Treasury Yields

Rates Spark: Treasuries need better than the consensus CPI outcome

Markets are awaiting Tuesday’s US CPI release which should give confirmation that the disinflation trend continues. But that's not enough, as a consensus month-on-month outcome would still be a tad too hot for comfort. Looking further ahead, foreign buyers aren't absorbing large UST supply, putting upward pressure on term premium.

 

US CPI inflation will fall, but Treasury yields are still at risk of rising

We're a bit troubled about Tuesday’s CPI report. On the one hand, year-on-year rates will fall, with practical certainty. That's because of a base effect. For January 2023 there was a 0.5% increase on the month, so anything less than this will bring the year-on-year inflation rate down, for both headline and core.

So why are we troubled? It's the size of the month-on-month increases. Headline is expected at 0.2% and core at 0.3% MoM. The 0.2% reading is just about okay, especially if it is rounded up to 0.2

Debt Ceiling Drama! How the Bond Market Reacts and What It Means for Rates

Debt Ceiling Drama! How the Bond Market Reacts and What It Means for Rates

ING Economics ING Economics 30.05.2023 08:38
Rates Spark: Debt ceiling deal adds to bond angst A deal to raise the US debt ceiling increases selling pressure on Treasuries, but will also result in tighter financial conditions for the economy. This opens upside to EUR rates but a soggy economic backdrop means wider rate differentials near-term.   Once approved, the debt limit deal paves the way to a liquid crunch  The deal between President Biden and House leader McCarthy amounts to the removal of a tail risk for financial markets, that of a US default. Even if this was a tiny probability event to begin with, it'll allow markets to focus on the more important debate: whether the Fed is indeed done with its hiking cycle. The budget deal, which lifts the debt limit for two years and caps some categories of government spending, still needs to be approved by the House tomorrow.   The outcome of the vote is uncertain but the likely opposition by some Republicans means Democrat votes will be key. We expect the run-up to the vote to see Treasury Yields gradually climb higher if more lawmakers come out in favour of the deal.   Money markets can expect a $500bn liquidity drain over the coming months Beyond tomorrow, US rates will quickly look past the deal and turn their attention to the Treasury's task of rebuilding its cash buffer at the Fed. Two aspects matter here. On the liquidity front, money markets can expect a $500bn drain over the coming months as more debt is issued. In a context of $95bn/month Quantitative Tightening (QT) and of likely tightening of at least some banks' funding conditions, this should amount to an additional drag on financial conditions for the broader economy.   This should ultimately draw a line under the US Treasury selloff but, should the new borrowing come with an increase in maturity, some of that support may be weakened.   The case for a June hike has strengthened after Friday's higher than expected core PCE print and Treasuries are set to trade softly into Friday's jobs report as recent prints have demonstrated the labour market's resilience. 4% yield for 10Y now seems a more achievable level.   Weak European data prevents EUR rates from rising as fast as their US peers        
Chinese Soybean Imports Surge as Brazil Lowers Production Estimates

Crude Prices React to Disappointing China Stimulus Efforts, While Gold Bears Dominate Amid Hawkish Fed Expectations

Ed Moya Ed Moya 21.06.2023 08:37
Crude prices are lower on disappointment with the size of cuts with China’s key lending rates. ​ Oil seems locked in on anything and everything that has to do with China. ​ Last week, oil was supported by improving Chinese refiner quotas. ​ This week, energy traders are seeing oil weakness emerge on disappointing stimulus efforts. ​   WTI crude looks like it is starting to find some decent support at the $68 region and that should hold as long the Fed does spook markets that they might be ready to deliver more than two additional rate hikes. ​     Gold The gold bears are in control and momentum selling doesn’t seem to care that stocks are softer and as Treasury yields come down. ​ Wall Street is still thinking that the Fed will only deliver one more quarter-point rate rise but no one wants to be long gold before what will likely be a shortened week of hawkish Fed speak. ​ Fed Chair Powell will defend his FOMC performance. Fed’s Waller will stick to his stance of supporting further hikes. ​ Fed’s Goolsbee might be closer to supporting a pause. ​ A temporary rebound in housing data might push Fed’s Bowman might wait to see if that impacts the trend of lower rents. ​ ​ Fed’s Mester has been a true hawk and probably won’t say she sees a reason to pause rate hikes. ​ Fed’s Bullard will likely confirm he still supports two more rate hikes. ​ If gold selling accelerates, it could get ugly as major support won’t appear until the $1900 region. ​  
US Retail Sales Mixed, UK Inflation Expected to Ease: Impact on GBP/USD and Monetary Policy

