Dollar Strengthens in Spite of U.S. Debt Downgrade and a Second Federal Indictment of Former President Trump
August 2, 2023
The dollar remained well-bid overnight with rises of 0.6% against the New Zealand kiwi, o.5% relative to the Australian dollar, 0.8% versus the Russian ruble, 0.3% against the Swiss franc, 0.2% versus the loonie, and 0.1% against the euro. Alternatively the dollar is steady against the Chinese renminbi and sterling and has lost 0.4% versus the Japanese yen as the 10-year JGB yield crossed above 0.60%.
The Fitch credit rating agency downgraded U.S. debt to AA+ from triple A and projects a slight U.S. recession starting next quarter. Donald Trump, who remains the top polling Republican candidate by far now has three criminal indictments against him, greatly complicating the 2024 election campaign calendar.
In geopolitical news, tensions became more strained between Beijing and Taipei, and Russia attacked southern Ukrainian ports and grain facilities. The price of West Texas Intermediate oil rose 0.9% further overnight in the wake of data yesterday showing a bigger-than-expected drop in U.S. inventories. Oil now costs 23% more than the low in mid-March and has almost fully regained its April high. This elevation casts doubt on hopes that U.S. and global inflation will continue to recede.
In other financial market action today, equities took a hit, dropping 2.5% in Hong Kong, 1.9% in Taiwan, 2.3% in Japan, 1.5% in Singapore, 1.3% in Australia, 1.9% in South Korea, 1.0% in India and 0.9% in China. European share prices are down over 0.5% so far, and U.S. stock futures point to a weaker open. Ten-year sovereign debt yields have settled back six basis points in France and Italy and five basis points in Germany, Spain and Australia. The price of gold has risen 0.5%, while that for Bitcoin tokens has declined 0.7%.
The directionality of central bank stances has become more nuanced in 2023 in contrast to broadly shared tightening experienced during 2022.
The National Bank of Georgia’s benchmark interest rate has been cut a second time. The drop of 25 basis points to 10.25% follows an initial 50-basis point reduction in May. The rate remains above the pandemic low of 8.0% and Georgian on-year CPI inflation, which at 0.6% in June was its lowest in 79 months and down from a 127-month high of 15.9% in December 2021. A released statement defends the case for normalizing the policy rate “only at a moderate pace.”
Despite the favorable dynamics, inflation risks remain high. The current tense geopolitical situation increases the uncertainty on the commodities markets… If due to strong aggregate demand the economic growth turns out to be even higher, additional pressure on inflation will arise… wage growth significantly exceeds the productivity growth. If sustained for a long time, such a trend will increase production costs and eventually affect the prices as well.
In Thailand where inflation is currently also very low at 0.2% as of June, monetary officials today agreed unanimously to raise the central bank’s key interest rate by 25 basis points to 2.25%. The Bank of Thailand‘s rate had been lowered from 1.75% in August 2019 to 0.50% by May 2020 in increments of 25 basis points. Later, a cycle of rate hikes commenced in August 2022. Today’s meeting being in August, it is interesting to note that the previous and current rate cycles began in August, and all moves, down and then up, have been 25 bps in size. The inflationary backdrop to the current upward trend is that CPI inflation crested at 7.86% in August 2022 and ten months later had dropped back to a 22-month low. While expecting inflation to stay inside its targeted range, a statement released today acknowledges upside price risks such as diminishing productive slack, higher food prices, and a severed El Nino episode.
In today’s menu of economic data reported around the world, the most surprising figure was the ADP’s monthly guesstimate of private sector U.S. employment growth, which at 324k topped street expectations by about 70%.
New Zealand unemployment rate last quarter rose 0.2 percentage points to a two-year high and greater-than-anticipated 3.6%. But labor costs went up 1.1% on quarter and held steady at an excessive 4.3% year-on-year pace.
The Swiss manufacturing purchasing managers index sank 6.4 index points to a 171-month ow of 38.5, well below the record high of 71.1 in July 2021. Switzerland’s service sector PMI reading of 42.7 reflects the fastest rate of deterioration in conditions in 38 months. The quarterly index of Swiss consumer confidence (-27.1) was its least negative in a year and a half but still quite depressed from an historical perspective.
Thailand’s manufacturing PMI weakened to a 13-month low and near stagflationary 50.7 in July.
Australia’s AIG-compiled manufacturing PMI score (-25.6) constitutes a record low, and the AIG Australian construction index swung from +10.6 in June to -9.2 last month.
Business confidence in Thailand weakened to a 7-month low of 49.3 after four above-50 readings in the prior five months.
South Korean consumer price inflation slowed to a 27-month low of 2.3% in July. Romanian producer price inflation of 3.76% in June was at a 28-month low and down from a record high of 53.0% in mid-2022.
Spanish jobless insurance claims last month were their lowest since 3Q 2008.
U.S. mortgage applications fell by 1.8% and then 3.0% in the third and fourth weeks of July despite a steady 30-year fixed mortgage rate that was 6.87% for a third straight time and practically unchanged from its end-June level.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: ADP private employment estimate, Bank of Thailand, National Bank of Georgia, U.S. debt downgrade by Fitch
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