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The DXY Index depreciated 1.7% in the first fortnight of July to 104.09, back to early June lows. The greenback is under pressure from the futures market, increasing the probability that the Fed will start lowering rates in September to 94.5% vs. 56.5% at the last FOMC meeting on June 12. Fed officials have become more confident about US inflation resuming its decline after a sticky first quarter. CPI inflation fell a third month and posted its first negative month-on-month reading since May 2020. The Fed’s favourite inflation gauges, the PCE deflators, should mirror the softer CPI readings. PCE inflation fell to 2.6% YoY in May, hitting the Fed’s forecast for 4Q24. Core inflation was more impressive by declining to 2.6%, below the Fed’s 2.8% forecast.
Today, Fed Chair Jerome Powell will focus on “balanced risks” during his interview at the Economic Club of Washington DC. Powell will likely be less concerned about reducing rates too soon without reigniting inflation while acknowledging that lowering them too late could lose the economic expansion. The US unemployment rate extended its rise to 4.1% in June after hitting 4% in May, the Fed’s forecast for 4Q24. During his semi-annual testimonies last week, Powell told US lawmakers that the Fed could respond if the US labour market weakened unexpectedly in a material way.
Assuming the US inflation and jobs data keep moving as they have, the Fed could become to be less neutral at the FOMC meeting on July 30-31 and affirm a bias to lower rates in September at the Kansas City Fed’s Jackson Hole Symposium on August 22-24. We maintain our view that the Fed should start lowering rates every quarter from 3Q24 through 4Q25.
Meanwhile, the USD is clawing back some of its losses on the “Trump Trade” after the failed assassination attempt on the Republican presidential candidate, Donald Trump. With President Joe Biden losing support from Democrats for his re-election bid, polls are skewed towards Trump at the US Presidential elections on November 5. However, we are sceptical about a replay of the USD’s rally into Trump’s victory in the 2016 elections. Today, the Fed is looking to lower rates after a hiking cycle and not at starting a two-year hiking cycle in December 2016. The fiscal situation has become unsustainable after persistent budget deficits during the Trump and Biden terms. The Congressional Budget Office projected the federal debt held by the public exceeding 100% of GDP in 2025 from 75% in 2015. DXY plunged almost 10% in 2017 during the first year of Trump’s presidency from political uncertainties in the US amid more economic optimism in Europe and emerging markets.
We have lifted our end-2024 target for USD/CNY to 7.21 from 7.12. The People’s Bank of China (PBoC) raised the daily fixing from 7.0950 at the end of 1Q24 to 7.1315 last Friday. The central bank is gradually shifting monetary policy from quantitative targets towards interest rates. The PBOC is studying how to carry out government bond trading in the secondary market with the finance ministry without being seen as adopting quantitative easing. Year-to-date, the 10Y bond yield declined by 30 bps in China vs. a 30 bps increase in the US, while the SPX 500 rallied 17.7% vs. a slight 1.2% gain in the CSI 300 Index. However, we expect the USD to decline against the CNY when the Fed cut cycle begins.
Quote of the day
“Assassination is the extreme form of censorship.”
George Bernard Shaw
15 July in history
Boeing Company (Pacific Aero) was formed by William Boeing in Seattle, Washington USA, in 1916.
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