Morning Commentary “Curiouser and Curiouser!”

Foreign Exchange - Morning Commentary
“Curiouser and Curiouser!”
Lewis Carroll, Alice in Wonderland
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Over the past few days, we have been writing about how markets have reached a short term equilibrium point as they await the outcome of key upcoming events. Equities, commodity prices, and the U.S. dollar have all been hovering within similar ranges over the past week. The odd man out has been the U.S. interest rate market, where without any news or market-provoking economic data, interest rates have been ratcheting sharply higher and yield curves have become less inverted.

The U.S. 10-year yield has marched higher by 31 bps in the past week with 2-year yields up by 24 bps. Yield curve inversion is also abating with 2-year vs. 10-year yields back in positive territory. More importantly, and reflective of this rapid change in sentiment, is the fact that the 3-month vs. 10-year yield curve inversion has gone from -53 bps to -21 bps, its best level since August 2. These moves all reflect a less pessimistic global outlook.

I am old school so price action still remains a very important ingredient in my analysis of the markets. When an asset class begins to move for no apparent reason and unilaterally, my antennae begin to twitch as my history in the markets has taught me that there is a change in the market dynamics afoot. I do not at this time know what that catalyst will be, but between the upcoming ECB and FOMC meetings and the U.S.-China trade talks, there is plenty of room for surprises. If there is a surprise, the other asset classes will not remain idle much longer.
  • China is taking steps to reduce the trade tension ahead of the key U.S.-China trade summit in October. They are exempting certain U.S. goods from the 25% tariffs put in place last year. However, in the key battleground states where farmers are getting hit the hardest, there will be no exemptions for corn, soybean, or pork producers. Global equities are responding positively to this news.
  • U.S. PPI for August came in near expectations rising 0.1% bringing the YoY rate up from 1.7% to 1.8%. Core prices (ex-food and energy) rose by 0.3% with the YoY rate rising from 2.1% to 2.3%. U.S. interest rates are nearly unchanged after their rapid ascent over the past week, but the U.S. dollar has firmed up overnight in a delayed reaction to the higher U.S. rates.
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