Sive Morten
Special Consultant to the FPA
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Fundamentals
No doubts, the major event of this week is inflation data reports. And I would say that PPI numbers are more important than widely announced CPI slowdown. Because so huge divergence between PPI and CPI is a sign of big problems in the US economy, and production sector in particular. Although drop of nominal CPI has put all markets in euphoria (while core CPI remains stubbornly high), and everybody start talking that July might be the last Fed's upward rate step, BofA suddenly has released counter-side view showing that CPI could start climbing again very soon.
Market overview
The U.S. dollar bounced on Friday after falling sharply the last few days, as investors consolidated losses ahead of the weekend, but its trajectory remained tilted to the downside with the Federal Reserve thought near the end of its rate hike cycle amid softening inflation. It was still on track for its biggest weekly decline since November against a basket of six major currencies.
U.S. producer prices barely rose last month and the annual increase was the smallest in nearly three years, data showed on Thursday, a day after a report indicated that consumer prices gained modestly last month.
Governor Christopher Waller said he was not ready to call an all-clear on U.S. inflation, as he favored more rate rises this year. Markets are still pricing in a 95% chance of a 25 basis point hike from the Fed this month, CME's FedWatch tool showed, but no more for the rest of the year.
Investors have been betting on a turn lower in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.
Cooling U.S. inflation is accelerating a decline in the dollar, and risk assets around the world stand to benefit. The dollar is down nearly 13% against a basket of currencies from last year’s two-decade high and stands at its lowest level in 15 months. Its decline quickened after the U.S. reported softer-than-expected inflation data on Wednesday, supporting views that the Federal Reserve is nearing the end of its interest rate-hiking cycle.
The greenback's tumble has come as U.S. Treasury yields eased in recent days, dulling the dollar's allure while boosting a wide range of other currencies, from the Japanese yen to the Mexican peso.
A continued fall in the dollar could boost profits for foreign exchange strategies such as the dollar-funded carry trade, which involves the sale of dollars to buy a higher-yielding currency, allowing the investor to pocket the difference. The dollar's decline has already made the strategy a profitable one this year: An investor selling dollars and buying the Colombian peso would have collected 25% year-to-date, while the Polish zloty has yielded 13%, data from Corpay showed.
Of course, being bearish the dollar has its own risks. One is a potential rebound in U.S. inflation, which could stoke bets on more Fed hawkishness and unwind many of the anti-dollar trades that have prospered this year. Though inflation has cooled, the U.S. economy has remained resilient compared with other countries and few believe the Fed will cut rates anytime soon, which could potentially limit the dollar's near-term downside.
U.S. data on Thursday reinforced the view that inflation is moderating. U.S. producer prices (PPI) inched up 0.1% in June, with the annual increase at 0.1% as well, the smallest year-on-year rise in nearly three years. The PPI data followed Wednesday's consumer price index (CPI) report, which showed U.S. core inflation slowed a lot faster than expected. It came in at 0.2% in June against market expectations for 0.3%, while headline annual CPI fell to 3%.
But he noted that the dollar will find support somehow because the U.S. economy is still outperforming the rest of the world. Data also showed an unexpected fall in U.S. initial jobless claims by 12,000 to a seasonally-adjusted 237,000 for the week ended July 8. This was hardly talked about by market participants, given the focus on inflation, but it does suggest that the labor market remains tight. Whether or not the dollar is on a one-way trip lower for the rest of the year remains to be seen though.
Inflation is slowing rapidly enough to allow the Federal Reserve to stop tightening U.S. monetary policy after what is still widely expected to be an interest-rate hike at its meeting in two weeks' time, traders bet on Wednesday. With that core inflation figure still more than twice the Fed's 2% target, traders continue to overwhelmingly expect policymakers to increase the benchmark rate a quarter point, to a 5.25%-5.5% range, at their July 25-26 meeting.
But they now see little more than a one-in-four chance of another rate hike before year's end, down from a more than one-in-three chance seen before the report, futures prices show.
Not only does Europe directly import cheaper U.S. goods and services as a result of a lower dollar, it cheapens the cost of dollar-denominated energy, commodity and food prices still aggravating consumer prices everywhere. And, even if less welcome, it dampens domestic demand via exporters' margin hits that can also further sap inflation.
Still, the ECB will likely stay shy of peak Fed rates, but an expected move to 4.0% policy rates by year-end will involve two quarter point hikes after the Fed has stopped. The European Central Bank may need to continue raising interest rates beyond this month to bring inflation back to target, ECB policymakers said at their last meeting according to an account published on Thursday.
