Greenback Consolidates while Yields Continue to March Higher

The US dollar is consolidating inside yesterday’s ranges against the euro
and yen while extending its gains against
sterling and the dollar-bloc currencies.
  The sell-off in the US debt
market continues to drag global yields higher.  The 10-year Treasury yield
reached 2.01% on September 8 and now, nearly three weeks later, is near
2.35%.  It had finished last week at 2.25%.   With today’s three
basis point increase, the 10-year yield is above the 200-day moving

The 10-year German Bund yield moved above 50 bp today for the first time
since early August. In early September, it reached a low near 29 bp.
The US premium reached 1.88% today, the most since July.  The two-year
premium reached almost 2.2% earlier today, its largest since March.  

The US 10-year premium over Japan has risen sharply as well.  It
bottomed on September 7 just below 2.03%.  It tested 2.30% today, moving
above its 200-day moving average (~2.26%) for the first time since

There are only two major currencies that have appreciated against the
dollar over past month, sterling and the Canadian dollar. The gains in both can also be traced to interest rate expectations.
The market has moved to discount a strong chance of a BOE hike as early as the
November 2 meeting  (~75% chance). The two-year Gilt yield has risen
nearly 30 bp over the past month, nearly twice the increase of the US two-year Treasury
yield.  The yield on the 10-year Gilt is up 35 bp, again nearly twice as
much as the US increase.  

Canada is a similar story.  Its 10-year yield is up 27 bp, and the two-year yield is up 31 bp. Over
the past two weeks, first the deputies and yesterday the Governor seemed to
signal to the market that it will not likely raise rates next month, as some
had thought likely given the continued strength of Canadian real sector

The immediate focus is on inflation reports.  Spain and German
states have reported a mixed bag ahead of tomorrow’s preliminary regional
estimate.  Spain’s harmonized measure rose 0.6% in September, which is a touch less than expected, and due to the
base effect, the year-over-year pace ticked down to 1.9% from 2.0%.  
Five German states reported inflation figures today.  The year-over-year
rates increased in two states, fell in one state, and was unchanged in the
remaining two.  The composite will be reported shortly and is expected to
tick up to 1.9% from 1.8%.  

The eurozone preliminary September CPI is expected to have increased to
1.6% from 1.5%, mostly due to energy costs.
  The core rate is expected
to be unchanged at 1.2%, for the third month.  It is most unlikely to
change Draghi’s assessment that continued substantial monetary accommodation is

Japan will report August inflation figures tomorrow.  The
headline rate is expected to rise to 0.6% from 0.4%.  It would be the
highest in two years.  The core rate, which excludes fresh food is
expected to accelerate to 0.7% from 0.5%.  This
would also be the highest reading in two years.   The measure that
excludes fresh food and energy belies the challenge.  It is expected to
edge higher from 0.1% in July.   It would match the fastest pace
reported this year (January).  

The US reports a revised estimate for Q2 GDP today alongside trade and
inventory data that will help shape expectations for Q3 GDP.
initial jobless claims too will be reported, but the disruption caused by the
storms has not completely washed out.  Tomorrow, the US reports personal
income and consumption data, which includes the core PCE deflator.  The
core deflator is expected to have risen 0.2% in August, the most since
January.  However, the year-over-year rate may stabilize after falling in
five of the first seven months of the year.  

There are a couple of other developments to note.  First, the
Reserve Bank of New Zealand left rates on hold as widely expected.  It did
not shed fresh light on the course of policy
but signaled no hurry whatsoever.  It was cautious on growth and expected
inflation to soften.  From a technical point of view, we still like the
Kiwi against the Aussie.  We anticipated an Aussie bounce at the start of
the week but saw that as a selling opportunity. 
Today, the cross returned to nearly the low of the week.  We suspect there
is room for the cross to drop another 1-2% in the coming weeks. 

Second, reports suggest that the EC could make a small gesture toward the
UK on Brexit and that is to change the negotiators’ mandate to also include a transition period.
The  EU Parliament is already reportedly drafting a motion that could be voted on next week.  One of the issues
with that is what is the status of the European Court of Justice during the transition.
Earlier this week, UK’s Davis argued against its jurisdiction during the
transition, but of course, the EC will
insist on it.  

There is a large BOE conference today as it celebrates its 20-years of
  The conference is well underway,
and it poses some headline risk, but this is not the venue for new policy
announcements or hints.  Three Fed officials are speaking today as
well.  We have already heard from Atlanta’s Bostic, and George heads up
the hawkish wing of the Fed (we suspect she was the dot plot that thought two
rates hikes this year would be appropriate,
meaning she thinks the Fed is
already slipping behind the curve). 
That leaves the outgoing Vice Chairman Fischer who is speaking at the BOE
conference that may be the most interesting of Fed speakers today.  

The euro is trading inside yesterday’s ranges.  Yesterday’s high
was just shy of $1.18.  A move above there could see gains toward
$1.1830.  We’ll be watching the price action to see if the market’s bias
has shifted from buying euro dips to selling into rallies.  Between
$1.1750 and $1.1755 today there are 1.6 bln euro options set to
expire.   The firmer US rates are
not lifting the greenback against the yen today.  It was turned back from yesterday’s highs near
JPY113.20.  Initial support is pegged
in the JPY112.40-JPY112.60 area.  

Sterling is slipping lower after closing below $1.34 yesterday.At $1.3350
it retraced 61.8% of its BOE-spurred rally.
  Additional support is seen near the 20-day moving average that is found near $1.3310.   After
selling off hard yesterday as Bank of Canada,
Governor Poloz confirmed not set the course
of Canadian rates and sounded a bit cautious. The US dollar rose above CAD1.25
today for the first time this month and was turned back amid the dollar’s
general consolidative tone.  The CAD1.2430-CAD1.2450 may offer initial

After filling a gap from September 12 on Monday and consolidating Tuesday, the S&P 500 rose to
a new record of 2511.75 yesterday. 
It was not sufficient to lift
Asian shares, where the MSCI Asia Pacific Index fell for the sixth consecutive session, and this is even with the bounce back
in Japanese stocks after yesterday’s ex-dividend dip.  The MSCI Emerging
Markets Index is off 0.6% a, and it is
has fallen for the sixth session.   European shares are faring better, and the Dow Jones Stoxx 600 is edging
higher, led by financials, industrials,
and energy.  Utilities and consumer sectors are drags. 


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