Daily Market Comment – Soft business surveys put the brakes on dollar rally



  • Dollar cools off after gloomy surveys highlight Fed’s dilemma
  • Stock markets keep grinding lower as risk buyers go on strike 
  • Oil spikes higher on OPEC reports, gold attempts recovery
Fed dilemma 

A disappointing batch of US economic data knocked the wind out of the dollar rally yesterday, although the reserve currency recouped most of its losses in the following hours with a little help from the Fed’s Kashkari, who emphasized the central bank’s determination to eradicate inflation. 

The latest business surveys from S&P Global painted a picture of an economy that is losing power and another sharp drop in new home sales added to the gloom. Companies are warning demand is rolling over as rapidly rising interest rates and raging inflation curtail consumer spending, which has translated into slower employment growth and new business orders being scaled back. 

Recent data has been filled with conflicting signals, complicating matters for the Fed. Depending on which of the two official employment surveys you look at, the US economy has either added nearly 2 million jobs since March or none at all. Similarly, business surveys from S&P Global suggest the economy is contracting, whereas the ISM surveys point to solid growth. And even if inflation has peaked, it's difficult to declare victory when it’s running at four times the target. 

All this highlights the dilemma facing the Fed. Yields on government bonds are simply not restrictive enough to bring inflation back to 2% because markets are speculating about rate cuts next year. Will Powell attempt to right the ship by stressing that rates will remain elevated for as long as it takes to slay inflation or will he strike a more measured tone, fearful of hiking the economy into recession? 

FX and equities

The dollar didn’t stay down for long. Euro/dollar spiked higher after the PMI data but the parity level acted as resistance on the way up, blocking the advance. Dollar/yen fell but it bounced back like a spring, taking solace in the fact that longer-dated Treasury yields closed the session higher. 

Even when the US data pulse slows, there isn’t any other destination for investors to seek shelter in. Europe is staring down the barrel of a deep recession as the energy crisis deepens, the Bank of Japan wants the yen to depreciate so that inflation expectations rise, the pound is at the mercy of stock markets, and the meltdown in China’s property sector has taken the shine off commodity currencies. 

In the equity arena, it was another session characterized by uncertainty. The S&P 500 and the Dow Jones lost some ground while the Nasdaq closed flat. Most importantly, implied volatility continued to rise, signaling growing demand for downside protection. There has been a buyers' strike in stocks this week, with traders reluctant to raise their exposure, afraid of getting run over by a more forceful Fed. 

Oil spikes, gold grinds

In the commodity complex, crude oil prices rose sharply following some reports that OPEC would consider production cuts in case a nuclear deal with Iran is reached, to prevent the market from being flooded with supply. A breakthrough with Iran seems to be coming as Tehran has dropped some of its key demands, but it may not be the smoking gun traders expect it to be if OPEC actively counteracts it. 

Gold prices edged higher too, capitalizing on the pullback in the dollar. It is still too early to get excited about a sustainable recovery, however, in an environment where Treasury yields have resumed their march higher and there is still no real alternative to the US dollar. 

As for today, the show will continue with US durable goods orders for July. 

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