The ECB raised borrowing costs by a quarter of a percentage point in June but the account showed "a preference was also initially expressed for raising the key ECB interest rates by 50 basis points". It also decided to stop replacing bonds bought its Asset Purchase Programme when they mature although one policy maker proposed "deferring the decision to a later date" to assess how the market would digest the repayment of half-a-trillion-euros worth of central bank loans.
Fathom consulting points that Most major economies have avoided a recession, so far, with only a few countries and regions, such as Germany and the euro area, experiencing a technical recession. Economic activity remains fairly strong as household spending continued to grow despite the sharp fall in real wages globally, supported by fiscal transfers, excess savings accumulated during the pandemic and net migration.
Although we've clearly shown that savings are melting and it is not too much time left until they will totally exhaust:
Fathom still points that "although the global economy has been more resilient than expected, the dangers of a downturn have not passed. As we have argued for a while now, higher interest rates have a habit of breaking things, and this time is unlikely to be different. This one appears to be increasingly defined by a much greater uncertainty over how quickly and by how much the economy will respond to the higher rates already implemented.The continued resilience of the global economy suggests that, when a recession does emerge, it may materialise from unexpected angles."
WHY PPI IS MORE IMPORTANT
Annual data for June (i.e. June 2023 to June 2022), a decrease in prices for all industrial goods, -9.5%. Previous data (May to May) -7.1% . In other words, there is a severe deflation (on the scale of 1930-32), which in itself is the surest sign of a very serious economic downturn. In such a situation, even a drop in consumer inflation (CPI index) from 0.4 to 0.3% per month does not mean anything positive.
Rising costs in trade and logistics can cause prices to increase even when prices are falling in industry sector. It is possible that consumer prices are rising due to rising import prices. But the situation in the industry in any case becomes catastrophic, what to do about it is completely unclear. Raising the rate won't help matters here.
The policy aimed on reducing consumer inflation is carried out in a situation of extremely high deflation in the industrial sector. A typical example of a "nose pulled — tail stuck" situation: if you take efforts (rising rates) to defeat consumer inflation, it will collapse (it is already collapsing!) industry, if you give it investments (and its consumers — money for purchases), inflation will go up. And the scale of debt problems is so great that fluctuations in these two indicators (consumer inflation — industrial recession) they are increasing all the time.
It is becoming interesting if we take a look at recent Ministry of Finance activity. The actual average interest on the US government debt is now 2.76% per annum, the zone of 3.5% and above at the average debt service rate is seen as long-term problematic and unstable, when debt service costs exceed 4% of GDP. Generally speaking, if the average interest on the US national debt is below 3%, and this is already more than a trillion, then things are getting complicated for everyone.
The problem here is purely in maths - a trillion percent, plus a trillion and a half deficits totaling 2-2.5 trillion. fresh money should be poured in annually. Well, or $180-200 billion. monthly, as you like it more in this way. Without super-QE there is simply nowhere to take it - neither the economy is growing so much, nor foreigners will buy so much. So the Fed's printing press will turn on, if not right now, then in 2-3 quarters.
Indeed recent analysis shows that Fed tightening lags for two quarters behind the decision and major impact on US economy comes in II-IIIQ of 2024:
That's why a recession is a more likely outcome than a soft landing, regardless of what happens to inflation. Beside, Real Estate market suddenly start showing signs of life, forming rebound, drop of inventory that could add a headache to Fed, because this is definitely an inflationary factor, despite that Mortgage rate near 7.1% already
Finally, BofA confirms our suggestion that CPI slowdown is mostly the statistical effect of high base comparison rather than real improvement. They show few scenarios for CPI direction but all of them are up. Confirming our idea of possible CPI upward turn in August and September:
With taking in consideration current situation in the US Budget and funds requirements, I would bet against 2.8% BofA scenario. Indeed.
In the coming year (from July 2023 to June 2024), the US Treasury will have to repay and, accordingly, refinance 4.64 trillion bills, 2.64 trillion notes, 22 billion bonds and 145 billion TIPS in accordance with its own calculations for all bonds.
Next year, in total, 7.45 trillion bills and bonds, where only 2.81 trillion securities with a circulation period of more than one year, should be refinanced. All this is relevant without taking into account the need for new borrowings, which can go in two directions – financing the current budget deficit and replenishing the cash position.
