Dollar Extends Gains

August 16, 2022

In spite of some weak data, the dollar climbed another 0.3% overnight relative to the euro and on a DXY weighted basis. The greenback also strengthened 0.6% versus the yen, 0.8% vis-a-vis the kiwi, 0.4% against the Swiss franc and Australian dollar and 0.2% versus the peso, yuan, and sterling.

U.S. equities had risen on Monday, shrugging off weaker than expected U.S. data such as a collapse of the Empire State manufacturing index, which printed at -31.3 in July after +11.1 in June, and a 27-month low reading in the National Association of Home Builders housing index of 49 in August versus 69 in May and 81 in February.

U.S. stock futures today point to a modest dip at the open, but European share prices have traded up 1.1% in Spain, 0.6% in Germany, 0.5% in the U.K. and 0.4% in Italy. The Japanese and Chinese stock markets closed unchanged and up 0.1%, respectively.

Ten-year German bund and British guilt yields are four basis points higher this morning. Prices for WTI oil and gold are down 0.4%, while Bitcoin is steady.

British labor market data are consistent with the Bank of England’s prediction that the U.K. economy will be in recession by late this year and remain so for most of 2023. Jobless insurance claims fell only 10.5k last month, about a fourth as much as the average monthly decrease in the second quarter. The jobless rate unexpectedly ticked 0.1 percentage point higher in 2Q, while employment growth slowed over 40%. Average wage earnings growth slowed to a 5-month low, and productivity flat-lined in the second quarter.

Japan’s tertiary index, a measure of the perceptions of service sector workers, fell 0.2% in in June, breaking a string of three straight monthly increases.

Euroland’s seasonally adjusted trade deficit of EUR 30.8 billion in June exceeded EUR 30 billion for the second time in three months, and the unadjusted trade balance swung adversely from a surplus of EUR 100.6 billion in the first half of 2021 to a deficit of EUR 140 billion in the first half of this year. Net energy imports nearly tripled between 1H21 and 1H22.

Investor sentiment toward the Euroland economy continued to deteriorate in August. The ZEW expectations index fell to a 129-month low of -54.9 from readings of -51.1 in July and +48.6 in February just before Russia invaded Ukraine. Perceived current economic conditions ticked up to a 2-month high but, at -42.0, remained very depressed as well. Germany’s ZEW expectations and current conditions indices of -55.3 and -47.6 in August were also weaker than analyst expectations. The one silver lining of the report was some modest relaxation of expected inflation.

That said, price data released today remained elevated. For example, Czech producer price inflation was at 26.8% last month compared with 7.8% in July 2021, and Bulgarian consumer prices jumped 1.1% on month in July after June’s 0.9% increase, and that lifted the 12-month inflation rate to a 482-month high of 17.3%.

Although wholesale price inflation in India eased back to a 5-month low in July of 13.9%, such has been in double-digit territory for quite a while and exceeded the 11.2% pace in July 2021. Fuel prices against posted an increase of more than 40%, while food price, which were unchanged year-on-year in July 2021, climbed 10.8% over the ensuing 12-month period.

The Central Bank of Uruguay’s policy interest rate was raised today by a further 50 basis points to 10.25% and is 525 basis points above its year-earlier level. The string of rate increases haven’t run full course, but the tightening cycle is closer to the end than the beginning.

Minutes released from the Reserve Bank of Australia’s monetary policy review earlier this month likewise indicate that additional rate normalization is probable. The official cash rate was increased on August 2 by 50 basis points to 1.85%, which compares to a rate level of 0.10% prior to the initial increase this past May. Australia’s labor market is exuding resilience and officials expect both total and core consumer price inflation to crest higher during the second half of 2022.

Treasury-compiled U.S. capital flow data reported after markets closed on Monday revealed another substantial net long-term inflow of more than $120 billion in June that was matched by an almost equal net outflow of short-term capital. Today’s U.S. data release menu features industrial production and includes housing starts and building permits.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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