown is driven by the CPI components that were most affected by supply constraints and pent-up demand, investors may read that as a sign that inflation is peaking.
That could spark some profit taking in the dollar but may not necessarily alter expectations much about Fed tapering. The main priority for the Fed during the pandemic has been the labour market and it’s now a question of how much further there is to go before achieving “substantial further progress”.
Divisions within the FOMC about how to measure this progress were laid bare on Tuesday when Chicago Fed President Charles Evans suggested he would need to see “a few more” jobs reports before making up his mind. This contrasts with comments by the recently dove-turned-hawk James Bullard, the President of the St. Louis Fed, who thinks the US economy has made sufficient progress and that tapering should begin soon.
Euro poised for new yearly low as dollar overpowers all
In the broader FX sphere, the euro and yen continued to get hammered by the surging US dollar. The Swiss franc struggled too, although gold appears to have steadied for now. The dollar climbed to a one-month top versus the yen, while the euro edged closer to brushing a fresh yearly low and was last trading at $1.1713.
A shock plunge in Germany’s closely watched ZEW economic sentiment gauge in August yesterday underscored the view that the ECB is miles behind the Fed in terms of exiting its emergency stimulus.
But other majors were on the backfoot too on Wednesday, with the pound and the commodity-linked dollars all paring yesterday’s gains. The New Zealand dollar’s sluggish performance has been particularly surprising given that local bond yields are soaring on expectations that the RBNZ will hike interest rates in a week’s time. It’s possible that souring sentiment in neighbouring Australia, which is still battling the Delta variant, is infecting the kiwi too.
Value stocks shine but Big Tech gets the jitters
Wall Street remained mostly unhindered by the growing speculation that a Fed taper announcement is imminent. The Dow Jones Industrial Average, comprised mainly of value stocks, closed at a new all-time high on Tuesday, with the S&P 500 just about managing to eke out gains to finish at a record as well.
But the tech-dominated Nasdaq Composite ended the day down by 0.5% as higher yields began to bite. Rising long-term yields tend to reduce the present value of future cash flows, pressuring bloated stock valuations such as those in the tech sector.
However, value stocks are not impacted as much by higher yields and more importantly, the US Senate just passed a $1.2 trillion infrastructure bill, which should benefit old economy companies. Whilst there are still several hurdles to go until the bill completes its passage through Congress, not to mention the question marks about how the Democrats will be able to push through their follow-up $3.5 trillion budget resolution without needing the help of Republicans to increase the debt ceiling first, Wall Street is being buoyed by the mere prospect of more federal spending coming from Capitol Hill.
European shares also appear undaunted by either Delta or Fed tapering concerns, with many of the region’s leading indices trading near or at record territory. US stock futures, though, were slightly in the red on Wednesday.