Taking into account the budget deficit inflating to obscenity and a brisk start after the lifting of the limit (almost 0.8 trillion net placements), the volume of total borrowings (refinancing of existing debt + increment of new debt) may exceed 9.5 trillion and rather approach 10 trillion, where ¾ is debt refinancing (!!!).
The nearest repayment will be on July 17 for 50 billion and on July 31 for 133 billion for notes and another 53 billion TIPS on July 17, i.e. for July in medium–term and long-term securities are extinguished by 237 billion, in August - 302 billion (279 billion notes and 23 billion bonds), in September – 187 billion notes only.
Why is this important?
Firstly, there is a permanently increased load on the market of treasuries and the concentration of dollar liquidity in this instrument, which prevails over other instruments, i.e. takes away liquidity in favor of treasuries. Secondly, the most important thing is the increased burden on the budget through the uncontrolled expansion of interest expenses. Since June, 88% of all placements have been in short-term T-Bills, and the weighted average actual borrowing rates from June 1 to July 13, 2023 amounted to 5.17%, which is almost 5 percentage points higher than from March 2020 to March 2022.
So far, Powell and market participants agree, things have been going smoothly. There are still more than $3.2 trillion of bank reserves parked at the Fed, and no indication that that gauge of liquidity has shrunk to a level that would cause problems in money markets as happened in 2019. Analysts estimate — with low conviction — the banking system needs at least $2.5 trillion to function smoothly. So is it only ~ 0.7 Trln left to use by the Fed&Co? That's why they want to rise banks' reserves requirements.
One reason things are going well so far is that there’s another big element of liquidity on the Fed’s balance sheet — the reverse repo facility. Known as RRP, money-market funds have used it to park cash. And that account stands at more than $1.8 trillion.
For now, the major source of US Treasury borrowing are RRP and Bank Reserves. The RRP can shrink “dramatically” without “particularly important macroeconomic effects,” Powell explained last month. And he told a Senate panel that “that’s what we would have hoped to see, rather than taking reserves out of the system.” With the Treasury in the middle of ramping up its own cash reserve by as much as $1 trillion, market participants will be closely monitoring what gets drained as that goes ahead.
Bank of America Corp. strategists, led by Mark Cabana, estimate that 90% of the Treasury’s issuance will be funded by the RRP, as money-market funds shift from that Fed facility to investing in higher-yielding T-bills. RBC Capital Markets analysis indicates that, so far, about 60% of the Treasury’s sales are coming from draining the RRP.
That could put upward pressure on very short-term rates, sending them above the Fed’s target rate, Marchioni indicated.
Conclusion:
Speaking on recent USD drop and whether it is healthy for global finances or not... Well, the US dollar, as usual, is at the base of the pyramid. Therefore, any sudden movement can lead to the launch of a cascade collapse. Here, even without the BRICS currency and other external disturbances, it’s scary. What is the fundamental difference? The fact that the building of the dollar system is already well shaken. Here we have inflation that has subsided, but not completely defeated, and the budget deficit that is not decreasing, which cannot be financed in any way but only with emission, and problems with banks, which also have not been systematically resolved. In general, a sharp depreciation of the dollar under an outwardly noble pretext can provoke problems in the debt market and inflation. The same approach to the second turn of the stagflation spiral. The only question that nobody could answer right now - where this red line of USD weakness that system could hold.
Second I would be cautious on massive euphoria and anticipation of Fed pivot and inflation defeat. Data, mentioned above shows that nothing is done yet. And, this is not just our own calculation, BofA and many other experts think the same. The speech of JPow on coming Fed meeting might become a cold shower for the markets. So big US bonds supply and budget deficit unavoidable reduce its cost, pushing yields higher, while reserves are limited - US Treasury account with ~400 Bln, RRP -1.8 Trln and Bank Reserves 700 Bln of 3.2 Trln for painless using. That's all. Not too much, actually. Yes, in long-term this is definitely negative factor, but due to rising of interest rates and falling in recession, missing so-called "soft landing" - first in the US, later in EU (and especially in EU), dollar could rise. Besides, constant high rate and less inflation than in EU makes core carry trade attractive. For now and for another few months downside trend on dollar probably holds (if Fed will not become surprisingly hawkish). But as soon as first liquidity problems come on surface, closer to the fall, situation could change. Also don't forget that political situation is changing as well. Recent NATO summit approves, although indirectly EU troops (Poland and Romania) participation in Ukrainian conflict. Hardly it supports EUR in long term.
