• US 10-year Treasury yield falls 6.6bps to 4.587%
• Fed’s Bowman and Waller become less hawkish
• FOMC minutes to be released at 2pm EST

The US dollar pared losses after a hot PPI report but still settled lower as Wall Street focused on the latest Fed speak that had two hawks dial down dial the immediate need for further tightening.  The high-beta currencies might struggle for further gains until Wall Street sees tomorrow’s CPI report, which could come in hot given producer prices were supported on higher energy and food prices. The latest round of Fed speak supported the initial move higher for stocks, but too many geopolitical risks and start of earnings season has investors cautiously buying into this rally. 

PPI     

US supplier prices came in hotter-than-expected as stubborn inflation pressures remain in the economy.  The Labor Department gauge showed PPI final demand in September rose 0.5% from a month ago, which was down from 0.7% in the prior month, but well above the 0.3% consensus estimate.  The headline gauge advanced 2.2% from a year earlier, the highest pace since April and well above the upwardly revised 2.0% prior reading. 

The knee-jerk reaction for both stocks and the dollar to the hot PPI report did not deliver a sustained move as the overall theme from this report was that companies might be struggling to pass on costs to the consumer.  With US manufacturing showing signs it is ramping up, softer spending trends should support the case that the disinflation process will still remain in place. 

Fed

Fed’s Bowman dialed down the hawkishness, noting that rates may need to rise more to curb inflation.  Two and a half weeks ago, she was stating that more rate hikes will be needed to curb inflation.  Fed’s Waller said they can watch and see what happens before taking further action with interest rates as financial markets tighten.

The Fed is done hiking for now and if 2024 has a mild recession, that should allow them to hold off on rate cuts.  Given the change of tune from the Fed hawks, the FOMC minutes might not matter as much, but could provide valuable insights as to how they see the impact from a government shutdown.

GBP/USD Daily Chart:

 The bond market rally has provided a much needed lifeline for the European currencies.  It is clear that Wall Street is convinced that the US long-end yields are too elevated and that put an end to the king dollar trade.  Price action on GBP/USD shows the bullish rebound faces key resistance from both the 200-day SMA and the downward sloping trendline that started in mid-July.  If bullish momentum remains in place major resistance lies at the 1.2590 region, which is the 50% retracement of the recent surge in the greenback.  To the downside, 1.2165 provides initial support and the 1.2000 remains a key price barrier.

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