government shutdown

FX Daily: Government shutdown averted

The dollar continues to claw back some of Tuesday's losses after US October retail sales suggested that the consumer is still spending. Also helping has been the Senate's support of a stop-gap funding bill that kicks the risk of a government shutdown into 2024. Expect more rangy price action in FX markets today, with the focus on speakers and US claims data.

USD: Bouncing around

The dollar is drifting higher as investors continue to assess whether the large drop on Tuesday was the start of something meaningful or just more noise in an uncertain environment. We have heard a couple of Federal Reserve speakers still holding out the risk of a further hike, but for the time being, US money markets seem pretty confident that the Fed cycle is over and have now priced 90bp of easing in 2024. Yesterday's release of US October retail sales failed to kindle this week's dollar bear trend and the Senate's support for a stopgap funding bill has removed the

Hawkish Tail Risks Loom in Rates Markets Amid Central Bank Decisions and Inflation Concerns

Hawkish Tail Risks Loom in Rates Markets Amid Central Bank Decisions and Inflation Concerns

ING Economics ING Economics 19.09.2023 13:34
Rates Spark: Hawkish tail risks The week kicked off with a bearish tone in rates markets, with key central bank decisions just ahead. Ever-rising energy costs only add to fears that the inflation fight is not yet decided. ECB hawks offered more pushback against an overly dovish interpretation of last week's hike, and the focus is shifting to other means of policy tightening than just rates.   A bearish tone in markets to start the week, and a renewed discussion of the ECB balance sheet Ahead of the key Fed and Bank of England meetings, the week kicked off with a bearish tone in rates. It was, in particular, the front end that showed weakness in the US, with the 2Y US Treasury rate pushing further above 5%. The outlier was the UK, where it was more the belly of the curve and rates further out that led rates higher – perhaps it is the “Table Mountain” comparison used by the BoE’s Chief economist gaining more attention. But more broadly speaking, it could also be markets bracing for more hawkish tail risks to their longer views. With a view to the European Central Bank, which had signalled that rates had reached a level which, if held long enough, would make a “substantial contribution” to reaching the inflation goals, markets are having second thoughts about their initial dovish interpretation. Oil prices are pushing higher, EUR market-based inflation expectations, i.e., longer-term inflation swaps, are not coming down, and real interest rates still remain well below the July highs. The decline of the latter, Isabel Schnabel had cautioned ahead of the European Central Bank's meeting, could counteract the ECB’s inflation-fighting efforts. So it may not be all that surprising to see the ECB’s hawks come to suggest it was too early to call the peak, with some also suggesting now is the time to think about speeding up the reduction of the balance sheet. If rates contribute substantially to reaching the inflation target, can the balance sheet provide the minor remainder that is needed?   Next to the ECB officials’ remarks, the key piece of news yesterday was a Reuters background story that the ECB wants soon to tackle the high level of excess reserves in the banking system. Basically, there are two ways this could be done, either via raising the minimum reserve requirement for banks or via the speeding up of quantitative tightening.      According to the article, several policymakers favour raising the reserve ratio from the current level of 1%, which currently is equivalent to around €165bn, to closer to 3% or 4%. As the ECB recently also decided to drop the remuneration of required reserves to 0%, it would also have the benefit of reducing the ECB’s interest rate costs. Most saw room to phase out the Pandemic Emergency Purchase Programme (PEPP) by ending the portfolio’s reinvestments earlier. But all were 'nervous' about the potentially negative impact on sovereign spreads. The argument against outright selling of the other portfolios under the Asset Purchase Program (APP) was that it would crystallise mark-to-market losses, highlighting the ECB’s concern with interest rate costs. Perhaps the article's main take-away on quantitative tightening is that any decision might not come this year and would take effect only in “early 2024 or even later in the spring”.   The ECB still has work to do   Today's events and market view In terms of outright direction, the sell-off in Bunds could slow with 10y yields having pushed above 2.70%, which could also mean that the curve flattening has more room yet. Elsewhere, US politics, with a potential government shutdown and strike action, is muddying the outlook for US rates. It could also imply a bit more caution from the Fed. Data today includes final CPI data out of the eurozone and in the US housing starts and building permits data for August. In government bond primary markets, Finland will tap 7y and 10y bonds for €1.5bn in total. Outside the eurozone, the UK will tap the 30Y Gilt for £2.75bn and later in the day, the US Treasury taps the 20Y bond for US$13bn.    
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 
Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Asia Weakness Sets Tone for Lower European Open on 26th September 2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 26.09.2023 14:41
05:40BST Tuesday 26th September 2023 Asia weakness set to see lower European open By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA. Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while US data is proving to be more resilient.   Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources. The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one week low.   US markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as US 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as US stocks closed higher for the first time in 5 days. The US dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the US economy. The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the US, as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.   On the data front today the focus will be on US consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows. The late rebound in US markets doesn't look set to translate into today's European open with Asia markets also sliding back on the same combination of stagflation concerns and reports that Chinese property company Evergrande missed a debt payment.   Another warning from ratings agency Moody's about the impact of another government shutdown on the US economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the US dollar as well as yields.     EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1.0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.      GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.       EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.     USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.     FTSE100 is expected to open at 7,624     DAX is expected to open at 15,405     CAC40 is expected to open at 7,124  
Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Stocks Down, USD Up Amid Looming Government Shutdown Concerns

