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EMU August CPI at 9.1%, while the Core Rate Jumps to 4.3%

Overview: The rise in global interest rates continues. The US 10-year yield is a few basis points near 3.15% and European benchmarks are mostly 5-6 bp higher. Of note, the sharp sell-off in UK Gilts has being extended. Yesterday’s 10 bp rise has been followed by another 14 bp surge today. Italian bonds are also getting hit. The 10-year yield is up a little more than 10 bp. The US dollar is mostly firmer against the major currencies, though the yen and Australian dollar are little changed. Among the emerging market currencies, a small number of Asian currencies, including the Chinese yuan and South Korean won are firmer, but most are under pressure. Equity markets in the Asia Pacific region were mixed, but the downside bias is evident in Europe, where the Stoxx 600 is lower for the fourth consecutive session and seven of the last nine. It is at new lows since mid-July. US futures are narrowly mixed and have a three-day loss in tow. Gold is also making new lows for August and traded at $1711 having been above $1800 in the middle of the month. Iraq says its exports will not disrupted by the violent demonstrations which helped the October WTI contract reverse lower yesterday (possible key downside reversal). Today it is testing the 200-day moving average near $89. US natgas is steady after falling 3.3% yesterday. Europe’s Dutch benchmark is up nearly 5% to snap a three-day slide of over 20%. Iron ore jumped nearly 3.8% to resurface above $100 and halt the two-day slide of almost 8%. December copper is slipping lower for the fourth session and is trading near four-week lows below $354. December wheat is slipping further after falling 2.7% yesterday.

Asia Pacific

China’s composite August PMI eased to 51.7 from 52.4. The contraction in the manufacturing sector continued with the PMI below 50 for the second consecutive month (49.4 vs. 49.0). The drought, power outages, Covid disruptions, and the ongoing drag from the end of the property bubble are hobbling the economy. The drop in supplier delivery times (49.5 from 50.1) are illustrative. Output and new orders continued to fall. The non-manufacturing PMI slowed to 52.6 from 53.8. Construction, reflecting, the emphasis of government efforts on manufacturing remained a bright spot at 56.5, albeit down from 59.2 in July.

Japan’s industrial production and retail sales were better than expected. Industrial production has surged 9.2% in June (month-over-month) in a response to the re-opening of Shanghai from Covid lockdowns and many expected a small pullback in in July. Instead, the preliminary estimate has it growing by another 1% in July. Autos, boilers, and turbines output grew, according to the report. Retail sales rose by 0.8% in July, more than twice the median in Bloomberg survey after the June series was revised to show a 1.3% decline rather than 1.4%. Autos, food, and beverages led the better-than-expected report. Today’s data suggests a firm start to Q3. Economists expect the world’s third-largest economy to expand by around 2.0% in Q3.

The US claims,  echoed by many media outlets, that it is not seeking to change the status quo about Taiwan, but that Beijing is. Beijing claims that it is the US that is the antagonist. Both assessments seem correct. Leave aside Pelosi’s visit and the other official visits, often using US military aircraft. Forget about reports of US military advisers in Taiwan for nearly two years. Consider a bill before Congress that proposes to declare Taiwan an important non-NATO ally. Consider Senator Blackburn’s suggestion earlier this week that it is “may be” time to revisit the US one-China policy President Biden has intimated as much on several occasions only to have his comments “walked back.” Beijing is no innocent bystander. It continues to harass Taiwan and challenge others in the South China Sea, including the Philippines and Japan. Yesterday, Taiwan fired warning shots for the first time at a PRC drone near an offshore island. Beijing struck a secret deal with the Solomon Islands a few months ago and one of the consequences has become clearer in recent days. Last week, a US coast guard ship was denied refueling permission by the Solomon Islands, which has declared a moratorium on all US Navy visits pending an update of its protocol of procedures. The US embassy was closed in the Solomon Islands nearly two decades ago, but plans on re-opening it, according to press reports earlier this year.

The yen did not react much to the better-than-expected local data, and the firm US yields kept the US dollar firm. The greenback is little changed, but so far, holding below yesterday’s high slightly above JPY139.05. It is also holding above yesterday’s low just above JPY138.00, where the five-day moving average is found. The Australian dollar finished the North American session on its lows yesterday, near $0.6855. There has been no follow-through selling yet today and the Aussie poked above $0.6900 before finding new offers, which is also where the five-day moving average is found. Position-adjusting around the expiration of options for A$400 mln today at $0.6875 and tomorrow for A$720 mln at $0.6867 may be contributing to the choppy tone. For the sixth consecutive session, the PBOC set the dollar’s reference rate below market expectations (Bloomberg survey) as CNY6.8906 vs. CNY6.9083. The dollar gapped higher on Monday against the yuan. It entered the gap today, which extends to last Friday’s high around CNY6.8730 and recorded a low near CNY6.8870. Its sideways movement follows a two-and-a-half week gain of about 2.3%.


France reported slightly softer inflation but also considerably weak consumer spending. The EU harmonized CPI rose 0.4% in August for a 6.5% year-over-year rise (6.8% in July). French caps on energy prices run until the end of the year, but the government is considering new measures and the EU is considering collective action. Service price inflation was sustained, and food and manufactured goods prices accelerated. Consumer spending fell 0.8% in July compared with a 0.2% decline median projection in Bloomberg’s survey. June’s 0.2% increase was shaved to 0.1%. The third quarter is off to a weak start. After contracting by 0.2% in in Q1, the French economy expanded by 0.5% in Q2. The 0.3% forecast for Q3 might be a bit optimistic. Italy’s harmonized CPI jumped to 9.0% from 8.4%. Many economists had hoped for a dip to 8.2%. The month-over-month gain of 0.8% followed a 1.1% decline in July. Recall that yesterday’s German inflation edged up to 8.8% from 8.5% and Spain’s eased to 10.3% from 10.7%.

