Dollar gains as bonds and stocks slide
It turned out to be eventful enough in markets yesterday with the dollar staging a broad-based rally as bonds and equities sold off together. Sterling was a notable underperformer on the day, falling by just over 1% against the dollar and by 0.6% against the euro, as concerns that the UK Prime Minister’s new and beefed up economics team would create tensions with his Chancellor weighed on the currency. It remains near yesterday’s lows this morning, trading at around $1.3340 and £0.87 respectively. The euro shed around 0.6% against the dollar yesterday and hit a low of almost $1.16 earlier this morning before recovering a touch to $1.1620.
Long-dated bonds yields backed up the most yesterday, as this part of the curve remains under pressure amid ongoing concerns about government deficits and debt. UK and German 30-year yields both rose by around 5bps, the former hitting their highest level since 1998, while equivalent US yields increased by about 3bps. The latter have edged up further in overnight trading in Asia, which has also seen Japanese 30-year bond yields increase by around 7bps to fresh multi-year highs. Rising bond yields weighed on equity markets, with European stocks falling by almost 1.5%, the FTSE 100 in the UK off around 0.9%, and the main US indices shedding between 0.6% and 0.8%.
On the economic data front, August’s flash inflation reading in the Euro area was in line with expectations. The headline rate of inflation ticked up to 2.1% (from 2% in June), reflecting a slower pace of energy price deflation last month. Core inflation remained at 2.3% with services inflation dipping to 3.1% (from 3.2%) but goods inflation unchanged at 0.8%. Separately, ECB member Muller says “it’s reasonable right now to take the time and monitor the economic data as it comes in” over the coming months, which points to steady interest rates ahead.
In the US, the ISM index of manufacturing activity picked up in August but remained in contractionary territory (<50), coming in just under 49.0. Output and employment in the sector both fell last month, though there was a bounce in new orders after several months of contraction. Cost pressures remained elevated, partly reflecting the impact of tariffs, though they eased a touch from July.
Looking to the day ahead, economic data due include job openings and factory orders in the US; producer prices and a final services PMI reading for August in the Euro area; with a final services PMI reading for August scheduled in the UK as well. The Fed publishes its latest Beige Book, which will give some anecdotal insight into economic and business conditions over the past few weeks, while a number of Bank of England MPC members appear before Parliament’s Treasury Select Committee, where they will no doubt be quizzed about the continuing rise in UK bond yields.