China’s July inflation readings show the potential for more flexible monetary policy. However, officials have not been willing to lower the key one year medium term lending rate (January’s 2.85%) but they are hesitant. The July CPI rose to 2.7%, from 2.5% in January. Although this is the highest CPI level in 2 years, it still falls below the Bloomberg survey’s median forecast of 2.9%. 6.3% was the first rise in food prices since September 2020. This was due to a 20.2% increase in pork prices. Fresh food prices rose 16.9% while vegetable prices rose almost 13%. This is likely due to the supply. However, demand remains soft. This 0.7% decrease in pressures on service prices was less than the 1.0% increase in June. Core rate dropped to 0.8%. From 6.1%, the core rate fell to 0.8%. Producer price increases declined to 4.2% from 6.1%. Bloomberg’s survey indicated that the median forecast for an increase was 4.9%. Chinese producer prices have been declining for nine consecutive months. It was 13.5% in October 2013.
Japan’s much-publicized cabinet reshuffle didn’t involve policy. Key ministers including the chief cabinet secretary and finance minister remained in their respective positions. Hamada took over from the brother of former Prime Minister Abe, Defense Minister Kishi. He will still be a national security adviser. Hagiuda was previously a trade minister as well as an Abe acolyte. Nishimura, who will now be the party’s policy chief, replaced him. Prime Minister Kishida appointed Takaichi, his former rival, to the post of minister for economic safety. The reshuffle seemed to have been about balancing power among key factions, and strengthening the government, which has seen its support decline. The next step in economic policy could be to draft a supplement budget. BOJ Kuroda’s term as a monetary policy expert ends in April. His two deputies’ term ends March.
Today’s US dollar hovered at JPY135.00, a low of half a Japanese currency. However, it was still below Monday’s JPY135.20 high. The US Treasury market’s reaction today to the CPI report will play a major role in the exchange rate. The US 10-year yield remains within the range set at the end of last week with the stronger-than-expected employment report (~2.67%-2.87%). The Australian dollar received support of $0.6945. However, it fell to $0.6975 this morning in Europe. This indicates that there is limited penetration. However, it could mean that any subsequent buying may be limited. The expiration date for today is A$400 Million at $0.6985. The greenback is stable despite a slight increase in value against the Chinese Yuan. It is still within the current ranges. The dollar’s reference rate was CNY6.7612. This is slightly more than the median forecast by Bloomberg’s survey for CNY6.7606.
It’s unlikely that the center right will win next month’s Italian elections. This seems to be increasing in likelihood. It is hard to tell how much of this is due to voters’ judgements and how much is the ineptitude of the center-left parties. The possibility exists that both chambers will be controlled by the center-right. This would enable constitutional changes. A poll by Istituto Cattaneo found that the center-right garnered 46% of votes, 61% of senators and 61% of the deputies. According to Istituto Cattaneo, the analysis showed that even though it received more votes, the center-right may not be able to increase its number or deputies. In ten years, the Italian premium has fallen in 10 of the ten sessions that have taken place since 2000. Today is no exception. It is currently at 2.10%. This is 25 bp less than its recent peak, and slightly lower than its 20-day moving average. Yesterday, the 2-year premium for Italy dropped to 0.73%. This is the lowest level it has been since mid-July. It reached 1.30% in late July.
It’s not Italy’s center right attacking Bank of Italy and European Central Bank. Truss, as ironic as that may sound, is leading Sunak to become the next leader of Conservatives or Prime Minister. The Governor of the BOE Bailey warned Britain that there was a danger of a five quarter contraction. This excludes the 0.2% contraction that economists expect the UK to announce for Q2 this week. Truss quickly responded that 7BLN’s GBP39.9 billion tax cuts (7BLN) could help avoid this scenario. Sunak increased the payroll tax in April. She would abolish it. Truss would repeal Sunak’s corporate tax increase and end the green levy that is applied to household electricity bills. The swaps market believes there will be a 50-bp rise at the MPC meeting in September. This is less than two weeks following the election of the Tory leader. Swaps market prices another 75 bp rise in the two previous meetings.
Today’s euro price was above $1.02 for the first time since August 1. However, it remains within last Friday’s range of $1.0140 to $0.1.0250. The US CPI report today will likely nullify the $1.0210 worth of options in euro worth 1.2 billion that expire today. The session high was $1.0225 in the European morning. This stretched the intraday momentum indicator and we expect it will probe lower. Initial support is below $1.02 within the $1.0170–80 region. Sterling is also in the same boat. The range between $1.2000 and 1.2170 remains stable. The push to European session highs, just above $1.21, has stretched the intraday momentum indicators. The risk of a reversal to $1.2050-60 is possible.
Although today’s U.S. CPI report is interesting, it does not give a complete picture. It is possible that the Fed is still waiting for the slowdown in labor market. We’ve seen that financial conditions have improved over the past few months. This has been rejected by the Fed. Before it meets again, the FOMC will review August CPI. Fourth, the Fed will not permit it to achieve its definition of a sustained movement towards the 2% target regardless of what data is available today. The median survey data from Bloomberg has aligned with the Inflation Nowcast of the Cleveland Fed. The median survey is for an 8.7% headline rate, which is lower than 9.1% and 6.1% core rate, respectively (up from 5.9%). It is 8.8% and 6.1%, according to the Cleveland Fed’s Nowcast. The Fed funds futures market discount gives you a 80% chance of a 75-bp rise next month. It may not be affected by the CPI report.
Yesterday, US Treasury sold $34 Billion in 1-year bills at 3.2%. This is a 24-bp rise in yield. Even though the bid-cover declined, it was still threefold more than what was submitted. Indirect bidders were able to recover nearly 63% of the bill. This is a remarkable increase over 51% last year. The US also sold $42 Billion in 3-year notes valued at $42 Billion, which was 3.20%. This was an 11-bp increase in yield. Bid-cover rose to 2.5% and the indirect participants took 63%. This is an increase of the previous 60.4%. Today, Treasury returns to the well with a $30 billion cash management invoice for 119 days and $35 billion 10-year notes. In the last auction, the 10-year note was purchased at 2.96%. The market yield for the 10-year note is approximately 2.799%.
Yesterday the US dollar traded in the range ofCAD1.2845-CAD1.2900. Today it is still within that range. Today, there are nearly 1.15 billion options at CAD1.29. After the euro fell to session lows, we took the greenback. A rise in the CAD1.2910 level may lead to a rise towards CAD1.2950. Yesterday’s inflation in Mexico was slightly lower than expected. This confirmed the expectation of a Banxico 75-bp increase tomorrow. Today, the US Dollar is being offered against peso. It is currently pressed at MXN20.20 (the low yesterday). The top side is locked at MXN20.27 – MXN20.30. The options today for $765 million at the MXN20.30 price are closed. A convincing break in MXN20.20 could target the MXN20.05 region.