The aggregate eurozone inflation figures were worse than expected. The headline rose to 9.1% from 8.9%. However, more troubling was the jump in the core rate to 4.3% from 4.0%. The median forecast in Bloomberg’s survey looked for a 4.1% year-over-year core rate. The euro was sold to session lows (~$0.;9975) a few minutes before the report. The swaps market is pricing in a slightly greater chance of a 75 bp hike next week by the ECB, just shy of a 66% chance. It was about 50% at the end of last week.

There is a dramatic interest rate adjustment taking place in Europe, which over time, will likely impact the foreign exchange market. Yesterday, we noted that the German two-year interest rate more than doubled in the past two weeks (from about 0.50% on August 16 to almost 1.20% on Monday and about 1.18% today). This has overwhelmed the increase in US yields and sliced the US premium to about 230 bp, the lowest since early July. The UK 2-year Gilt is no slouch. It has played a bit of catch-up yesterday and traded above 3% for the first time since 2008. It spent most of July and the first half of August below 2%. At the start of the year, the UK and US two-year yields were near parity. The more aggressive trajectory of Fed policy had given the US a 135 bp premium as recently as mid-August. The premium has collapsed to around 45 bp, the least since mid-March.

After holding above $0.9900 on Monday’s test, the euro reached $1.0055 yesterday before sold in North America back down to $0.9980. Today’s low has been about $0.9975, and the intraday momentum indicators suggest it could stabilize for a little. The nearby cap may be around $1.0020. With the August CPI estimate behind it, the next two key events are this Friday’s US jobs report and next week’s ECB meeting. Sterling was sold to new two-year lows yesterday near $1.1620 and remains pinned in the trough today. It has recorded lower highs this week, and today, for the first, time has not traded above $1.1700. However, like the euro, the intraday momentum indicators for sterling suggest some consolidation is likely in the North American morning.


Two recent business surveys have caught our attention. First, a survey of CFOs by Deloitte found that 73% regarded persistent inflation as bigger threat than a recession, with the other 27% more concerns about a recession. What is a bit surprising by this is that judging from the recent earnings many businesses have been able to lift prices to more than covering rising costs, including wages. Adjusted pre-tax profits rose 6.1% in Q2 over Q1, which had seen a 2.2% decline quarter-over-quarter. By another metric that measures pre-tax profits as a percentage of gross value added, corporate profit margins rose 15.5% in Q2, the widest in more than 70 years. Separately, and somewhat less surprising, a survey by the US-China Business Council of its 117 members found over half attributed plans to cancel or delay investment plans in China due to its Covid-related restrictions. Most said the negative effects were reversible, but 44% said it would take “years” to restore confidence.

ADP launches a new methodology for its estimate of private sector employment today. In its press release, it claims the report will be more robust, using granulated data based on payrolls covering 25 mln US workers. In addition, estimates of the current month’s nonfarm private sector employment will change, it will also provide weekly data from the previous month by industry and business size. A new pay measure is also being introduced. ADP did not provide an estimate for July, pending this methodological change. The median forecast in Bloomberg’s survey of 15 economists is for a 300k increase, though the average is a bit lower at 280k. Yesterday’s report on job openings (July JOLTS) was around 850k more than expected and the June series was revised higher. The Fed funds futures are pricing in about a 75% chance that the third 75 bp hike will be delivered next month. It was about a two-thirds chance before Fed Chair Powell spoke at Jackson Hole.

The dramatically smaller than expected Canadian Q2 current account surplus reported yesterday (C$2.7 bln rather than the C$6.8 bln expected warns of downside risks with today’s Q2 GDP report. The current account surplus in the first quarter was revised sharply as well (C$2.7 bln from C$5.0 bln). Bloomberg’ survey of a dozen economist generated a median forecast of 4.4% annualized pace after 3.1% expansion in Q1. The monthly GDP figures are more troubling. The cumulative monthly increases in Q1 were 1.4%. June figures will be reported today. The median forecast calls for a 0.1% increase, which would bring the Q2 cumulative increase to 0.4%. We note that Canada’s 10-year breakeven has risen from about 1.93% at the start of last week to 2.20% today. On the other hand, the five-year breakeven has eased about six basis points at the same time and is below 2.10% today. The Bank of Canada meets next week, and although the market flirted with another 100 bp increase, it appears to recognize a 75 bp move is more likely. Separately, a small and minor cabinet reshuffle is expected later today, with no policy implications.

The US dollar is trading at new highs for the month today against the Canadian dollar. Yesterday, it traded above CAD1.31 for only the third time this year but closed slightly below it. It is extending the leg up that began last week near CAD1.29 and has approached CAD1.3115. The spike high recorded in the middle of last month was near CAD1.3225. The intraday momentum indicators are stretched but the key remains the broader risk appetite (S&P 500 proxy). Initial support now may be in CAD1.3060-80 area. The greenback is trading firmly against the Mexican peso and is near a seven-day high above MXN20.22. The high set on August 19 around MXN20.2670 is the key to the immediate outlook. A move above it, could spur a move toward MXN20.35-37. But, if it holds, it may signal a consolidative phase. That said, note that the five-day moving average is poised to cross above the 20-day moving average for the first time since late July.

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Marc Chandler
He has been covering the global capital markets in one fashion or another for more than 30 years, working at economic consulting firms and global investment banks. After 14 years as the global head of currency strategy for Brown Brothers Harriman, Chandler joined Bannockburn Global Forex, as a managing partner and chief markets strategist as of October 1, 2018.
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