Dollar Continues to Climb Higher and Markets Turn Bullish Before The Bell

The dollar has remained broadly buoyed. The narrow trade-weighted DXY dollar index edged out a two-day peak at 91.71, returning focus to recent three-month highs at 92.82-85. The dollar lifted out of a two-day low at 92.27 yesterday with the sputtering tone on equity markets — despite solid corporate earnings reports and renewed pledges from Fed Chair Powell of ongoing ultra-accommodative monetary policy — serving to drum up a degree of safe have demand for the greenback.

Sentiment improves somewhat as the European morning session wore on, with U.S. equity index futures tracking moderate gains in European stock markets. Oil prices also lifted out of lows, which at the nadir were nearly 6% down on the highs seen on Monday. The dollar index is set for its best weekly gain in four weeks. Longer-dated U.S. Treasury yields lifted, the 10-year yield rising over 3 bp from lows near 1.30%.

Despite Fed Chair Powell’s inflation-is-transitory, tapering-remains-distant signaling, investors have been vacillating between optimism based on vaccination success and ongoing stimulus, against the rapid Delta-variant driven global spread of new Covid cases, which is even threatening new restrictions being taken in Europe despite the advancing vaccination rate there.

Bond bulls remained in control yesterday with yields extending lower after Fed Chair Powell’s day 2 testimony didn’t necessitate any course correction. Ongoing curve flattening trades helped knock longer-dated rates sharply lower again to test the levels seen last Thursday that had not been seen since February. The 10- and 30-year yields fell over 5 bps to intraday nadirs of 1.297% and 1.9199%, respectively.

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Momentum and technicals added to the move. Wall Street was generally weaker, but losses were pared. Big tech weighed on the NASDAQ which dropped over -1% before recovering to close only -0.12% in the red. The S&P 500 was off -0.14% and the Dow was down -0.11%. Powell again stressed the acceleration in prices has been a function of reopenings and bottlenecks but assured if inflation remains persistently firm, the Fed will act. The heavy data slate was mixed, with a record high on the Empire State index, firmer than expected jobless claims and trade prices, and slightly disappointing industrial production.

Today’s calendar features June retail sales, expected to fall -0.8% overall from the previous -1.3% outcome, and flat from -0.7% on an ex-auto basis. May business inventories are seen rising 0.6% from -0.2% in April. The preliminary July University of Michigan consumer sentiment index likely improved to 86.0 from 85.5 in June. May TIC flow data are also on tap.

The earnings calendar features reports from HDFC Bank, Schwab, State Street, and Kansas City Southern.

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