The DXY Index recovered with risk appetite, appreciating by 0.2% to 103 overnight. US equities rose after Monday’s capitulation. As the VIX Volatility Index retreated to 27.71 from its blowout to 65.73 on Monday, the S&P 500 and Nasdaq Composite indices rose for the first time in three sessions by 1% each. The US Treasury 10Y yield rebounded by 10.4 bps to 3.892% from Monday’s intra-day low of 3.665%, near the level at the end of 2023 when markets were pricing for 7-8 rate cuts in 2024.
In the short term, the Fed will likely support the USD by pushing back the market’s aggressive bets for 100 bps of cuts in the remaining three FOMC meetings this year. The Fed does not subscribe to the market’s fear of a US recession triggered by last Friday’s increase in the unemployment rate. However, the Fed has flagged a rate cut in September and will not respond with a “higher for longer” stance like it did in the first 4-5 months of this year. The cooling labour market provides scope to remove top-level restriction amid the sharp decline in US inflation from four-decade highs.
However, inflation has yet to return to the 2% target despite renewed confidence that it will do so. Hence, markets must stop expecting a larger 50 bps cut in September, especially if next week’s CPI inflation rises to 0.2% MoM in July from -0.1% in June. At the Fed’s Jackson Hole Symposium on August 22-24, the Fed and the other central banks will likely emphasize that monetary policy decisions will continue to depend on data, meeting by meeting. We reckon the DXY Index will hold a 102.5-103.5 range over the next fortnight.
Quote of the day
”Opportunity is missed by most people because it is dressed in overalls and looks like work.”
Thomas Edison
7 August in history
Philippe Petit walked tightrope strung between twin towers in 1974.
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