Dollar Weakens as Inflation Cools, Apple Makes History with $3 Trillion Market Cap

Ed Moya Ed Moya 03.07.2023 10:12
Dollar weakens as inflation cools Apple reaches historic $3 trillion market cap Fed rate hike bets eye a peak at 5.410%   US stocks are rallying after the Fed’s favorite inflation gauge showed the disinflation process remains intact and the consumer is showing signs of weakness. A hot inflation report and Fed swaps might have been convinced that a second-rate hike by year end was likely.  Treasury yields edged lower after the PCE report was a little dovish. US Data The core personal consumption expenditure index, a key reading followed by the Fed rose 0.3% in May, matching the consensus estimate.  On annual basis, the PCE reading dropped from 4.7% to 4.6%.  Personal spending came in softer at 0.1%, while the prior reading was revised lower from 0.8% to 0.6%.  The consumer is starting to look a lot weaker and that should support inflation to drop even further over the coming months.   Apple Apple is attempting to become the first $3 trillion company as Wall Street remains all-in on mega-cap tech stocks.  Last month, Apple’s capitalization became more valuable than the entire Russell 2000 and it seems like that could widen further.  Apple got a boost after Citi raised their price target to a Street-high price of $240.  Apple’s outlook remains solid given their balance sheet and future revenue projects, but these latest gains might be more of a defensive switch for traders who see a US economy that is recession bound.    
EUR/USD Analysis: Low Volatility Ahead of US CPI Release, Market Players Brace for Potential Impact on Risky Assets

Strong ADP Job Gains and Surging ISM Services Index Boost US Economic Outlook User

ING Economics ING Economics 07.07.2023 09:09
ADP shows 497,000 jobs created in June, biggest gains in over a year ISM Services Index makes 4-month high ISM Prices paid declined from 56.2 to 54.1, lowest since March 2020 US stocks extend losses after a hot ADP report and impressive ISM services report raised the odds the Fed might have to do deliver more rate hikes beyond the July FOMC meeting. The dollar pared losses as Fed rate hike odds rose on expectations the NFP report will deliver its 15th straight beat.   ADP The labor market is not loosening at all according to this ADP report.  The headline gain of 497,000 jobs was much higher than the forecast of 225,000 and well above the downwardly revised prior reading of 267,000 jobs.  Leisure and hospitality jobs surged 232,000 as summer job hiring supports the narrative that Americans will be vacationing a lot this summer.  The Fed’s rate hiking campaign is not yet crippling small and medium size businesses, but that should change going into the fall.  ADP Chief Economist Richardson noted, “Consumer-facing service industries had a strong June, aligning to push job creation higher than expected. But wage growth continues to ebb in these same industries, and hiring likely is cresting after a late-cycle surge”. The ADP report also includes coverage on wages, which showed year-over-year pay increase of 6.4%, which was down from 6.6% in May.    Jobless Claims Initial jobless claims for the week ending July 1st rose from 236,000 to 248,000, which was higher than the 245,000 consensus estimate.  Traders might not put a lot of weight with this weekly jobless claims report as it includes noise from the Juneteenth holiday and the summer auto closures.    Trade Data The May trade data showed the deficit narrowed from $74 billion to $69 billion as imports dropped 2.3% and exports weakened by 0.8%. The trade deficit won’t get a lot of attention but it does support the narrative that the economy is slowing down.    Fed Fed’s Logan noted that more rate hikes are necessary to combat inflation. Adding that a challenging and uncertain environment enabled a June pause. The data-dependent Fed will look at the labor market and that should support the case for much more tightening.   JOLTS The JOLTS report suggests the labor market is slowly weakening as job openings fell from 10.3 million to 9.824 million. The quits rate increased from 2.4% to 2.6%, which suggests people are confident they can get new work.   ISM Services Index The ISM Services report showed last month’s soft reading was not the beginning of a deteriorating trend. The ISM Services Index surged in June, rising to 53.9, significantly better than the prior reading of 50.3 and a 51.2 consensus estimate. Prices paid eased from 56.2 to 54.1. The employment component returned to expansionary territory at 53.1. This data suggest the economy still has a lot of strength. Treasury yields surged after the impressively strong ADP report and kept those gains post ISM services.     
Market Digest: Fed Minutes and Employment Data Spark Pessimism, Impacting Global Stock Markets and Currency Pairs