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.09.2023 13:04
Stocks down, USD up By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     Investors continue to dump stocks and buy US dollars on looming uncertainty regarding whether the US government will be shut in three days. There is progress regarding a 6-week short-term funding deal, but getting an approval from the Senate will be a challenge. In the meantime, falling savings, rising theft and delinquencies hint at the growing cost-of-living crisis whereas the central banks' inflation fight is certainly not over just yet.  The looming government shutdown talks continue feeding into a stronger US dollar. US politicians have agreed to a 6-week short-term funding to keep the government running for another month and a half, but getting approval from the full Senate will be a challenge with far-right Republicans' determination to 'shoot it down if it reaches the floor'.   The S&P500 fell to the lowest levels since the beginning of June and the Stoxx 600 could slip below 445 due to slowing European activity, waning Chinese demand, the European Central Bank's (ECB) pledge to keep the monetary policy tight until inflation comes down significantly. The euro's depreciation makes inflation harder to ease along with rising energy prices.     After a few sessions of consolidation, and despite a more than 1.5-mio-barrel build in US crude inventories last week, US crude is upbeat this morning, again. The barrel of American crude is trading above the $92 level, as the European nat gas futures flirt with the 200-DMA. The EURUSD lost around 6.5% since the July peak. Oversold market conditions call for consolidation, or recovery, yet appetite in the US dollar remains too strong to let the other currencies breathe. And if this is not enough bad news, the EU is now investigating the degree to which China has subsidized EV manufacturers. Tesla is clearly in a hot seat, but not only. Some European carmakers including Renault and BMW also have joint ventures in China and will be probed. The cherry on top, VW announced to cut EV output at German sites due to lacking demand. All this to say, there is little place to go in the market other than the FTSE 100, which could at least take advantage of the energy rally.     The combination of higher energy and stronger dollar has well pushed inflation in Australia to 5.2% in August, up from 4.9% printed a month earlier -which was a 17-month low. We could see a similar upturn in global inflation metrics due to rising oil prices. The Eurozone data will soon be coming in. Unfortunately for the Aussie, the uptick in inflation won't prevent it from getting smashed against the US dollar. The pair will likely test and take out the September support of 0.6360
Franc Records 11th Consecutive Daily Decline Against the Dollar as US Economic Concerns Mount

Franc Records 11th Consecutive Daily Decline Against the Dollar as US Economic Concerns Mount

