August 16. Weaker USD. Key to a steeper curve?
–Yields pushed a bit higher yesterday with tens up 3.6 bps to 155.1. Volume was light. Economic data continues to disappoint with Empire State -4.2 vs expected +2.5. SF Fed’s Williams said yesterday in a paper posted on the website that monetary policy can’t do it all, suggested raising the inflation target [which isn’t being hit now] and instituting stronger (automatic) counter cyclical fiscal measures.
–This morning, partially in response, is a weaker dollar, with $/yen on top of the Brexit low at 100.19. Precious metals are seeing a bounce and crude oil is adding to strong gains made yesterday. In some ways, the Williams paper argues for a steeper curve, almost in contradiction to other recent comments where he suggests pre-emptive tightening. This paper is more aligned with the idea of letting inflation and the economy run a bit hot before acting.
–In any case, the curve did steepen modestly yesterday, with red/gold ED pack spread bouncing 4.375 from the low set Friday. There are isolated signs of inflation picking up in Sweden and Norway, and UK inflation is also showing a pulse coming in at yoy +0.6 today. The point is that even with sluggish growth data in the US, an ever more gradual-leaning Fed will weaken USD and steepen the curve from extremely flat levels.
–News today includes Housing Starts expected -0.8. CPI expected 0.0 with Core +0.2, and yoy Core of 2.3. Industrial Production expected +0.3.
