At the end of what has been a rough week for the dollar and risk assets overall, no help was found in the release of U.S. Consumer Price Index (CPI) data or from the Minneapolis Fed President Neel Kashkari. The 0.1% increase for the CPI in July disappointed investors which had expected a 0.2% increase. The CPI report on Friday morning followed an equally disappointing report on Thursday from the Producer Price Index (PPI). The PPI came in down 0.1% for the month of July while estimates were for an increase of 0.1%. The weak consumer and wholesale inflation data follows positive wage growth data in last week’s July NFP report and Monday’s JOLTS report.
Consequently, the USD sold off and treasuries rallied mid morning and into the afternoon. The dollar index (DXY) dropped around 0.40% on the day, with the euro rallying 0.48% and the yen and Swiss franc each up 0.20% against the greenback. The yen has gained approximately 1.5% against the dollar this week, as investors look for safe haven assets given the current tensions between North Korea, the United States, and China. U.S. treasuries whipsawed following the 8:30 am CPI release but ended up on the day. The 10-Year dipped under 2.19%, with the yield dropping 8 basis points for the week.
“We’ve been around a 1.7% inflation rate, but if inflation starts to climb and we end up at 2.3% or 2.4% or 2.5%, so what?” Minneapolis Fed President, Neel Kashkari
Also on Friday, the Minneapolis Fed President, Neel Kashkari, vehemently talked down inflation worries during a question and answer session with community bankers in Bloomington, MN. Mr. Kashkari, who many consider to be the most outspoken dove in the U.S. central bank system, called the hawk’s worries around accelerating inflation from an acceleration in wage growth, a “ghost story.” His lack of concern for the effects of inflation on the U.S. economy can be further heard with his statement that, “We’ve been around a 1.7% inflation rate, but if inflation starts to climb and we end up at 2.3% or 2.4% or 2.5%, so what?” Mr. Kashkari has been the lone dissenter for the Fed’s two previous rate hikes this year and will most likely oppose a third rate hike regardless of the data from now through the end of the year.
The weak inflation data on Thursday and Friday only tell half of the story, however, of the dollar’s rough week. After harsh rhetoric was exchanged between the U.S. and North Korea on Tuesday and Wednesday, President Trump doubled down on his strong stance against the radical nation led by Kim Jong Un on Friday morning. President Trump tweeted, “Military solutions are now fully in place, locked and loaded, should North Korea act unwisely.” The comments come after North Korean state media announced on Thursday a plan for four missiles to be launched within 18-25 miles of the U.S. territory of Guam in mid-August as a show of force.
“Military solutions are now fully in place, locked and loaded, should North Korea act unwisely.” President Trump
The Pentagon confirmed on Friday that the U.S. and South Korea will proceed with planned joint military exercises in ten days as scheduled. The exercises will almost certainly further upset an already irate North Korean leadership. World leaders have urged restraint and for the current bellicose rhetoric to be toned down before the situation reaches a critical point of no return.
Despite the reprieve from the weekend, volatility will most likely continue through to next week. The dollar was unable to maintain its gains from the strong wage growth data in the July NFP and JOLTS reports, which further exacerbates the continuing bias for further weakness. The poor PPI and CPI inflation data only added to the safe haven bid U.S. treasuries received earlier this week, as expectations for a third rate hike this year diminished from 50% to around 42% as measured by the CME FedWatch tool. Barring significant improvement on the geopolitical front, current trends will continue into early next week, as treasuries continue to receive a bid and volatility persists in the equity, commodity, and currency asset classes.