Ed Moya Ed Moya 27.09.2023 13:41
Franc posts 11th straight daily decline versus the dollar US consumer confidence falls to 4-month low 10-year Treasury yield rises 1.2 bps to 4.546% The relief rally was not meant to be for risky assets, but that didn’t seem to matter for USD/CHF.  The US dollar is rallying after consumer confidence fell to 4-month low, new home sales had their largest drop in almost a year, while S&P Corelogic Case-Shiller reported home prices rose to a record high. The economy sure looks like it might break, and it could easily get a lot worse if the Fed needs to take rates much higher.  The dollar is higher on both safe-haven flows and fears the Fed might not be done.   JPMorgan CEO Dimon warned that the Fed might not be done raising rates, highlighting that he is not sure the world is prepared for 7% along with stagflation.  The Dow is having its worst day since March, and it won’t take a lot for momentum selling to heat up.  A government shutdown seems likely as lawmakers are nowhere close to agreeing on deep spending cuts and how much aid should go to Ukraine. A stopgap solution is losing momentum and it seems that House Speaker McCarthy might lose his position as hard-right Republicans are not budging.  The worse the economic outlook becomes; the lower Fed rate hike odds should get but inflation is proving to be tricky here.  Wall Street won’t be able to say the peak is in place and that the disinflation process will remain if we are seeing record house prices, surging oil prices, and a surging dollar. US Data The economy is headed towards a rough patch if you believe the Conference Board’s latest consumer confidence report.  Given how high gas prices are becoming and the record prices it takes to buy a house, the consumer isn’t feeling too good.  Corporate stress is here and as credit conditions tighten further, the labor market is ready to weaken.  The Expectations survey plunged from 83.3 to 73.7, which is below the 80 level that typically signals a recession is coming.        USD/CHF Daily Chart     USD/CHF (a daily chart of which is shown) as of Tuesday (9/26/2023) has been locked into a very strong bullish trend.  Price action is close to hitting 0.9161 level, which is the 38.2% Fibonacci retracement of the 1.0150 to 0.8550 downward move.  If bullish momentum remains intact key resistance lies at the 0.9350 level.  Major support lies at the 0.89o0 level.  
EUR/USD Faces Ongoing Decline Amid Budget and Market Turbulence

EUR/USD Faces Ongoing Decline Amid Budget and Market Turbulence

InstaForex Analysis InstaForex Analysis 27.09.2023 14:05
EUR/USD A significant decline in stock markets, gold, and several commodities on Tuesday helped boost the counter-dollar currencies as investors await the budget-parliamentary crisis in the United States. Yesterday, the S&P 500 lost 1.47% and gold dropped by 0.88%. Yields on 5-year U.S. government bonds edged up, but this only confirms the investors' bets on a budget "short squeeze." This is particularly noticeable against the backdrop of reduced attention to the "government shutdown." The euro has been declining for the eleventh consecutive week. From a technical perspective, a turbulent correction begins after twelve weeks of either rising or falling. This pattern is rare; the last time it occurred with the euro was in the summer and fall of 2014 during the height of the European crisis, with a caveat related to the candle of the second week of September. Prior to that, with a similar caveat, the pattern occurred in the fall of 2004 when the euro rose for 11 consecutive weeks.     On the daily chart, the price has come very close to the magnetic intersection point of three lines: the Fibonacci ray, the Fibonacci channel line, and the target level of 1.0552. The signal line of the Marlin oscillator is in no hurry to exit the wedge. In the eleventh week, the price may still dip below this support, but in such a situation, time becomes the main factor - Monday of the following week.   On the 4-hour chart, the Marlin oscillator has turned the convergence into a wide range within a downtrend. The price has approached the lower band of the 1.0552 range and may now edge up. One reason for the rise could be a decrease in orders for durable goods in the United States, expected at -0.5% for August.      
Long-Term Yields Soar Amidst Hawkish Fed: Will They Reach 5%?

Long-Term Yields Soar Amidst Hawkish Fed: Will They Reach 5%?

