Economic data last week painted a picture of an economy still humming and a labor market still relatively tight. In reaction to the data, as well as a growing consensus that the Fed can still engineer a soft landing, the front end of the curve sold off with the 2-year bouncing up against 5%. Fed Fund futures and OIS swaps have now priced in about a 50% chance of one more policy rate tightening in 2023, most probably for the November FOMC. The strength of the U.S. economy and the belief rates will be higher for longer have lit a fire under the U.S. Dollar. Since the beginning of August, the Bloomberg Dollar Index (DXY) is up approximately 3.2%, which is quite a big move for the global reserve currency. Interestingly, over the same time period, WTI crude oil front futures contract is up 6.98% in USD terms. During the same time period, the Japanese Yen has weakened considerably, approaching the 150 Dollar Yen mark. Therefore, in Yen terms, crude oil has increased approximately 11.3%. It seems the markets are not paying much attention to Japanese monetary policy but at some point, the combination of global inflation and weak currency is going to produce something unsavory in the Japanese rates markets which will spill over to the global rates markets. It is just a matter of when, not if.
We start the week this morning with the Treasury curve steepening a bit while global equities are up a fair amount. This week is packed with tier one economic data. On Wednesday, we get August CPI. The focus will be on the core month-over-month CPI, which has logged two consecutive 0.2% increases. The Fed is looking for a 3rd 0.2% print for further evidence that we continue to make progress on the inflation front. On Thursday, we get August Retail Sales and PPI and on Friday University of Michigan Consumer Sentiment. Away from the data, this Thursday seems to be the deadline for a new deal between the UAW union and the “Big Three” automakers. Both sides appear to be very far apart and dug in. A strike may have the effect of a FOMC rate hike, especially if it is prolonged. The Fed is in its quiet period ahead of next week’s FOMC meeting.
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