The dollar index (DXY00) Wednesday fell by -0.50% and posted a 1-1/2 week low. The dollar retreated Wednesday as the yen soared to a 4-1/2 month high against the dollar after the BOJ unexpectedly raised its benchmark interest rate. The dollar was also under pressure from a sharp rally in stocks, which curbs liquidity demand for the dollar. In addition, weaker-than-expected US economic news Wednesday on Jul ADP employment and the Q2 employment cost index knocked the 10-year T-note yield down to a 4-1/2 month low and undercut the dollar. The dollar maintained its losses after Fed Chair Powell said a Fed rate cut "could be" on the table at the September FOMC meeting.
The US Jul ADP employment change rose +122,000, weaker than expectations of +150,000 and the smallest increase in 6 months.
The US Q2 employment cost index rose +0.9% q/q, weaker than expectations of +1.0% q/q.
The US Jul MNI Chicago PMI fell -2.1 to 45.3, a smaller decline than expectations of 45.0.
US Jun pending home sales rose +4.8% m/m, stronger than expectations of +1.5% m/m and the biggest increase in 6 months.
The FOMC, as expected, kept the fed funds target rate unchanged at 5.25%-5.50% and said it doesn't expect to cut interest rates "until it has gained greater confidence that inflation is moving sustainably toward 2%." However, the FOMC tweaked its post-meeting statement to say it is "attentive to the risks to both sides of its dual mandate," rather than prior wording focused just on inflation risks.
Fed Chair Powell said upside risks to inflation have come down as the labor market has cooled, and a Fed rate cut "could be" on the table at the September FOMC meeting.
The markets are discounting the chances for a -25 bp rate cut at 100% for the Sep 17-18 FOMC meeting.
EUR/USD (^EURUSD) on Wednesday rose by +0.12%. The euro rose moderately on Wednesday due to the dollar’s weakness. Also, Wednesday’s economic news showed that the Eurozone Jul CPI climbed more than expected, which is a hawkish factor for ECB policy. Limiting gains in the euro were lower German bund yields as the 10-year German bund yield fell to a 4-month low today.
Eurozone Jul CPI rose +2.6% y/y, stronger than expectations of +2.5% y/y. The Jul core CPI rose +2.9% y/y, stronger than expectations of +2.8% y/y.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 95% for the September 12 meeting.
USD/JPY (^USDJPY) Wednesday fell sharply by -1.78%. The yen soared Wednesday after the BOJ unexpectedly raised its benchmark interest rate to 0.25% from 0% to 0.1%. The yen also rallied after the BOJ announced plans to cut monthly bond purchases. Better-than-expected Japanese economic news Wednesday on Jul consumer confidence, Jun retail sales, and Jun industrial production also supported the yen.
The Japan Jul consumer confidence index rose +0.3 to 36.7, stronger than expectations of 36.6.
Japan Jun retail sales rose +0.6% m/m and +3.7% y/y, stronger than expectations of +0.2% m/m and +3.2% y/y.
Japan Jun industrial production fell -3.6% m/m, a smaller decline than expectations of -4.5% m/m.
The BOJ unexpectedly voted 7-2 to raise its benchmark interest rate to 0.25% from a range of 0% to 0.1%. The BOJ also said it would reduce its monthly pace of bond purchases to around 3 trillion yen ($19.9 billion) by the first quarter of 2026 from 5.7 trillion yen in July.
The BOJ cut its 2024 Japan GDP forecast to 0.6% from 0.8% and cut its 2024 core CPI estimate to 2.5% from 2.8%.
BOJ Governor Ueda said he views the weak yen as a risk factor for rising inflation, and any additional rate hikes this year would be data-dependent and undertaken only after considering the impact of today's move and the March rate increase.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 9% for the September 20 meeting.
August gold (GCQ24) Wednesday closed up +21.50 (+0.89%), and September silver (SIU24) closed up +0.413 (+1.45%). Precious metals Wednesday posted moderate gains. Escalating geopolitical risks in the Middle East have spurred safe-haven buying of precious metals after Israel said it assassinated top leaders of Hezbollah in Beirut and Hamas in Tehran. Wednesday’s slump in the dollar index to a 1-1/2 week low is also bullish for metals. Higher than expected Eurozone consumer prices also boosted demand for gold as an inflation hedge after Wednesday’s news showed Eurozone Jul CPI rose more than expected. Gold prices rose by over $6 an ounce above Wednesday’s settlement Wednesday afternoon after Fed Chair Powell said a Fed rate cut "could be" on the table at the September FOMC meeting.
On the bearish side, Wednesday’s sharp rally in stocks has reduced some safe-haven appeal of precious metals. Also, Wednesday’s action by the BOJ to raise interest rates and cut its monthly bond purchases is bearish for gold. In addition, Wednesday’s action by the BOJ to cut its 2024 Japan GDP estimate to 0.6% from 0.8% is bearish for industrial metals demand and silver prices.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