No doubts, the major event of this week is inflation data reports. And I would say that PPI numbers are more important than widely announced CPI slowdown. Because so huge divergence between PPI and CPI is a sign of big problems in the US economy, and production sector in particular. Although drop of nominal CPI has put all markets in euphoria (while core CPI remains stubbornly high), and everybody start talking that July might be the last Fed's upward rate step, BofA suddenly has released counter-side view showing that CPI could start climbing again very soon.
Market overview
The U.S. dollar bounced on Friday after falling sharply the last few days, as investors consolidated losses ahead of the weekend, but its trajectory remained tilted to the downside with the Federal Reserve thought near the end of its rate hike cycle amid softening inflation. It was still on track for its biggest weekly decline since November against a basket of six major currencies.
U.S. producer prices barely rose last month and the annual increase was the smallest in nearly three years, data showed on Thursday, a day after a report indicated that consumer prices gained modestly last month.
Governor Christopher Waller said he was not ready to call an all-clear on U.S. inflation, as he favored more rate rises this year. Markets are still pricing in a 95% chance of a 25 basis point hike from the Fed this month, CME's FedWatch tool showed, but no more for the rest of the year.
Investors have been betting on a turn lower in the dollar for months, with short positions more than doubling over the month to July 7, according to data from Commodity Futures Trading Commission, although they remain far off the levels in 2021.
Cooling U.S. inflation is accelerating a decline in the dollar, and risk assets around the world stand to benefit. The dollar is down nearly 13% against a basket of currencies from last year’s two-decade high and stands at its lowest level in 15 months. Its decline quickened after the U.S. reported softer-than-expected inflation data on Wednesday, supporting views that the Federal Reserve is nearing the end of its interest rate-hiking cycle.
The greenback's tumble has come as U.S. Treasury yields eased in recent days, dulling the dollar's allure while boosting a wide range of other currencies, from the Japanese yen to the Mexican peso.
A continued fall in the dollar could boost profits for foreign exchange strategies such as the dollar-funded carry trade, which involves the sale of dollars to buy a higher-yielding currency, allowing the investor to pocket the difference. The dollar's decline has already made the strategy a profitable one this year: An investor selling dollars and buying the Colombian peso would have collected 25% year-to-date, while the Polish zloty has yielded 13%, data from Corpay showed.
Of course, being bearish the dollar has its own risks. One is a potential rebound in U.S. inflation, which could stoke bets on more Fed hawkishness and unwind many of the anti-dollar trades that have prospered this year. Though inflation has cooled, the U.S. economy has remained resilient compared with other countries and few believe the Fed will cut rates anytime soon, which could potentially limit the dollar's near-term downside.
U.S. data on Thursday reinforced the view that inflation is moderating. U.S. producer prices (PPI) inched up 0.1% in June, with the annual increase at 0.1% as well, the smallest year-on-year rise in nearly three years. The PPI data followed Wednesday's consumer price index (CPI) report, which showed U.S. core inflation slowed a lot faster than expected. It came in at 0.2% in June against market expectations for 0.3%, while headline annual CPI fell to 3%.
But he noted that the dollar will find support somehow because the U.S. economy is still outperforming the rest of the world. Data also showed an unexpected fall in U.S. initial jobless claims by 12,000 to a seasonally-adjusted 237,000 for the week ended July 8. This was hardly talked about by market participants, given the focus on inflation, but it does suggest that the labor market remains tight. Whether or not the dollar is on a one-way trip lower for the rest of the year remains to be seen though.
Inflation is slowing rapidly enough to allow the Federal Reserve to stop tightening U.S. monetary policy after what is still widely expected to be an interest-rate hike at its meeting in two weeks' time, traders bet on Wednesday. With that core inflation figure still more than twice the Fed's 2% target, traders continue to overwhelmingly expect policymakers to increase the benchmark rate a quarter point, to a 5.25%-5.5% range, at their July 25-26 meeting.
But they now see little more than a one-in-four chance of another rate hike before year's end, down from a more than one-in-three chance seen before the report, futures prices show.
Not only does Europe directly import cheaper U.S. goods and services as a result of a lower dollar, it cheapens the cost of dollar-denominated energy, commodity and food prices still aggravating consumer prices everywhere. And, even if less welcome, it dampens domestic demand via exporters' margin hits that can also further sap inflation.
Still, the ECB will likely stay shy of peak Fed rates, but an expected move to 4.0% policy rates by year-end will involve two quarter point hikes after the Fed has stopped. The European Central Bank may need to continue raising interest rates beyond this month to bring inflation back to target, ECB policymakers said at their last meeting according to an account published on Thursday.
