FX Daily: Tornadoes on Terrible Tuesday
DXY rebounded with a vengeance by 1.4% to 109.82, threatening to break above 110 again. S&P 500 plummeted 4.3%, its largest single-day fall since June 2020. Dow and Nasdaq Composite Index also plunged 3.9% and 5.2% respectively. The US Treasury 2Y yield scurried 18.5 bps to 3.756%; 10Y rose 5 bps to 3.408%. Fed Funds Futures now see the Fed delivering a third 75 bps hike to 3.25% on 21 September and ending the year above 4%. The dot plot has become the focal point at next week’s FOMC meeting. Markets need guidance on where and when the Fed Funds Rate will peak and pause.
Markets betted too heavily on US CPI inflation falling with gas prices. Headline inflation did not decline by the 0.1% MoM consensus; it rose by 0.1% instead. More importantly, after stripping out food and energy prices, core inflation was strong at 0.6% MoM, double the 0.3% expected. The strength of core inflation over headline inflation reflected the second-round effects keeping the Fed awake. Falling gasoline prices did not offset the increases in rent, medical care, transportation services, and restaurant meals. Companies appear able to pass higher costs to consumers amidst the tight labour market keeping incomes growing. Investors were too quick to cheer the lower inflation expectations in the New York Fed’s Survey of Consumer Expectations. Yesterday, we highlighted the NYF’s underlying inflation gauge as a better guide on Fed hike expectations. The past three Fed hike cycles ended when the gauge (last at 4.7% in July) fell back to 3%.
Despite some short covering in the Asian session, currencies may be pressured again during the European session. AUD and NZD suffered the most from risk aversion, shedding 2.3% of their values each in the overnight session. AUD reported its lowest daily close at 0.6730 for the year. Taking out 0.6682, the intra-day low in July, could send the Oz lower. NZD closed below 0.60 for the first time since May 2020; the Covid low was 0.57 in March 2020. The sell-off in tech stocks should weigh on the KRW and the SGD. JPY and CNY are unlikely to shake off monetary policy divergences. In Japan, markets are likely to test the resistances for USD/JPY and the 10Y JGB yield at 145 and 0.25% respectively. In Europe, EUR closed below parity and GBP below 1.15. Sentiment remains less hawkish than the Fed with the European Central Bank’s jumbo 75 bps hike behind us, and the Bank of England meeting likely to disappoint with a 50 bps hike (consensus) one day after the FOMC next week. Our NowCast model sees the US economy exiting its technical recession in 3Q22. Conversely, consensus expects EU and UK growth to turn negative in 4Q22.
Quote of the day
“First they ignore you, then they laugh at you, then they fight you, then you win.”
14 September in history
India’s Constituent Assembly adopted Hindi as an official language in 1949.
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.