The dollar index (DXY00) Thursday rose by +0.40%. The dollar rallied on stronger-than-expected US economic reports, which were hawkish for Fed policy and drove the 10-year T-note yield higher by +8 bp. Thursday’s economic reports helped reduce expectations for a 50 bp rate cut by the Fed at the September 17-18 FOMC meeting to 26% from 75% last week.
Thursday’s rally in stocks curbed liquidity demand for the dollar. Also, dovish Fed comments Thursday undercut the dollar when Atlanta Fed President Bostic said he is "open" to an interest rate cut in September, and St. Louis Fed President Musalem said, “The time may be nearing when an adjustment to moderately restrictive policy may be appropriate.”
US weekly initial unemployment claims unexpectedly fell -7,000 to a 5-week low of 227,000, showing a stronger labor market than expectations of an increase to 235,000.
US July retail sales rose +1.0% m/m, stronger than expectations of +0.4% m/m and the biggest increase in 1-1/2 years. July retail sales ex-autos rose +0.4% m/m, stronger than expectations of +0.1% m/m.
The US Aug Philadelphia Fed business outlook survey fell -20.9 to a 7-month low of -7.0, weaker than expectations of 5.2.
The US Aug Empire manufacturing survey general business conditions rose +1.9 to -4.7, stronger than expectations of -6.0.
US July manufacturing production fell -0.3% m/m, right on expectations.
The US Aug NAHB housing market index unexpectedly fell -2 to an 8-month low of 39, weaker than expectations of an increase to 43.
Atlanta Fed President Bostic said he is "open" to an interest rate cut in September, and the Fed can't "afford to be late" to ease monetary policy amid signs of cooling in the labor market.
St. Louis Fed President Musalem said from his perspective, "The risk to both sides of the Fed's mandate seems more balanced. Accordingly, the time may be nearing when an adjustment to moderately restrictive policy may be appropriate as we approach future meetings."
The markets are discounting the chances at 100% for a -25 bp rate cut at the Sep 17-18 FOMC meeting and at 28% for a -50 bp rate cut at that meeting.
EUR/USD (^EURUSD) Thursday fell by -0.31%. Thursday’s rally in the dollar on signs of US economic strength weighed on the euro. However, higher European government bond yields Thursday were supportive of the euro.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 95% for the September 12 meeting.
USD/JPY (^USDJPY) Thursday rose by +1.13%. The yen tumbled to a 1-1/2 week low against the dollar Thursday after stronger-than-expected US economic reports pushed T-note yields higher. The stronger US economic news also dampened expectations that the Fed will aggressively cut interest rates, a bearish factor for the yen. The yen also came under pressure Thursday after Japan's June industrial production was revised lower. However, Thursday’s Japan Q2 GDP report showed the Japanese economy grew faster than expected, which is a hawkish factor for BOJ policy and a supportive factor for the yen.
Japan's June industrial production was revised downward to -4.2% m/m from the previously reported -3.6% m/m, the biggest decline in 5 months.
Japan's Q2 GDP rose +3.1% q/q annualized, stronger than expectations of +2.3%. Q2 private consumption rose +1.9%, stronger than expectations of +0.6% and Q2 business spending rose +0.9%, stronger than expectations of +0.8%. The Q2 deflator rose +3.0% y/y, stronger than expectations of +2.6% y/y.
Swaps are pricing in the chances for a +10 bp rate hike by the BOJ at 0% for the September 20 meeting and +8% for the October 30-31 meeting.
December gold (GCZ24) Thursday closed up +12.70 (+0.51%), and September silver (SIU24) closed up +1.079 (+3.95%). Gold and silver prices on Thursday closed higher, with silver rallying sharply to a 1-1/2 week high.
Dovish Fed comments Thursday were bullish for gold demand as a store of value after Atlanta Fed President Bostic said he is "open" to an interest rate cut in September and St. Louis Fed President Musalem said, “the time may be nearing when an adjustment to moderately restrictive policy may be appropriate.” Also, safe-haven demand for precious metals remains strong as an attack by Iran on Israel may be imminent in retaliation for the recent assassination of a Hamas political leader in Tehran. Silver garnered support Thursday after Q2 Japan's GDP grew faster than expected and from better-than-expected US economic reports, which were positive for industrial metals demand.
Thursday’s stronger dollar and higher global government bond yields were bearish for precious metals. Also, Thursday’s stronger-than-expected US economic reports reduced expectations for a 50 bp rate cut at next month’s FOMC meeting to 26%, down from 75% last week, a bearish factor for gold. Thursday’s rally in the S&P 500 to a 2-week high has also curbed safe-haven demand for precious metals.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
