Hawkish Fed speak boosts dollar across all the board

• Fed’s Bowman reiterates that more hikes might be need to bring down inflation
• German Industrial Production fell to a 6-month low
• US inflation data expected to support a September pause, but possible coin flip for the November meeting

The US dollar is stronger across the board as the bond market selloff returns, sending the 10-year Treasury yield 6.9 basis points higher to 4.103%. After a mixed jobs report (slower job growth pace but higher wages) this week is all about an inflation report that will probably show moderate price growth.  The focus for many traders is all about the end of tightening and this weekend’s Fed speak supported the higher for longer stance.  Fed’s Bowman noted that it will likely need to raise interest rates further to bring down inflation.  A New York Times article this morning reported that Fed’s Williams stated that the central bank’s work to cool the economy is almost done and that he expects rate cuts could happen next year.   

Heading into Thursday’s US inflation report, expectations are for headline CPI to rise from 3.0% to 3.3%, mainly due to base effects, but snapping a long streak of declines that has been in place since last August. Fixed income markets are growing confident that the September FOMC will support a rate pause.  The core readings are also expected to hold steady, but any hot surprises could keep the pressure on for a November hike.   

At the end of last week, the euro saw some volatility after the Bundesbank said domestic government deposits would not receive any interest, sparking a move into bills and other high-yielding markets.  This decision surprised many traders and could lead to significant outflows for German debt.  Today’s disappointing German industrial production data also sent the euro lower as recession risks continue to rise.  Output continues to drop, falling to a 6-month low.  

The weekly EURUSD chart shows price is approaching key trendline support at 1.0930. If downward momentum accelerates, downside targets include the 1.0850 region followed by 1.07667 level.  To the upside the 1.1050 provides initial resistance followed by the 1.1135 level.

Stocks

US stocks are slightly higher following Friday’s selloff as Wall Street embraces a very solid earnings season, but the harsh reality that the US economy is still recession bound. As we get the last batch of earnings, so far 84% of the companies in the S&P 500 have provided results, around 80% have delivered topped market expectations. Stocks are also surging alongside Treasury yields, which might prove difficult to continue if last week’s Treasury yield high is surpassed.  

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