GGMA Markets Briefing: Dollar Slides as Fed-Hike Bets Fade
Wall Street closed Friday mixed, with the S&P 500 down 0.22% as long yields rose and the dollar fell, capping a week in which soft retail sales reduced the chances of a Fed rate hike this year.
Monday's Asian session extended the theme: the dollar headed for a third day of losses near its May levels, MSCI's emerging-market currency index was set for a record close, and attention turned to a delayed Chinese data batch and tonight's expiry of the US-Iran ceasefire (BBG).
Asian equities traded higher in holiday-thinned trade, with South Korean markets closed. The Hang Seng led the region, up 1.79% at 25544.0, with the CSI 300 up 1.26% at 4711.2 ahead of China's July activity data, which Beijing pushed back to the late afternoon (LS). The Nikkei rose 0.50% to 69030, extending Friday's 0.63% gain, as investors read Japan's growth miss as a yen story rather than an equity story (BBG). MSCI's emerging-market index climbed 1.03% to 1720.5, while Sydney bucked the move, the ASX down 0.46% at 9006. US futures pointed modestly higher, with the S&P 500 contract up 0.14% at 7816.25 and the Nasdaq up 0.40% at 30262.25, as an earnings season running at its strongest growth outside recession rebounds in three decades underpins the record backdrop (BBG). Under the calm, the volatility complex is priced for nothing: options imply sub-1% daily swings into month-end with the VIX at its year low, while dealers sit short gamma and skew is flipping fast, a fragile mix if a headline lands in thin August liquidity (Slashdot).
Japan's second-quarter GDP was the overnight main event, and it missed: annualised growth of 1.1% against 2.0% expected and a revised 1.8% prior, with the domestic side doing the damage. Private consumption was flat against a 0.4% forecast, business spending fell 1.2% against expectations for a 0.5% rise, and only net exports and inventories kept the quarter positive (BBG). The GDP deflator rose 2.6% compared to 3.2% previously against a 2.3% survey. Swaps still price a 77% probability of a Bank of Japan hike on 18 September, though a hike would now lean on the weak yen rather than the economy as its rationale (BBG). Tokyo's former top currency official Takehiko Nakao went further, arguing the BOJ should raise rates at every meeting toward a policy rate above 2%, with real rates still negative and 1.2 trillion dollars of reserves available for further intervention (BBG). His predecessor-in-role Mitsuhiro Furusawa told Reuters last week that joint intervention could come again at any time and that the BOJ likely wants the policy rate substantially higher over time, judging from its neutral-rate estimates (Reuters).
Japanese government bonds sold off on the combination, the ten-year yield up 3.3bp at 2.925%, its highest since 1996, on hike speculation and unresolved questions over how the Takaichi government funds its food sales-tax cut (BBG). Treasuries went the other way: the two-year yield fell 1.49bp to 4.15%, and the ten-year eased 1.19bp to 4.68% as Goldman Sachs argued market pricing remains too hawkish, calling a September hike very unlikely after two months of softer jobs and inflation data and pushing its steepener view (BBG). The curve trade faces a live test Wednesday, when the Treasury sells 20-year bonds with the tenor's yield at 5.2477%, near the highest since its reintroduction, following a 30-year sale at the highest rate in a quarter century (Yahoo). The structural worry runs deeper than the Fed: two-thirds of the swap markets tracked by Bloomberg now price rate hikes, and traders see roughly 400bp of tightening across seven major markets over the next year, eroding the diversification case for bonds (Yahoo). The Bank of England's chief economist added a mechanism to worry about, warning that central-bank liquidity backstops are quietly subsidising the leveraged basis trades through which hedge funds hold 2.4 trillion dollars of Treasuries (WSJ).
Here is the current market pricing across the central banks: for the Fed, markets price 7.2 basis points of tightening for the September meeting, a 29% probability of a rate rise; 21.7 basis points cumulatively by December (BBG). For the ECB, markets price 22.8 basis points of tightening for the September meeting, a 91% probability of a rate rise; 40 basis points cumulatively by December. For the BoJ, markets price 19.3 basis points of tightening for the September meeting, a 77% probability of a rate rise; 40.5 basis points cumulatively by December. For the RBNZ, markets price 22.5 basis points of tightening for the September meeting, a 90% probability of a rate rise.
In currencies, the dollar index slipped 0.18% to 99.487, near its monthly low. The euro rose 0.15% to 1.1587, approaching a two-month high, sterling gained 0.13% to 1.3555, its firmest since May, and the Australian dollar advanced 0.44% to 0.7115, its strongest since June (Reuters). The yen firmed 0.15% to 159.08 per dollar, a second day of gains, as traders looked through the GDP miss to the fading Fed (Reuters). Westpac's FX strategy head attributed the greenback's slide partly to the politics: regular Trump-Warsh dialogue, renewed attempts to remove Governor Cook, and a murky Fed reaction function keep questions about the dollar's safe-haven properties alive (BBG).
In commodities, copper stole the session, up 1.74% and heading toward a record on the London Metal Exchange as the cash-to-three-month spread blew out to its widest since the 2021 squeeze; the tightness is locational, with metal drawn into the United States ahead of a still-pending tariff decision while LME stocks sit at their lowest since February (BBG). The broader industrial-metals gauge rose 1.01%. Crude drifted, WTI down 0.40% at 82.07, as the market weighed the weekend's escalation, Israel's deadliest strikes on Lebanon since June and fresh American economic measures being readied against Iran, against the covert shuttle trade that keeps Gulf barrels flowing at volumes above four million barrels a day (BBG). Gold added 0.39% to 4393.58 (BBG). Bitcoin rose 0.72% to 63467 dollars (Reuters).
On the data run beyond Japan's GDP: Japanese industrial production was finalised at 1.9% on the month in June, up from the preliminary 1.3%, while the tertiary industry index fell 0.2% against a 1.1% prior (LS). New Zealand retail card spending rose 1.3% in July, reversing June's revised 1.3% decline, and the services PMI held above breakeven (LS). The UK's Rightmove house-price index fell 2.0% on the month in August, a second consecutive decline (LS). Singapore's export run stayed rapid on AI-linked electronics demand, a fourth straight month of outsized growth (LS). Friday's US backdrop still frames the week: retail sales fell 0.6% in July against a 0.1% rise expected, the sharpest drop in over a year, and University of Michigan sentiment slumped to 51.0 against 55.0 expected (BBG).
In corporate news, Stripe finalised an agreement to buy AI model-router OpenRouter for more than 7 billion dollars, months after the startup raised at a fraction of that value (BBG). Alphabet mandated banks for a debut Australian dollar bond of up to 20 years as hyperscaler debt supply tests investor appetite (BBG). Anthropic is telling prospective investors its second-quarter revenue jumped at least 14-fold from a year earlier (BBG). Beijing-based Z.ai unveiled a coding-focused open-weight model it claims runs close to the US frontier, sharpening the AI price war (BBG).
Ahead today: China's delayed July activity batch lands in the European morning, with retail sales seen picking up and factory output slowing (BBG). ECB chief economist Lane speaks in Dublin at 11:30 CET, the day's only major central-bank appearance (BBG). Canada's July CPI at 14:30 CET is the session's most-watched release, with an energy-driven acceleration in the headline expected (BBG). The US calendar brings Empire State manufacturing at 14:30 CET, the NAHB housing index at 16:00 CET and TIC flows at 22:00 CET, while the US-Iran ceasefire expires with talks stalled and Hormuz traffic at a trickle (BBG). The Fed's July minutes on Wednesday will detail the three dissents in favour of a quarter-point rise, and Jackson Hole follows on 27-29 August (BBG).