Saxo Bank Saxo Bank 27.09.2023 15:27
Long-term yields are likely to continue to soar for as long as the Federal Reserve can convince markets it won't need to cut rates aggressively in the foreseeable future. Yet, the intensity of the recent rise in yields calls for a correction, which may come with a government shutdown at the end of the week. Before that, our focus is on the seven-year auction on Thursday, a tenor typically disliked by investors, which could accelerate the bond selloff but may also temporarily halt the rise in yields if investors' demand proves strong.   As bonds continue to tumble, the US Treasury benchmark becomes more appealing, paying the highest yield in over a decade while protecting against the risk of a recession. While ultra-long bonds also provide an attractive risk-reward ratio, we remain cautious about duration and prefer the front part of the yield curve. The intense selloff in long-term US Treasuries comes on the back of last week's FOMC meeting. The market realizes that the "higher-for-longer" message sets a reference point for the whole US Treasury yield curve. Suppose the Fed's economic projections are correct in showing that the economy will remain resilient, unemployment will stay well below the 2010/20-decade average, and inflation will gradually decrease. In that case, there is no reason for the Fed to cut rates aggressively as the market would expect amid a recession. Hence, the 10-year yields will need to price over a much higher expected Fed fund rate.   After the SVB debacle in March, 3-months SOFR futures were pricing rates to fall to 2.7% by the end of 2024. Investors now see the Fed cutting rates only to 4% in the next three years, building a much higher floor for 10-year US Treasury yields, which need to provide a premium above this level. Therefore, the recent move of 10-year yields breaking above 4.5% is justified. The question is whether yields will rise to test 5% and break further up or stabilize below, trading rangebound for a while. Although it's impossible to answer this question accurately, we can look at technical analysis to gauge the intensity of the current momentum to understand better how long it may last. The RSI has been slightly declining while the 10-year yield uptrend continued, indicating that the uptrend is weakening and a slight correction might be due. Therefore, it's fair to expect yields to test support at 4.42% in the short term before resuming their rise and setting above 4.5%, trading rangebound for some time. How high yields can rise above this level depends on how long the economy allows the Fed to keep its hawkish posture. If the signs of a shallow recession don't appear before the end of the year, yields might continue to rise towards 5%. Yet, if economic data get increasingly mixed, it would be fair to see yields trading rangebound well below this level.     This week’s US Treasury auctions will set the tone before a potential government shutdown The $134 billion auction of two, five, and seven-year notes may remove or apply further pressure on long-term Treasuries. Understanding whether demand remains resilient as auction sizes have increased across longer tenors will be critical. Investors’ appetite for the 7-year notes, one of the least liked tenors together with the 20-year, will be particularly important as foreign investor demand has dropped significantly this year, with indirect bidders taking only 13.4% of the issue in 2023 compared to 16.8% in 2022. At the August 7-year auction, domestic buyers came to the rescue of disappointing foreign bidders' demand. Still, if domestic demand wanes too, it may mean that investors are positioning for a further bear-steepening of the yield curve, demanding a higher term premium. On the contrary, if the appetite for the belly of the yield curve increases, it may imply that investors are beginning to position for a bull-steepening, putting a temporary ending to the bond selloff that has taken place after last week's FOMC meeting.   A government shutdown may be beneficial for US Treasuries Contrary to what many believe, a potential government shutdown and downgrade from Moody's may cause US Treasuries to rally rather than plunge. A government shutdown will inevitably be a drag on economic growth and will push the unemployment rate up. The longer the shutdown, the greater the severity on the economy. A quick deterioration of the economic backdrop might create an uncertain economic environment for the Federal Reserve’s November 1st meeting, forcing the hand of policymakers to hold rates steady rather than delivering another hike. That will send a positive signal to the bond market as another pause implies that the central bank is finally done with its hiking cycle, provoking a bull steepening of the yield curve. At the same time, considering that S&P and Fitch have already assigned an AA+ rating to the safe-haven, a downgrade from Moody's might be shrugged off by markets reasonably quickly. A downgrade from Aaa to Aa1 would reinforce the valuations of the other two rating agencies.   Long-term bonds: does it make sense to buy at current levels? It depends on your market view and how long you want to hold these securities. If you are a long-term investor, it may make sense to increase duration exposure gradually as yields peak. The modified duration of 10-year US Treasuries (US91282CHT18) is around 8%. Yet, if these securities are held for a year, and meanwhile yields rise by 100bps, the total loss of this position would be -2.5%. If yields drop by 100bps, the total return would be 12%. Assuming that rates are about to peak, the risk-reward profile of the safe haven becomes more appealing as yields soar. When looking at corporate bonds, we prefer quality over junk. As the highest yields in the investment grade corporate bond space are paid in the front and long part of the yield curve, investors might be interested in creating a barbell. Below is an example of well-rated short and long-term USD corporate bonds.    
Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric

