View from London: Will USD Reversal Prove Positive for Stocks, Bonds?
09/12/2017 2:59 am EST
The U.S. focus on inflation may be through commodities. The driving force for good inflation should be wage demand if you believe central bankers while the bad inflation is all about food, energy and pass-through from companies, says Bob Savage, CEO of Track Research.
The U.S. dollar rally stalls and some are seeing dead-cat’s bouncing. However, today is about inflation in the UK and Sweden – the British pound (GBP/USD) has gained to the best levels in a year at 1.3282 vs. USD and breaks below 0.90 vs. US dollar/euro (USD/EUR) as CPIH rises to December 2011 highs.
Sweden also saw higher CPIF 2.3% y/y and euro/Swedish krona (EUR/SEK) is off to 3.5290 – the biggest drop in a month.
The USD gains from yesterday wobble thanks to these moves as we now wait for Thursday CPI from the U.S. The larger question to ask for investors and traders is whether we are seeing a shift from concerns about politics and growth to fears about inflation and weaker forex. The moves today suggest we are at that turning point where pricing power is everything. The bond market move Monday is continuing today and that perhaps is the key as some central bankers remain in control of the markets and others less so. This forex control story is clearly in play for Turkey and China – as TRY is off 0.9% to 3.4370 after rates fell sharply (now off 1.15% to 6.45%).
China PBOC fixed the CNY lower for the first time in 11 days – pointing the way for (CNY/CNH) weakness to catch up to euro/Japanese yen (EUR/JPY).
Of course, that doesn’t mean that politics don’t matter – and how Congress and Trump deal with the Irma aid package will be important in the week ahead along with how the elections play out – with Norway a case in point as the right-wing coalition makes history as PM Solberg snatched victory from the jaws of defeat with 9 seat margin.
New Zealand is watching and polls there are pointing to a National Party bounce back lifting the New Zealand dollar (NZD/USD). For the EUR, French President Macron is watching the first big strikes against his labor reforms.
For the GBP bulls there is some caution still even as PM May gets over the first hurdle with Commons passing the “Brexit” bill as 12 Conservatives threaten to leave without amendments.
The U.S. focus on inflation may be through commodities – with the WASDE at noon and the OPEC monthly reminding many about real assets. This is clearly the argument highlighted by the WSJ today with China PPI and CPI both higher in August as reported over the weekend.
The driving force for good inflation should be wage demand if you believe your central bankers while the bad inflation is all about food, energy and pass-through from companies as they struggle to make margins.
This will be an important day to watch to see if the USD reversal that started yesterday can hold and prove that it’s a net positive for other assets – like stocks and bonds.
Watching 2.18% in 10Y and 92.10 in U.S. dollar index to see.