Despite a strong lead from North American equities, a modest majority of Asian equities were trading lower and S&P 500 futures were trading lower at the time of writing. Asian technology stocks were dragging bourses lower and concerns about China’s Evergrande remain a weight on sentiment with trading in the company’s bonds being suspended for a day. Strong NZ GDP data led to the NZD being the outperformer among G10 currencies in the Asian session. Weak labour market data led to the AUD being the underperformer alongside the SEK.
USD: retail blues
The softer-than-expected US CPI inflation data for August released earlier this week has seemingly confirmed the market expectation that the Fed will stick with its patient stance on QE taper at the upcoming September policy meeting next week. Indeed, the USD has lost some ground on the back of abating rate advantage. Ahead of the retail sales today, Crédit Agricole CIB and consensus are looking for further weakness in domestic demand in August with the headline print expected to contract by -0.7% MoM (in line with consensus) and the core by -0.1% MoM (below consensus 0.0% MoM). The data could further erode the rate and yields appeal of the USD and thus add to the headwinds for the currency. That may not be the end of the story, however. Indeed, we think that next week the Fed could start preparing the ground for a very cautious policy normalisation, potentially as soon as November. Indeed, a number of Fed hawks have expressed the view that – notwithstanding the recent weakness in the US labour market and activity data, along with signs that the inflation overshoot is losing its intensity – a QE taper is warranted before year-end. If confirmed, a more hawkish Fed message next week could put the nascent risk recovery to the test and boost the high-yielding safe-haven USD.
GBP: BoE expectations unhinged
GBP continues to hold its own and certainly the above consensus August CPI release made its mark. ING's James Smith argues that the lifting of energy price caps in October could add 0.7% to headline CPI, potentially sending the October and November readings above 4% YoY.
Above consensus CPI has seen UK money markets react. Recently we had been highlighting that money markets had priced a firm pause in the BoE's policy rate at around 0.5% in 2023/24, when the BoE would start quantitative tightening. Yet money market rates have now pushed policy rate expectations up to the 0.60% area.
Should UK growth/inflation data come in on the strong side, the market's search for the BoE terminal rate could keep GBP supported. 1.3800-1.3900 should hold Cable near term.