Markus Helsing Markus Helsing 05.10.2023 08:31
Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    
Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Not much relief, after all: Markets React to Political Uncertainties and Hawkish Fed Rhetoric - 05.10.2023

Markus Helsing Markus Helsing 05.10.2023 08:31
Not much relief, after all By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Relief that came with the news of a temporary avoidance of a potential government shutdown remained short lived. Sentiment in stocks markets turned rapidly sour, both in Europe and in the US, while the US treasury yields didn't even react positively to the no shutdown news in the first place. The selloff in the US 10-year bonds accelerated instead; the 10-year yield hit the 4.70% mark, whereas the 2-year yield remained steady-ish at around the 5.10% level, as the Federal Reserve (Fed) Chair Jerome Powell didn't say much regarding the future of the monetary policy yesterday, but his colleagues continued to sound hawkish. Fed's Michelle Bowman said that multiple more interest rate hikes could be needed to tame inflation, while Micheal Barr repeated that the rates are likely restrictive enough, but they should stay higher for longer. Sufficiently hawkish words combined to a set of still-contracting-but-better-than-expected manufacturing PMI data justified the positive pressure on US sovereigns.   The gap between the US 2 and 10-year yields is now closing, but not necessarily for 'good' reasons. Normally, you would've expected the short-term yields to ease more rapidly than the long-term yields when approaching the end of a tightening cycle, with the expectations of future rate cuts kicking in. But what we see today is bear steepening where the 10-year yield accelerates faster than the 2-year yield. The  latter suggests rising inflation expectations where investors prefer to buy short-term papers and to wait for the rate hikes to end before returning to long-term papers. The US political uncertainties and a potential government shutdown before the end of the year, and an eventual US credit downgrade likely add an additional downside pressure in long dated US papers.   The rising yields do no good to stocks. But interestingly, yesterday, the S&P5500 closed flat but the more rate-sensitive Nasdaq stocks were up. The US dollar index extended gains past the 107 level; the index has now recovered half of losses it recorded since a year ago, when the dollar depreciation had started.   The AUDUSD extended losses to the lowest levels since last November as the Reserve Bank of Australia (RBA) maintained its policy rate unchanged at the first meeting under its new Governor Michelle Bullock. This is the 4th consecutive month pause for the RBA. The bank said that there may be more tightening in the horizon to bring inflation back to the 2-3% range (inflation currently stands at 5.2%). But the fact that Australians biggest trading partner, China, is not doing well, the fact that real estate market in Australia is battered by rising rates and the fact that the Chinese property crisis is now taking a toll on Australia's steel exports toward China are factors that could keep Australian growth below target and prevent the RBA from hiking further. If China doesn't get well soon, Australia will see its iron ore revenues, among others, melt in the next few years, and that's negative for the Aussie in the medium run.  Elsewhere, the EURUSD sank below the 1.05 level on the back of accelerated dollar purchases and softening European Central Bank (ECB) expectations following last week's lower-than-expected inflation figures. Cable slipped below a critical Fibonacci support yesterday, and is headed toward the 1.20 psychological mark. The weakening pound is not bad news for the British FTSE100, as around 80% of the FTSE100 companies' revenues come from abroad, and they are dollar denominated. Plus, cheaper sterling makes the energy-rich FTSE100 more affordable for foreign investors. Even though FTSE100 fell with sliding oil prices yesterday - and this year's performance is less than ideal compared to European and American - London's stock market is closing the gap with Paris, and rising oil prices and waning appetite for luxury stuff could well offer London its status of Europe's biggest stock market, yet again.  Speaking of oil prices, crude oil sank below $90pb level yesterday, partly due to the overbought market conditions that resulted from a more than a 40% rally since end of June, and partly because the 'higher for longer rates' expectations increased odds for recession.    
Rates Spark: Escalating into a Rout as Bond Bear Steepening Accelerates