Market Digest: Fed Minutes and Employment Data Spark Pessimism, Impacting Global Stock Markets and Currency Pairs

InstaForex Analysis InstaForex Analysis 10.07.2023 12:01
Global stock markets edge lower amid pessimism sparked by the latest Fed minutes and contrasting employment figures from ADP and the US Department of Labor. Obviously, investors continue to be stirred up by the potential rate hikes by global central banks, primarily the Federal Reserve. The recent private sector employment data from the ADP, which indicated strong growth in new jobs, primarily in the services sector, increased the chances of seeing an increase in rates. However, the situation became uncertain after the US Department of Labor published its official data on the number of new jobs in the non-agricultural sector. Reportedly, employment rose by 209,000, lower than the 225,000 the previous month. Still, this figure remains above the threshold of 200,000, indicating an overall continuing positive pace of employment growth, but with the risk of a significant fall in the future. The currency and commodities markets reacted to the news rather coolly, effectively confirming the theory that the stabilization of US inflation or the resumption of its growth could force the Fed to continue raising interest rates. Latest inflation data from China, Germany, and the US lies ahead, but more focus will be given to the consumer price index in the US. Forecast says the overall figure will fall to 3.1% y/y, but increase by 0.3% m/m. Such figures will boost risk appetite, accompanied by a weakening of dollar as treasury yields fall. The chances of seeing further rate hikes will drop as well.     EUR/USD The pair hit 1.0970. Surpassing this level amid a decrease in US inflation will push the quote 1.1100.   GBP/USD The pair trades at 1.2835. A consolidation above it, which could be spurred by falling US inflation and steady expectations of rate hikes from the Bank of England due to high inflation, may bring the quote to 1.2985.  
Sterling Slides as Market Anticipates Possible Final BOE Rate Hike Amidst Weakening Consumer and Housing Market Concerns

Chinese Authorities Extend Support for Property Development Companies, Global Markets Show Modest Gains

ING Economics ING Economics 11.07.2023 08:27
Asia Morning Bites Chinese authorities extend support for property development conpanies.    Global macro and markets Global markets: Small gains in US stocks yesterday were in line with the early steer from equity futures, but those are not providing much direction today.  Chinese stocks also rallied slightly, helped along by an extension of relief measures for property development companies. Two of China’s financial regulators put pressure on financial institutions to extend outstanding loans to these companies. The measures also specify that project-based loans from commercial banks would not be classified as higher risk, and there was added encouragement for support to enable construction projects to be completed. Treasury yields dropped yesterday. The yield on the 2Y note came down by 8.8bp, while that on the 10Y UST fell 6.8bp to bring it back below 4%. The USD weakened further on Monday and has now pushed above the 1.10 level. The JPY has rallied down to 141.25. The AUD and GBP were more mixed. Both rallied in late trading, which brought the GBP up on the day but left the AUD lower than where it started. The rest of the Asia FX pack was very mixed. But with the exception of the IDR, which weakened by 0.39%, moves were muted.   G-7 macro: There were quite a few Fed speakers doing the rounds yesterday, and the key message was that rates needed to be raised further, probably twice more and then held at those levels to be sure inflation was on the path towards its target. That doesn’t match what we saw happening in bond or currency markets, where you would have expected such comments to be supportive of higher yields and the USD.  ECB comments from Nagel and Herodotou were similarly hawkish, though Nagel believed that a hard landing could be avoided in the Eurozone. Today’s macro calendar has only the German ZEW survey and US NFIB surveys to watch for.   Philippines: May trade data will be out today. Both exports and imports should post double-digit falls with the overall trade deficit likely settling at around $4.8bn. Exports will fall due to soft demand for electronics while imports are expected to contract due to relatively less expensive imported energy.   What to look out for: Philippines trade Australia Westpac consumer confidence and NAB business confidence (11 July) Philippine trade (11 July) South Korea unemployment (12 July) Japan PPI inflation (12 July) New Zealand RBNZ policy (12 July) India CPI inflation (12 July) US MBA mortgage application, CPI inflation (12 July) South Korea trade and BoK policy (13 July) China trade (13 July) US PPI inflation (13 July) Singapore GDP (14 July) Japan industrial production (14 July) India trade (14 July) US import prices and University of Michigan sentiment (14 July)
GBP's Strong Start: Outpacing G10 Currencies Amid Elevated Risk Sentiment

