Daily Market Comment – Dollar edges up, stocks struggle after yields spike higher

  • Market mood turns cautious amid mixed signs on the global economy
  • Bond yields extend gains as inflation expectations rise
  • But big drop in US consumer confidence casts doubt on recovery
  • Stocks softer, dollar crawls higher ahead of Jackson Hole

Yields creep higher: sign of economic health or trouble?

Risk appetite appeared to falter on Wednesday as higher long-term borrowing costs weighed on equities, while unexpected weakness in US consumer confidence supported the safe-haven dollar and yen in currency markets.

Stocks in Asia, as well as European and US futures eased off from Tuesday’s strong gains when they were boosted by Washington’s and Beijing’s recommitment to the Phase 1 trade deal. The diminishing risk of a near-term flare-up in Sino-US tensions was one factor driving up global sovereign bond yields yesterday. An oversupply of government debt issuance and rising inflation expectations may also be contributing to the sharp upward reversal in yields this week.

The growing perception that the deflationary impact of the coronavirus pandemic won’t be quite as acute as first feared and signs that economies around the world are recovering faster (though not necessarily more smoothly) than earlier predictions, have seen long-term yields move off their lows during August.

This comes on top of existing concerns that the record amount of government debt being issued to finance massive spending designed to support virus-stricken economies will give rise to higher inflation in the future.

Nevertheless, Wall Street managed another record-busting session on Tuesday, with the S&P 500 and Nasdaq Composite ending the day marginally in record territory.

US consumer confidence hits 6-year low; durable goods coming up

The jump in Treasury yields conflicted with the mixed messages about the US economy. The Conference Board consumer confidence index fell to the lowest in six years in August, confounding forecasts of an improvement and reviving fears about weakening consumer spending.

The drop could be the first sign that the reduced unemployment benefit that came into force in August is starting to hurt consumption. This could only be the start of a worsening income situation for millions of jobless Americans if Congress is unable to reach a deal on a new virus relief package in the next few weeks.

But it wasn’t all bad news as the better-than-expected new home sales figures added to the recent batch of robust housing data.

Durable goods orders for July will be the next US indicator to be watched later today.

Dollar firmer but held back by caution ahead of Powell speech

The mood in currency markets was also somewhat subdued on Wednesday, with the US dollar failing to capitalize significantly from the mild risk-off tone. The dollar index pared overnight gains to stand only slightly higher at the European open.

Expectations that Fed Chairman Jerome Powell will announce a new monetary policy regime of average inflation targeting when he speaks at the online Jackson Hole symposium on Thursday may be holding the dollar back. Targeting average inflation over time rather than setting a fixed 2% goal would likely mean lower rates for longer. Hence, if the Fed confirms such a move, the greenback would stand little chance of a meaningful rebound anytime soon.

This could, however, be good news for the yen as lower US yields would make it a more appealing choice among safe haven currencies. The yen was already attracting the biggest flow of risk-off trades today, rising broadly against most of its peers.

In commodities, gold continued to drift lower, while oil prices held on to yesterday’s advances when they were lifted from production shutdowns in the Gulf of Mexico due to a hurricane hitting the region.

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