Brown Brothers Harriman‘s (BBH) Elias Haddad notes that the Treasury’s buyback announcement initially pushed longer-term Treasuries lower, weakened the Dollar and boosted Gold. He argues the USD slump should stabilize this week, with the US growth advantage offsetting fiscal concerns. Futures imply modest further Fed tightening, but BBH sees risks skewed toward a dovish repricing as inflation and labor data remain contained.
USD slump expected to stabilize
“The Treasury‘s buyback announcement dominated market action last week. Longer term Treasury yields initially fell but the relief proved fleeting, USD weakened against all major currencies and gold rallied. The Treasury’s intervention blurred the lines between improving market functioning and suppressing borrowing costs to contain fiscal stress.”
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“Regardless, we expect the USD slump to stabilize this week. The widening US growth edge over other major economies, reflected by the composite PMIs, can offset some of the structural drag to USD from worsening US fiscal credibility.”
“ADP private employment change for the week ending August 8 will be of interest (Tuesday). While the weekly ADP is poor at predicting monthly NFP change, it does a better job at capturing the broad direction of travel. And it currently points to weakening labor demand. ”
“Fed funds futures price in a 40% probability of a 25bps hike to 3.75-4.00% at the next September 16 meeting and a total of nearly 50bps of tightening over the next twelve months. In our view, the risk is skewed towards a dovish Fed repricing. The US labor market is in balance, wage growth is consistent with the Feds 2% inflation target, and Fed policy is already somewhat restrictive.”
“US July PCE to show inflation contained and consumer spending activity flat. Headline PCE is seen rising 0.1% m/m vs. -0.1% in June and 3.6% y/y vs 3.7% in June. Core PCE is expected to rise 0.2% m/m vs. 0.1% in June and remain at 3.3% y/y for a second straight month. Real personal spending is expected at 0.0% m/m vs. 0.4% in June.”