Rates Spark: A Pre-Central Bank Meeting Stretch and Bond Market Analysis

ING Economics ING Economics 24.07.2023 08:40
Rates Spark: The stretch before two key central bank meetings There was some selling of bonds yesterday, and it feels a bit vulnerable here considering the decent total returns recorded year-to-date against all odds given monetary tightening and the future recession risk. There is also a pre-FOMC and pre-ECB theme in the air. Many will wait to get the central bank(s) assessment of things before pulling the trigger.   Long duration buying in the past month morphs to a selling tendency Most of the past month has been dominated by bond buying, typically long duration in nature. The same has been seen in corporates, and there has also been a decent bid into high-yield bonds. A glance at total return year-to-date show some impressive bond market performances, led by higher beta products. There are always profit-taking risks attached to this. A lot of the buying in the past month or so had helped to keep core yields from getting too carried away to the upside. But yesterday more selling than usual was seen for a change, in particular out of Asia. This was a factor in unleashing Treasury yields higher. The low jobless claims number pushed in the same direction, but would not have been enough as a stand-alone to push the 10yr yield from 3.75% to 3.85%. And other data today has in fact been quite muted or negative for the economy. The terminal discount for the funds rate also remains elevated, with the Jan 2025 future still above 3.75%. That keeps the pressure focused on the upside for market rates. The 4% level for the 10yr Treasury yield is firmly in focus here, likely post next week's FOMC outcome; at least we'll likely need to get through that first.   Closing in on cycle peaks With inflation dynamics looking more encouraging, the general notion is that central banks are close to their cycle peaks in terms of tightening. If we look at current pricing, the market is seeing a good chance that the Fed will deliver its final hike of the cycle next week. Historical patterns suggest that a re-steepening of the yield curve led by the front end then followed as recession eventually ensued. And indeed, if it were to go by the Conference Board's Leading indicator, which posted another drop yesterday, we would have been in recession for a long time already.  However, the context looks somewhat different this time, as some parts of the economy still look unusually resilient. And markets are seeing a growing likelihood of a soft landing, which itself limits the drop in front-end rates as less aggressive rate cuts are then needed. On the flip side, that resilience continues to harbour potential upside risks to inflation. And central banks will therefore tread more cautiously and not take any chances. They are sensitive to their poor track records of forecasting inflation in the past and are basing their policies on current inflation dynamics rather than their models.   Curves have reflattened over past weeks, a clear steepening signal remains elusive      
Continued Disinflation Trend in Hungary: July Inflation Figures and Prospects