Market Jitters: Strong US Jobs Data Sparks Fear of Tightening Labor Market and Rising Yields

Michael Hewson Michael Hewson 05.10.2023 08:54
The fear of strong jobs By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Even a hint of an improving US jobs market sends shivers down investors' spines.  This is why the stronger than expected job openings data from the US spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the US jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep US growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising US yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the US jobs market will continue to loosen.  But the market reaction to yesterday's JOLTS data was sharp and clear. The US 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the US House Speaker McCarthy lost his position after last week's deal to keep the US government open certainly didn't help attract investors into the US sovereign space. The US blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.  In the FX, the US dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in US private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an - God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.   The EURUSD consolidates below the 1.05 level, the USDJPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold.  The barrel of American crude remains under pressure below the $90pb level. US shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak. 
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US Retail Sales Show Resilience in Q3 but Face Potential Slowdown in October

Michael Hewson Michael Hewson 13.11.2023 14:38
  US Retail Sales (Oct) – 15/11 the US consumer has been remarkably resilient for most of this year. with only 2 negative months, in February and March. Since then, consumer spending has been steady, helped by a resilient labour market and inflation that has slowed much faster than elsewhere in the world. Q3 was particularly strong and consistent with gains of 0.5%, 0.8% and 0.7% from July to September. As we head into Q4 this week's October numbers could well see a slowdown in the pace of spending as consumers pare back ahead of the holiday seasons of Thanksgiving as well as the Christmas period. In comments made recently the CEO of Target, one of the US's largest retailers said that consumers were starting to slow the pace of their spending. Expectations are for a decline of -0.5%.     US Government shutdown deadline – 17/11  back on October 1st US lawmakers agreed a 45-day extension that averted a government shutdown, but which ultimately cost House Speaker Kevin McCarthy his job. There are huge differences of opinion on how much money the US is spending in supporting Ukraine in its battle against Russia, while recent events in the Middle East have complicated matters further. With new House Speaker Mike Johnson now in place markets are likely to get increasingly anxious the nearer to the date we get with any new deal likely to be of the variety that saw an extension at the beginning of October. Republicans want to see spending cuts due to concerns over the sharp rises in government debt as well as the rising cost of that debt. Any new deal will need to convince the markets that US debt isn't on an unsustainable upward path.        Birkenstock Q3 23 – 14/11  as IPOs go Birkenstock hasn't had a great time of it, trading consistently below its $46 listing price, the shares fell 12% on the opening day, trading down to $36 although we have since rebounded from those lows. They say timing is everything when it comes to IPO's and we can safely say Birkenstocks timing was off, given the sharp sell-off in October. One thing in its favour is that the business is profitable, with the business seeing total revenue in 2022 of $1.35bn, with net income of $202.8m. When the accounts were released prior to the IPO the revenues for the 9-months to June were estimated to be $1.2bn, and on course to beat last year's total revenue number. The money raised by the IPO as allowed the company to repay $550m in loans, reducing its total debt to €1.31bn. Will this week's Q3 numbers give the stock a decent leg up?            
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Rates Spark: Evaluating the Likelihood of a Shift in the Rate Cycle

