- ISM US August services PMI 56.5 vs 55.1 expected
- S&P Global final US August services PMI 43.7 vs 44.1 prelim
- Kwasi Kwarteng appointed UK Chancellor of the Exchequer, as expected
- Atlantic hurricane season continues to look like a dud
- Liz Truss first speech as Prime Minister
- New Zealand GDT price index +4.9%
- Spanish PM says there will be no energy rationing
Markets:
- Gold down $10 to $1700
- US 10-year yields up 15 bps to 3.34%
- WTI crude oil down $0.13 to $86.74
- S&P 500 down 16 points to 3908
- GBP leads, JPY lags (badly)
It's easy to get bogged down in the details or deliver a play-by-play on the market reaction to the ISM services report but what's unfolding in FX needs to be emphasized: The yen is falling apart. It's the third biggest economy in the world and it's acting like a frontier currency, falling another 220 pips today in what has been a straight line move to 143 from 104 at the start of 2021.
The catalyst today was an expensive UK rescue package that led to a blowout in long-dated gilts, along with a heavy slate of US corporate issuance that did the same for Treasuries. With yields jumping another 15-20 bps, the yield advantage over JGBs continues to grow. At some point, the falling yen will become intolerable for Japan but that day wasn't today as the move was a non-stop grind higher.
That's not to say the ISM data wasn't important, it highlighted a solid US consumer as did comments from Bank of America's CEO. Thta helped lift the dollar broadly and sank the euro through 0.99 for the first time since 2004.
Cable fared a bit better on hopes for better growth in 2023 on the energy plan but it's a dangerous game the UK government is playing with the bond market increasingly questioning spending, especially with plans to cushion businesses on energy and a tax cut to come.
The commodity currencies were weak as the RBA hike failed to boost AUD. Some of that can be explained by the moderate risk backdrop as AUD and NZD moved in lockstep.
The loonie held its ground against the US dollar despite a poor day in energy markets. That likely reflects positioning for a 75 bps BOC hike but I fear we'll see a catch-up trade with AUD despite that. The BOC is flirting with trouble in the Canadian housing market if it hikes 75 and continues to signal a hawkish stance.