Fed to Keep up the Squeeze with Another 25bp Hike

ING Economics ING Economics 24.07.2023 09:48
Fed to keep up the squeeze with another 25bp hike The Federal Reserve is set to resume its policy tightening on 26 July. Inflation is moderating but remains well above target and with a tight jobs market and resilient activity, officials may feel they can't take any chances. The Fed will continue to signal the prospect of further hikes, but with the credit cycle turning, we doubt it will carry through.       25bp hike an obvious call After 10 consecutive interest rate hikes over the previous 15 months, the Federal Reserve left the Fed funds target rate unchanged at 5-5.25% in June. While it was a unanimous decision, there was hawkish messaging in the accompanying press conference and updated Fed forecasts, signalling a broad consensus behind the idea of two more rate rises later in the year. Fed Chair Jerome Powell stated that the long and varied lags in monetary policy meant that the decision should be interpreted as a slowing in the pace of rate hikes rather than an actual pause. While inflation is moderating, it is still far too high and with the jobs market remaining very tight, the Fed can’t take any chances. The commentary since then remains consistent with this messaging, with broad support among officials that the 26 July Federal Open Market Committee (FOMC) announcement will be for another 25bp rate rise, taking the Fed funds range to 5.25-5.5%. Fed funds futures contracts are pricing 24bp with economists nearly universally expecting a 25bp hike   Keeping the door open for additional tightening The scenario graphic outlines the options open to the Fed and our sense of the likely market consequences of those actions. The no change and 50bp hike options seem very remote possibilities given comments from officials. The dilemma is whether the Fed hikes 25bp and sticks with the view that it needs to signal the likely need for one or more rate hikes or whether it moves more to a data dependency stance. A data dependency narrative would be a shift in position and lead the market to latch onto the possibility of the Fed not hiking further. This would likely see Treasury yields and the dollar fall quite significantly, which would loosen financial conditions in the economy. Given low unemployment, robust wage growth and the fact that core inflation is still running at more than double the 2% target, this is not something Fed officials would willfully countenance. Consequently, we put a 70% probability on the 25bp hike scenario that includes commentary emphasising the need to be attentive to inflation risks, that growth needs to slow below trend and that further rate hikes “may be appropriate”. We would then say there is a 25% chance of a more dovish 25bp hike, signalling a likely peak for rates, while the 0bp and 50bp outcomes each have a 2.5% chance of materialising.   Tighter lending standards suggest credit growth will turn negative
Central Banks' Rates Outlook: Fed Treads Cautiously, ECB Prepares for Hike

