The dollar index (DXY00) today is trading slightly lower by -0.06%. The dollar is being undercut by today's -4.7 bp decline in the 10-year T-note yield to 4.194%, which followed the dovish US PCE deflator report, the Fed's preferred inflation measure.
Today's PCE deflator report was close to expectations and supported the case for a FOMC rate cut in September. On a month-on-month basis, the June PCE deflator report of +0.1% m/m (headline) and +0.2% (core) was exactly in line with market expectations. On a year-on-year basis, the June PCE deflator of +2.5% y/y was in line with market expectations, fell from +2.6% in May, and matched the 3-1/4 year low of +2.5% posted earlier this year. The June core PCE deflator of +2.6% y/y was slightly stronger than expectations of +2.5% and was unchanged from May's 3-1/4 year low of +2.6%.
The fact that both the headline and core PCE deflators were at 3-1/4 year lows in June was a dovish factor for Fed policy. Also, the nominal deflator rose by only +1.5%, and the core deflator rose by +2.3%, on a 3-month annualized basis.
However, the headline deflator of +2.5% y/y and the core deflator of +2.6% y/y were still above the Fed's +2.0% inflation target, which means it might be premature for the Fed to declare success in meeting its inflation target. That suggests that the market is correct in predicting that the FOMC, at its meeting next week, will leave rates unchanged but will hint that a rate cut is likely at its next meeting in September.
In other US economic news, June US personal spending was in line with market expectations at +0.3% m/m, down from May's revised +0.4% (preliminary +0.3%). However, the June US personal income report of +0.2% m/m was weaker than expectations of +0.4% and was down from May's revised report of +0.4% m/m (preliminary +0.5%). Those reports suggested that US consumer spending is still holding up even as consumer finances deteriorate with less income.
Today's final-July University of Michigan US consumer sentiment index was revised upward by +0.4 points to 66.4 from the preliminary-July level of 66.0, which was slightly weaker than expectations for a +0.5 point upward revision to 66.5. The July level of 66.4 was an 8-month low and was down by -1.8 points from June's 68.2.
The markets are discounting the chances for a -25 bp rate cut at 5% for next week's July 30-31 FOMC meeting, and 100% for the following meeting on Sep 17-18 if the FOMC does not cut rates next week.
EUR/USD (^EURUSD) is slightly higher by +0.06% on dollar weakness. However, the euro has been undercut this week by the rise in the market odds for an ECB rate cut at its next meeting in September to the current level of 90% from 75% on Monday.
Swaps are discounting the chances of a -25 bp rate cut by the ECB at 90% for the September 12 meeting.
USD/JPY (^USDJPY) is down -0.28%. The yen rallied sharply this week on short-covering and the rise in the market odds for a BOJ rate hike at next week's meeting to the current level of 72% from 38% on Monday. Ruling LDP Secretary-Genera Motegi this week called for higher interest rates to combat yen weakness, joining the view of Minister for Digital Transformation Kono and illustrating political support for higher interest rates and a yen recovery.
Swaps are pricing in the chances for a +10 bp rate increase by the BOJ at 72% for next week's July 31 meeting and 100% for the September 20 meeting if there is no rate hike at the July 31 meeting.
August gold (GCQ24) is up +29.4 (+1.25%), and September silver (SIU24) is down -0.0160 (-0.57%). Gold saw support from today’s dovish US PCE deflator report and the decline in T-note yields. Silver prices continue to be undercut by the recent theme that the global economy is weakening.
Gold has underlying support from today's slightly lower dollar and this week's increased hopes for Fed and ECB rate cuts in September. Gold has underlying support after long gold holdings in ETFs rose to a 3-1/2 month high of 2,554.3 metric tons last Thursday, although gold holdings have since tailed off a bit.
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.