The ECB raised borrowing costs by a quarter of a percentage point in June but the account showed "a preference was also initially expressed for raising the key ECB interest rates by 50 basis points". It also decided to stop replacing bonds bought its Asset Purchase Programme when they mature although one policy maker proposed "deferring the decision to a later date" to assess how the market would digest the repayment of half-a-trillion-euros worth of central bank loans.
Fathom consulting points that Most major economies have avoided a recession, so far, with only a few countries and regions, such as Germany and the euro area, experiencing a technical recession. Economic activity remains fairly strong as household spending continued to grow despite the sharp fall in real wages globally, supported by fiscal transfers, excess savings accumulated during the pandemic and net migration.
Although we've clearly shown that savings are melting and it is not too much time left until they will totally exhaust:
Fathom still points that "although the global economy has been more resilient than expected, the dangers of a downturn have not passed. As we have argued for a while now, higher interest rates have a habit of breaking things, and this time is unlikely to be different. This one appears to be increasingly defined by a much greater uncertainty over how quickly and by how much the economy will respond to the higher rates already implemented.The continued resilience of the global economy suggests that, when a recession does emerge, it may materialise from unexpected angles."
WHY PPI IS MORE IMPORTANT
Annual data for June (i.e. June 2023 to June 2022), a decrease in prices for all industrial goods, -9.5%. Previous data (May to May) -7.1% . In other words, there is a severe deflation (on the scale of 1930-32), which in itself is the surest sign of a very serious economic downturn. In such a situation, even a drop in consumer inflation (CPI index) from 0.4 to 0.3% per month does not mean anything positive.
Rising costs in trade and logistics can cause prices to increase even when prices are falling in industry sector. It is possible that consumer prices are rising due to rising import prices. But the situation in the industry in any case becomes catastrophic, what to do about it is completely unclear. Raising the rate won't help matters here.
The policy aimed on reducing consumer inflation is carried out in a situation of extremely high deflation in the industrial sector. A typical example of a "nose pulled — tail stuck" situation: if you take efforts (rising rates) to defeat consumer inflation, it will collapse (it is already collapsing!) industry, if you give it investments (and its consumers — money for purchases), inflation will go up. And the scale of debt problems is so great that fluctuations in these two indicators (consumer inflation — industrial recession) they are increasing all the time.
It is becoming interesting if we take a look at recent Ministry of Finance activity. The actual average interest on the US government debt is now 2.76% per annum, the zone of 3.5% and above at the average debt service rate is seen as long-term problematic and unstable, when debt service costs exceed 4% of GDP. Generally speaking, if the average interest on the US national debt is below 3%, and this is already more than a trillion, then things are getting complicated for everyone.
The problem here is purely in maths - a trillion percent, plus a trillion and a half deficits totaling 2-2.5 trillion. fresh money should be poured in annually. Well, or $180-200 billion. monthly, as you like it more in this way. Without super-QE there is simply nowhere to take it - neither the economy is growing so much, nor foreigners will buy so much. So the Fed's printing press will turn on, if not right now, then in 2-3 quarters.
Indeed recent analysis shows that Fed tightening lags for two quarters behind the decision and major impact on US economy comes in II-IIIQ of 2024:
That's why a recession is a more likely outcome than a soft landing, regardless of what happens to inflation. Beside, Real Estate market suddenly start showing signs of life, forming rebound, drop of inventory that could add a headache to Fed, because this is definitely an inflationary factor, despite that Mortgage rate near 7.1% already
Finally, BofA confirms our suggestion that CPI slowdown is mostly the statistical effect of high base comparison rather than real improvement. They show few scenarios for CPI direction but all of them are up. Confirming our idea of possible CPI upward turn in August and September:
With taking in consideration current situation in the US Budget and funds requirements, I would bet against 2.8% BofA scenario. Indeed.
In the coming year (from July 2023 to June 2024), the US Treasury will have to repay and, accordingly, refinance 4.64 trillion bills, 2.64 trillion notes, 22 billion bonds and 145 billion TIPS in accordance with its own calculations for all bonds.
Next year, in total, 7.45 trillion bills and bonds, where only 2.81 trillion securities with a circulation period of more than one year, should be refinanced. All this is relevant without taking into account the need for new borrowings, which can go in two directions – financing the current budget deficit and replenishing the cash position.