Central Banks' Rates Outlook: Fed Treads Cautiously, ECB Prepares for Hike

ING Economics ING Economics 28.07.2023 08:23
Rates Spark: Can Christine sound as calm as Jerome? The more Chair Powell spoke yesterday, the more he meandered into less hawkish territory. But he did not stray too far. Next up is the ECB's Lagarde, who is more prone to deviate. The 25bp hike is not the point. The tone is. We show that the US 10yr yield looks low relative to the strip, while in fact the 10yr Euribor rate looks if anything high versus its strip.   The Fed cements a mild rate cutting discount ahead, keep upward pressure on Treasury yields From a market rates perspective one of the key things to watch from the Federal Open Market Committee (FOMC) outcome was how the Fed decision and subsequent commentary might affect the Fed funds strip. In particular, beyond the hiking and into the discounting completion of the rate cutting phase. This is important, as where the fed funds strip sits in 2025 has a material effect on longer-dated Treasury yields, as, say the 10yr yield, really should not trade much through the longer dates on the strip. In fact they should trade at a 30bp premium to it (above it). We went into the FOMC with the Jan 2025 implied rate at just under 4%. It’s still there post the meeting, but closer to 3.9% now (as it jumps around, typically on low volumes). Remember this was down in the 3% area when Silicon Valley Bank went down. The fact that its some 100bp higher now limits the extent to which the 10yr Treasury yield can fall. In fact it should rise, and we continue to target it to get to the 4% area in the coming weeks, versus a current level of around 3.9%. That is broadly flat to the implied funds rate in Jan 2025. That’s too low for the 10yr yield, as it implies no curve just as the Fed has completed it rate cutting cycle.     We are not agreeing with the market discount per se, but where it sits is important in terms of framing the here and now for the 10yr Treasury yield, and in that way helps to add context to the immediate few weeks ahead. Meanwhile, the Fed continues to gradually tighten through its bond roll-off programme. Most of the impact of this has been in lower volumes going back to the Fed on the reverse repo facility. Bank reserves have in fact held steady. This allows the Fed to keep the tightening pressure on. It also keeps bills rates under elevation pressure, and prevent the bills curve from moving to a state of material inversion. At least not just yet. And, all other key rates are up by 25bp too, including the reverse repo rate now at 5.3%. The ECB to match the Fed, but the 10yr Euribor rate trade with more of a cushion It's the European Central Bank's turn on Thursday, with a 25bp hike anticipated. Delivery will see the Refi rate get to 4.5% and the Deposit rate to 3.75%, with the latter still heavily influential with respect to where front end Euribor rates are actually pitched. The current 3mth Euribor rate is pitched at just over 3.7%, at or about the level of the deposit rate. And the Euribor strip has it extending up to 3.9%, and so just about discounting one more 25bp hike.   The biggest attention will be centered on the words coming from President Lagarde. Chair Powell post the FOMC outcome started off sticking to script, but slowly morphs to an acknowledgement that inflation has indeed fallen, the real rate had risen and was indeed in a restrictive state. As the conference went on he was almost on the verge of a nod towards an eventual rate cutting track down the line. Lagarde will need to be a bit more careful. Chair Powell tends not to stray too far from script, while Lagarde can deviate far more. If we look out along the Euribor strip, the 3mth rate is discounted to be below 3% by the middle of 2025, and it stays below, getting down to 2.7%. There is a gap between that and where the 10yr Euribor rate currently sits at around 3.6%. Here there is a difference relative to the US, there the 10yr Treasury yield is already flat to or below where the fed funds strip is pitched. Part of this is reflective of the tendency of the deposit rate to have an outsized influence, but it's not all that. Optically there is more value in 10yr Euribor on this simple measure.   Today's events and market views Ahead of the ECB meeting, we'll have some regional consumer confidence, produce price inflation and retail sales. But nothing that is likely to move the market in any material fashion. More influential will be the US data. US GDP data for the second quarter is expected to confirm that the US economy continued to growth at a pace of almost 2%, while the GDP price index is set to fall to about 3%. The latter is a good look, and a reminder of the recent CPI number at the same rate. The core PCE index should be more influential though. It too should fall, but to a still elevated 4%. We'll also get durable orders, which should see a calming in the ex-transportation reading. But still far from a recesionary-type number. The headline should remain elevated, in the area of 1.3% helped by airline orders. We'lll also get another helping of weekly jobless claims, expected to be still in the 230k area, and still well below average. And then there are inventories data which should not be very market moving. Home sales data is expected to be weak, but has had a tendency to surprise to the upside of late. And the the Kansas City Fed Index should be weak too, especially given its aimed at the manufacturing sector where weakness has been in the waters for quite some time now.
The Commodities Digest: US Crude Oil Inventories Decline Amidst Growing Supply Risks

Traders React to RBA Decision, Oil Rally Takes a Break, and Gold Awaits Bond Market Clarity

Ed Moya Ed Moya 02.08.2023 08:52
Traders push back RBA rate hike bets until November WTI and Brent crude implied volatility falls to lowest since 2020 Turkey unloads significant portion of gold holdings The Australian dollar tumbled after the RBA kept rates on hold again and signaled they might be done tightening.  Given most economists expected a hike, aussie-dollar was ripe for a plunge.  US dollar strength also supported the decline after the Treasury increased their net borrowing estimate.     Oil The oil price rally is ready for a break as US stocks soften and the dollar firms up.  August is off to a slow start for energy traders as the outlook on demand could face rising prices.  The oil market will likely remain tight even if the oil giants, like BP start delivering large price increases.  Oil remains one of the most attractive trades and buyers will likely emerge on every dip.   Gold Gold prices are not seeing safe-haven flows as US equities tumble, because the US dollar is catching a bid as yields rise higher.  Gold is going to need to see Treasury yields come down, but that might not happen until the market fully prices all the longer-dated issuance that is coming from the Treasury.  Gold’s moment in the sun is coming, but first markets need to see the bond market selloff end. If bearish momentum remains in place, gold could find major support at the $1940 level. Until we get beyond Apple earnings and the NFP report, positioning might be limited.  
Copper Prices Slump as LME Stocks Surge: Weakening Demand and Economic Uncertainty

