USD pulls back as inflation misses and bond yields drop

13 September 2018

This content has been created by X-Trade Brokers Dom Maklerski S.A.

Summary:

  • US CPI YY : +2.7% vs +2.8% exp

  • Core reading Y/Y: +2.2% vs 2.4% exp

  • USD drops back as TNOTE spikes higher

 

Yesterday’s PPI release coming in below forecasts served as a good predictor for today’s more widely viewed CPI number which also missed to the downside. In year-on-year terms the headline CPI for August came in at 2.7% vs a consensus forecast of 2.8%. This marks a larger than expected drop on the previous month which showed a print of 2.9% and today’s number is in fact the lowest in 4 months.

The immediate reaction has been a fair size drop in the US dollar, with the buck falling back against all of its crosses barring the JPY and BRL. The biggest gainers are the TRY and ZAR following the larger than expected rate hike from the CBRT earlier. Source: xStation


If volatile aspects of the index such as food and energy are stripped out then a core figure can be arrived at, and this painted a similar picture with a print for August of 2.2% compared to an expected 2.4% - inline with the previous number.   

Both the CPI and core reading pulled back last month and while they remain above the 2% threshold for the Fed’s inflation target they do seem to have levelled off in recent months and are no longer clearly trading higher. Source: XTB Macrobond

 

In terms of what this means for future Fed policy it is highly unlikely to see the bank step back from hiking later this month due to the lower prints, but it does enhance the argument that the future policy doesn’t require a faster pace of tightening to curb inflation. If anything it appears that inflation is drifting back towards target and therefore it allows a bit more wiggle room for the bank.

 

The initial reaction in the markets has been a clear drop in the US dollar while both US indices and the TNOTE have rallied higher, with the latter indicating a drop in yield on 10-year government debt. The move in the TNOTE is particularly noteworthy given its size with the market typically exhibiting smaller and less volatile moves than FX and equities. The H1 candle is showing the largest range since last Friday’s big drop following the strong NFP number and has engulfed the past 2 days of trade entirely.

There’s been a fairly sharp drop in US yields following the release with the TNOTE, which moves inversely to interest rates, showing a large bullish engulfing candle on H1. Source: xStation   

 

 

This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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