On Thursday (October 15th) during the European session, the US dollar index briefly touched an 18-month high within two trading days, but subsequently reversed course and fell back, currently down 0.44% at 102.05. Meanwhile, US Treasuries have recently seen buying interest, with the 10-year Treasury yield falling to 5.055% and the 30-year yield to 5.391%, both reaching three-week lows. The core focus of this week's trading has been the decline in US Treasury yields, or rather, bottom-fishing in US Treasuries. Besides a slight downward revision of long-term US economic growth expectations by the market, the core factors driving this US Treasury rally are the rapid cooling of expectations for an October rate hike and safe-haven buying in US stocks. This round of CPI increases is mainly driven by external geopolitical shocks to energy prices, rather than endogenous inflation driven by wages. Coupled with "nominally high retail sales but weak real consumption," the market judges that the Federal Reserve does not need to tighten immediately. At the same time, concerns about AI sector debt led to a sharp drop in US stocks, with safe-haven buying flowing into the bond market, coupled with the concentrated liquidation of previous US Treasury short positions, all contributing to the decline in US Treasury yields. The euro and pound sterling rebounded, with the euro recovering from a recent low to 1.1207, its largest single-day gain in nearly two months. Market funds shifted towards safe havens, with concerns about AI sector debt suppressing risk assets. Funds flowed into US Treasuries, and declining yields weakened the dollar's interest rate advantage. This, coupled with crowded long positions in the dollar previously, triggered profit-taking. Kit Juckes, Chief FX Strategist at Societe Generale, commented that the market is currently in a tug-of-war between bulls and bears. The dollar's previous significant gains and overcrowded long positions created a need for a correction, but economic data could reverse the trend at any time. Before the release of retail and PPI data, the exchange rate is likely to remain volatile.

CPI briefly boosted expectations of an interest rate hike, but comments from Federal Reserve officials quickly cooled down.

The rise in September's CPI year-on-year briefly boosted the market's probability of an October rate hike to 50%. However, several Federal Reserve officials collectively expressed a cautious stance, with Daly and Bowman both suggesting that more complete economic signals were needed and that an immediate rate hike in October was unnecessary. This led the market to quickly lower its bets on a rate hike that month. Khoon Goh, head of Asia research at ANZ Bank, analyzed that although the CPI was slightly stronger than expected, the data was not strong enough to force the Fed to raise rates immediately in October. Coupled with the October policy meeting being close to the midterm elections, policymakers are inclined to wait and see, and the market will not aggressively price in a rate hike in October. Traders interpret this round of inflation rebound as mainly due to external shocks from energy prices such as gasoline, rather than endogenous inflation driven by an overheated US economy, which is insufficient to force the Fed to tighten hastily.

Retail sales figures exceeded expectations, but underlying concerns remain about the consumer fundamentals.

US retail sales rose 0.8% month-over-month, seemingly stronger than expected, but the growth was mainly driven by rising gasoline prices, a price effect rather than an increase in the volume of physical goods purchased. Core retail sales, excluding gasoline and automobiles, only rose slightly, with a significantly weaker growth rate. With wages continuing to decline, residents' actual purchasing power is under pressure, and consumption is relying more on depleting savings and using buy-now-pay-later credit tools. Data from the Bank of America Research Institute shows that the usage rate of buy-now-pay-later is rising, with nearly one-fifth of related households owing more than $500, indicating that consumption pressure is gradually being transmitted to the household sector. Low-income groups are becoming more conservative in their consumption, and the Beige Book also confirms weak consumption growth in most regions. This consumption resilience supported by price increases is unsustainable. Macroeconomists predict that the annualized growth rate of consumer spending in the third quarter will be around 3.4%, lower than the 3.8% in the second quarter, increasing the risk of a slowdown in domestic demand and limiting the upside potential of the US dollar.

Federal Reserve Beige Book Consumer Signals

The Federal Reserve's Beige Book survey indicated that consumer spending in most districts across the U.S. remained virtually unchanged from late August to early October, with lower-income customers exhibiting more cautious spending behavior, confirming a weakening of endogenous consumer spending momentum. This offline business survey result further corroborates the institutions' assessment of insufficient consumer spending potential.

Summarize:

The core logic behind this dollar pullback is not the disappearance of inflationary pressures, but rather the market's understanding of the structural characteristics of the data: exogenous energy inflation is pushing up prices, but weakening domestic demand and wages are resulting in insufficient endogenous inflationary momentum. The general consensus among institutions is that the market is awaiting Fed official Warsh's speech at the IMF and World Bank annual meetings in Bangkok to further assess the Fed's interest rate path; his remarks will continue to dominate the dollar and US Treasury market. The decline in US Treasury yields has weakened the US's interest rate advantage relative to overseas markets, coupled with the unwinding of crowded long positions, causing the dollar to retreat from its highs. In the short term, the dollar will repeatedly oscillate between inflationary risks and slowing domestic demand. Technically, previous articles have consistently pointed out that the dollar index is under pressure from measured gains and a correction is highly probable. It remains to be seen whether readers have capitalized on this opportunity. Currently, watch for support around 101.8. (US Dollar Index Daily Chart, Source: FX678) At 21:34 Beijing time, the US Dollar Index is currently at 102.05.