Dollar Rises to Three-Week High amid Cooling Labor Market, while Fed Rate Hike Odds Decline

Ed Moya Ed Moya 02.08.2023 08:53
Dollar rises to three-week high (low for euro) as labor market cools Atlanta’s GDPNow index rises to 3.87%, up from 3.55% Manufacturing contracts for a ninth straight month The US dollar pared some its earlier gains after the JOLTS and ISM manufacturing employment component supported a Fed skip in September, possibly confirming hopes that they could be done tightening.  The dollar was rallying against the euro as equities tumbled over mixed earnings and over concerns the US soft landing needs to be confirmed before we return to record levels.   US Data The ISM Manufacturing reported contracted for a ninth straight month, as demand remains weak, but could be showing signs it is bottoming out.  The headline ISM index report came in at 46.4, higher than the 46.0 prior reading, but a miss of the 46.9 consensus estimate.  The prices paid component rose from 41.8 to 42.6, but was below the eyed 44.0 expectation.  New orders improved from 45.6 to 47.3, while employment dropped from 48.1 to 44.4. US job openings declined from 9.616 million openings to 9.582 million, which is the lowest levels since February 2021.  JOLTS data also showed hiring decreased and the quit rate declined.  The quit rate hit fell to 2.4%, the lowest level since February 2021.  The ratio of job openings still makes it a job searcher market as there still remains more than 1.6 jobs for unemployed job seekers .     The labor market is clearly weakening and that is good news for the Fed.  Post ISM Manufacturing and JOLTS, Treasury yields at the short end of the curve gave up some of their earlier gains. The dollar index chart is showing that the dollar rebound over the past few weeks is facing massive resistance at around the 102.50 region.  If the NFP report at the end of the week confirms that the labor market is weakening, the dollar rebound might be over. A dollar floor could be in place as Fed rate hike odds decline and rate cut odds move forward. Fed swaps will likely show  the market is pricing in a coin-flip chance of a rate hike over the next two FOMC meetings or if the market grows more confident that the Fed is done.  
Market Reaction to Eurozone Inflation Report: Euro Steady as Data Leaves Impact Limited

Asia Morning Bites: Trade Data Updates for Mainland China, Taiwan, and More

ING Economics ING Economics 08.08.2023 08:41
Asia Morning Bites Mainland China and Taiwan trade data for July today ahead of China's inflation release tomorrow.   Global Macro and Markets Global markets:  US stocks started the week in better form than they finished the last one, with the S&P 500 rising 0.9% and the NASDAQ gaining 0.61% on Monday. It is not clear that this is going to last though. US equity futures look slightly negative currently, though are wavering around a flat open. Chinese stocks didn’t start the week so well. The Hang Seng was basically flat on the day while the CSI 300 fell 0.76%. After their big post-payrolls fall, Treasury yields didn’t do much on Monday. The 2Y yield was only 0.2bp lower, while 10Y yields rose 5.5pb to 4.088%. The Fed’s Michele Bowman repeated her view that there would need to be more rate hikes, and Williams said he saw restrictive rates for some time. EURUSD is still managing to hold above the 1.10 level but tested the downside on Monday. The rest of the G-10 FX basket was very mixed. The AUD remains flat. Cable made some decent gains, while the JPY has weakened back to 142.45 despite comments from Bank of Japan Governor Ueda that currency was considered when making policy decisions. Most of the Asian FX pack lost ground to the USD on Monday. The PHP weakened by 0.51% on the day, the worst of the pack, but we also saw the CNY losing ground again and pushing above 7.19.   G-7 macro: There were no macro releases of any note on Monday, and it is pretty thin pickings today with final German July CPI data, and the US NFIB survey the main offerings as well as US June trade data.     China:  Trade data for July is expected sometime today. We expect another set of negative year-on-year figures for exports and imports, though we may see the rate of decline abating slightly, and are not expecting exports to contract as much as the consensus expectation for a 13.3% YoY decline, worse than the 12.4% fall for June.   Taiwan:  Further double-digit declines in Taiwan trade figures look likely for July, though we see some signs that the semiconductor cycle may be troughing. That could see some moderation in the rate of decline relative to the consensus and to last month’s figures.   Japan:  Both labour cash earnings and household spending results in June were below the market consensus. The market had expected earnings to improve as April’s wage negotiations were likely to be meaningfully reflected in June’s payment. Instead, labour cash earnings slowed to 2.3% YoY in June (vs 2.9% in May, 3.0% market consensus). Contracted earnings (1.5%) were little changed from the previous month (1.6%) while bonus payments, which are quite volatile month-by-month, rose only 3.5% in June compared to the previous month’s 35.9%. In a separate data report, household spending deepened its contraction to -4.2% YoY in June (vs -4.0% in May, -3.8% market consensus). However, in terms of the monthly comparison, real spending rebounded 0.9% MoM sa in June  - the first rise in five months and real worker spending rose for the second consecutive month. We still think that real household spending will continue to improve in the third quarter, supported by wage growth and a slowdown in inflation.   Philippines:  June trade figures will be reported today.  The market consensus points to a contraction for both exports and imports with the overall trade deficit remaining at a sizable $4.5bn.  Exports will likely revert to negative growth as demand for electronics shipments stays soft amidst weak global demand.  Meanwhile, imports are also likely to contract as energy imports become less expensive.    
China's Ninth Straight Month of Gold Holdings Increase; Oil Resilient Despite Russian Tanker Incident; Dollar Supported by Bond Supply Concerns

