Falling US yields cut dollar rally short
Worrisome “soft” conﬁdence data out of the US impacted Federal Reserve policy expectations and brought US yields down 15 basis points for the week.
The resulting headwinds made it difﬁcult for the dollar to continue its recent rally, and the Euro managed a modest recovery towards the 1.10 level. While the US payrolls report out Friday steadied sentiment in the US, lower yields proved a boom for emerging market currencies generally, particularly Latin American ones.
The developing dichotomy between “soft” survey data and hard numbers, particularly in employment and consumption, is becoming the key theme in ﬁnancial markets. The last round of ISM sentiment data was poor, so we think this week’s numbers on German industrial production on Monday and Tuesday and even second-tier data out of the US take on outsized importance. US inﬂation data on Thursday and the ECB minutes from the last meeting on Thursday round out the week, together with the always-unpredictable Brexit headlines as we head down to the last stretch in the negotiations.
Rather ghastly UK PMIs in the construction and services sector conﬁrmed that UK business conﬁdence is weakening noticeably, though it is hard to disentangle the Brexit effect from the worldwide downturn in sentiment.
While pressure is growing for a cut from the Bank of England, the Pound will be driven by the evolution of the Brexit negotiations more than backward looking economic data. We remain of the opinion that a Brexit postponement and a general election in November is the most likely scenario, and therefore see room for modest short-term gains in the Pound.
This will be an unusually quiet week in the Eurozone. Aside from German manufacturing data, we are focused on the release of the meetings from the ECB September meeting Thursday. The level of consensus on the easing package, as well as the degree of concern over the slowdown apparent in economic data will be key in this release, which is more important than it usually is given policy and data uncertainty.
Last week’s Eurozone PMI numbers were again pretty underwhelming, with the composite PMI falling to a barely expansionary 50.1 in September. The numbers out of Germany were particularly poor, suggesting that Europe’s large economy may soon be entering into a technical recession.
The growing gap between sentiment data and actual economic numbers has now crossed the Atlantic. ISM surveys of business activity were fairly dismal in September, with the services employment component particularly grim. However, the September payroll report shows that the US labour market is still generating jobs and pressuring unemployment downward, although this pressure has not resulted in any sustained upward pressure in wages.
Key this week will be the Fed minutes out on Wednesday, although they are already somewhat superseded by recent economic developments, and the inﬂation data out on Tuesday.