Taking into account the budget deficit inflating to obscenity and a brisk start after the lifting of the limit (almost 0.8 trillion net placements), the volume of total borrowings (refinancing of existing debt + increment of new debt) may exceed 9.5 trillion and rather approach 10 trillion, where ¾ is debt refinancing (!!!).
The nearest repayment will be on July 17 for 50 billion and on July 31 for 133 billion for notes and another 53 billion TIPS on July 17, i.e. for July in medium–term and long-term securities are extinguished by 237 billion, in August - 302 billion (279 billion notes and 23 billion bonds), in September – 187 billion notes only.
Why is this important?
Firstly, there is a permanently increased load on the market of treasuries and the concentration of dollar liquidity in this instrument, which prevails over other instruments, i.e. takes away liquidity in favor of treasuries. Secondly, the most important thing is the increased burden on the budget through the uncontrolled expansion of interest expenses. Since June, 88% of all placements have been in short-term T-Bills, and the weighted average actual borrowing rates from June 1 to July 13, 2023 amounted to 5.17%, which is almost 5 percentage points higher than from March 2020 to March 2022.
So far, Powell and market participants agree, things have been going smoothly. There are still more than $3.2 trillion of bank reserves parked at the Fed, and no indication that that gauge of liquidity has shrunk to a level that would cause problems in money markets as happened in 2019. Analysts estimate — with low conviction — the banking system needs at least $2.5 trillion to function smoothly. So is it only ~ 0.7 Trln left to use by the Fed&Co? That's why they want to rise banks' reserves requirements.
One reason things are going well so far is that there’s another big element of liquidity on the Fed’s balance sheet — the reverse repo facility. Known as RRP, money-market funds have used it to park cash. And that account stands at more than $1.8 trillion.
For now, the major source of US Treasury borrowing are RRP and Bank Reserves. The RRP can shrink “dramatically” without “particularly important macroeconomic effects,” Powell explained last month. And he told a Senate panel that “that’s what we would have hoped to see, rather than taking reserves out of the system.” With the Treasury in the middle of ramping up its own cash reserve by as much as $1 trillion, market participants will be closely monitoring what gets drained as that goes ahead.
Bank of America Corp. strategists, led by Mark Cabana, estimate that 90% of the Treasury’s issuance will be funded by the RRP, as money-market funds shift from that Fed facility to investing in higher-yielding T-bills. RBC Capital Markets analysis indicates that, so far, about 60% of the Treasury’s sales are coming from draining the RRP.
That could put upward pressure on very short-term rates, sending them above the Fed’s target rate, Marchioni indicated.
Conclusion:
Speaking on recent USD drop and whether it is healthy for global finances or not... Well, the US dollar, as usual, is at the base of the pyramid. Therefore, any sudden movement can lead to the launch of a cascade collapse. Here, even without the BRICS currency and other external disturbances, it’s scary. What is the fundamental difference? The fact that the building of the dollar system is already well shaken. Here we have inflation that has subsided, but not completely defeated, and the budget deficit that is not decreasing, which cannot be financed in any way but only with emission, and problems with banks, which also have not been systematically resolved. In general, a sharp depreciation of the dollar under an outwardly noble pretext can provoke problems in the debt market and inflation. The same approach to the second turn of the stagflation spiral. The only question that nobody could answer right now - where this red line of USD weakness that system could hold.
Second I would be cautious on massive euphoria and anticipation of Fed pivot and inflation defeat. Data, mentioned above shows that nothing is done yet. And, this is not just our own calculation, BofA and many other experts think the same. The speech of JPow on coming Fed meeting might become a cold shower for the markets. So big US bonds supply and budget deficit unavoidable reduce its cost, pushing yields higher, while reserves are limited - US Treasury account with ~400 Bln, RRP -1.8 Trln and Bank Reserves 700 Bln of 3.2 Trln for painless using. That's all. Not too much, actually. Yes, in long-term this is definitely negative factor, but due to rising of interest rates and falling in recession, missing so-called "soft landing" - first in the US, later in EU (and especially in EU), dollar could rise. Besides, constant high rate and less inflation than in EU makes core carry trade attractive. For now and for another few months downside trend on dollar probably holds (if Fed will not become surprisingly hawkish). But as soon as first liquidity problems come on surface, closer to the fall, situation could change. Also don't forget that political situation is changing as well. Recent NATO summit approves, although indirectly EU troops (Poland and Romania) participation in Ukrainian conflict. Hardly it supports EUR in long term.