ING Economics ING Economics 16.11.2023 11:06
Rates Spark: Shifting the rate cycle discount How convinced are we that the Fed has peaked? You can never be 100% sure on this, but the odds firmly favour the view that they’re done. That places rate cutting on the radar. Ahead of that, market rates tend to ease lower.   Have market rates peaked in the United States? Most probably yes The US 10yr has gapped below 4.5% in the wake of the CPI report – immediate impact effect. It did feel like Treasuries were waiting for this report before making any conclusive subsequent move having had a look below 4.5% twice and each time finding an excuse (good ones though) to get back above. Although the headline inflation rate is now 3.2%, the caveat is that core is still at 4% (even if lower than the 4.1% expected). But the path is positive, and that’s what the market rates are extrapolating. It is still not clear that market rates should capitulate lower from here though. Tuesday’s CPI report was great. But the absolute numbers mean there is still some inflation reduction work to get done. There will be an interesting supply test next week from the 20yr auction, which will be watched following the badly tailed 30yr one last week (the main reason we gapped higher again in yields). On the front end, the 2yr is back in the 4.85% area, having been above 5%. This is an easier sell. A big move lower is likely here. It’s only a matter of when – typically it’s about 3 months before an actual cut. Not quite at that point, but it will be there as a theme over the turn of the year. Breakeven inflation has also moved lower post the number. But real yields are lower by more – by over 20bp in the 10yr (now 2.2%). Real yields are still elevated though, and reflective of macro resilience and the fiscal deficit. That’s a resistance that can remain an issue for longer tenor market rates. Ongoing dis-inversion and a steeper curve ahead.   Today's events and market view The CPI data gave the market the green light to drop the 10Y US yield back to just below 4.5%. EUR rates were pulled lower alongside, bull flattening with the 10Y Bund yield touching 2.6%. This level held twice last week, having marked the lowest yield since mid September. Today’s calendar features more data that could feed the bullish sentiment. We will get the US producer prices and  we will likely also see softer retail sales data, where gasoline prices will have depressed values of sales. But as our economists point out, vehicle sales were down on the month and that credit card spending has been subdued, also pointing to a soft spending number. In the eurozone, markets will be looking at industrial production data, pointing to a worsening situation in the sector. With a view to the risk of a government shutdown, there are signs that the Speaker's interim plan that continues government funding at current levels until early next year has some support among Democrats. In primary government bond markets Germany will tap two 30y bonds for €2bn in total.
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
Rates Spark: Time to Fade the Up-Move in Yields

US Market Outlook: Retail Sales, Big Retail Earnings, and Political Jitters Set the Stage - 16.11.2023

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.11.2023 11:16
Back to US: retail sales, Big Retail earnings & US political jitters   Yesterday's rush to open fresh long US Treasury positions was likely intensified by a hurry to cover short positions. We shall see a correction in the US yields, as the Fed members still maintain their position for 'higher for longer' interest rates. But the market position is clear. The pricing now suggests a 50bp cut from the Fed by July next year; the sweet and sour cocktail of softening jobs market and easing inflation suggests that the Fed's next move will probably be a rate cut, rather than a rate hike.   So yes, ladies and gentlemen, the way is being paved for a potential Santa rally this year. But the Fed will continue to calm down the game, and any strength in the US economic data should reinforce the 'high for long' rhetoric and tame appetite.  Investors will watch the US retail sales data today. A strong figure could pour cold water on heated Fed cut bets. A soft figure, on the other hand, could bring in more buyers to US bond markets.   On the individual front, Home Depot shares rallied more than 5% yesterday. Earnings and revenue narrowed and the company released a cautious year-end guidance, but the results were better than expected. Target is due to report today, and Walmart on Thursday.  To add another layer of complexity – on top of the economic data and corporate earnings – the US political scene will impact bond pricing in the next few days. The US politicians try to avoid a government shutdown by Friday. The latest news suggests that the odds of shutdown diminished yesterday as House Speaker Mike Johnson gained more Democratic support for his interim funding plan. The interim plan however excludes aid for Ukraine, aid for Israel and could lead to a two-step shutdown at the start of next year. And it does not include the steep spending cuts that the hardcore Republicans are looking for. In summary, the political mess continues.   In the best-case scenario, the US politicians will agree on another short-term relief package and avoid a government shutdown, push away the threat of another rating cut – from Moody's this time. The latter would maintain appetite in US bonds and support a further rally in the US stocks. In the worst-case scenario, the US government will stop its operations by the end of this week and the political chaos will lead to a bounce in US yields and stall the equity rally.   
Market Digests Optimistic Fed Outlook: Soft Economic Data Supports 'Soft Landing' Scenario

Market Digests Optimistic Fed Outlook: Soft Economic Data Supports 'Soft Landing' Scenario

ING Economics ING Economics 16.11.2023 12:00
Happily digesting By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was about digesting Tuesday's softer-than-expected US CPI data, feeling relieved that the US Senate passed a stopgap spending bill to avert a government shutdown and welcoming a softer-than-expected producer price inflation, and a softer-than-expected decline in US retail sales – which came to support the idea that, yes, the US economy is probably slowing but it is slowing slowly, while inflation is easing at a satisfactory pace.   The sweet mix of the recent economic data backs the idea that the Federal Reserve (Fed) could achieve what they call a 'soft landing' following an aggressive monetary policy tightening – and more importantly stop hiking the interest rates.   At this point, investors are 100% sure that the Fed won't hike rates in December. They are 100% sure that the Fed won't hike rates in January. There is more than a quarter of a chance for a rate cut to be announced by March. And the pricing suggests that there is a higher chance for a rate cut in the Fed's May meeting, than not.   Conclusion: investors threw the Fed's 'higher for longer' mantra out of the window this week.   BUT this is certainly as good as it gets in terms of Fed optimism. If the markets go faster than the music, the Fed must calm down the game by a tough talk, and if needed, by more action. The Fed's Mary Daly expressed her concerns about the Fed's credibility if it declared victory over inflation prematurely. And credibility is the most important tool that a central bank has. When the credibility is broken, there is nothing to break.    
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Tide Turning: Dollar Recovers as Government Shutdown Is Averted

ING Economics ING Economics 16.11.2023 12:05
FX Daily: Government shutdown averted The dollar continues to claw back some of Tuesday's losses after US October retail sales suggested that the consumer is still spending. Also helping has been the Senate's support of a stop-gap funding bill that kicks the risk of a government shutdown into 2024. Expect more rangy price action in FX markets today, with the focus on speakers and US claims data. USD: Bouncing around The dollar is drifting higher as investors continue to assess whether the large drop on Tuesday was the start of something meaningful or just more noise in an uncertain environment. We have heard a couple of Federal Reserve speakers still holding out the risk of a further hike, but for the time being, US money markets seem pretty confident that the Fed cycle is over and have now priced 90bp of easing in 2024. Yesterday's release of US October retail sales failed to kindle this week's dollar bear trend and the Senate's support for a stopgap funding bill has removed the risk of a dollar bearish government shutdown at midnight on Friday. Where does that leave us? Confidence that the Fed tightening cycle is over should be positive for the rest of the world currencies - especially those that are very sensitive to higher interest rates. Yet with overnight rates in the US at 5.4%, the dollar is an expensive sell and the bar is high to invest elsewhere. That is why - as we conclude in our 2024 FX Outlook: Waiting for the tide to come in - the dollar bear trend is going to take some time to build and its more intense period may not be until 2Q24. For today, the focus will be on the weekly jobless claims data and industrial production. Any spike in jobless claims could hit the dollar. We also have a few Fed speakers today - most from the hawkish end of the spectrum.  Look for DXY to trade in something like a 104.00-104.85 range for the short term.  

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