China's Ninth Straight Month of Gold Holdings Increase; Oil Resilient Despite Russian Tanker Incident; Dollar Supported by Bond Supply Concerns

Kenny Fisher Kenny Fisher 08.08.2023 08:48
China increased gold holdings for a ninth straight month in July Oil unfazed as Ukraine sea attack Russian oil tanker didn’t lead to a major disruption Dollar supported amidst bond supply concerns; 10-year Treasury yield rises 3.8bps to 4.074%   Oil Crude prices are lower following a surge in the US dollar and as Saudi Arabia anticipates a bumpy road for the crude demand.  The Saudis are raising prices across most of Asia and Europe, with the Arab light crude only being boosted by 30 cents, which was less than the 50-cent rise expected by traders. The initial rally from news that a Russian oil tanker was damaged  only provided a brief rally on Sunday night.  Unless we see a meaningful disruption to crude supplies, prices will remain  Also dragging oil prices down is the rising expectations that the US will see a recession by the end of 2024.  A Bloomberg investor poll showed two-thirds of 410 respondents expect a recession by the end of next year and 20% see one by the end of this year.    Gold Gold prices are struggling here on a strong dollar and as global bond yields rise and after an early round of Fed speak are still supporting the case for one more hike by the Fed. Wall Street is playing close attention to fixed income at the start of the trading week, which saw the bond market selloff cool at the end of last week after a mixed nonfarm payrolls report. If Treasury yields rally above last week’s high, that could trigger some technical buying and that could be very negative for gold prices.  For many traders, this week is all about inflation data and any hot surprises could prove to be short-term bearish for gold.  As earnings season wraps up, stocks have mostly posted better-than-expected results (excluding Apple) and that has hurt the gold’s safe-haven appeal.  At some point over the next few weeks, if the stock market rally can’t recapture the summer highs, a decent pullback could help trigger a big move back into gold.     
Soft US Jobs Data and Further China Stimulus Boost Risk Appetite

Market Insights: Fed's September Decision Hinges on Thursday's Inflation Report Amid Strong Demand for Treasury Notes and China's Deflation Concerns

ING Economics ING Economics 10.08.2023 09:27
Thursday’s inflation report to seal the deal for a Fed hold in September Treasury sells 10-year notes with strong demand as yields drop China deflation raises prospects of more stimulus USD/JPY rose after a strong auction signaled that Wall Street is very confident that inflation will continue to fall. It looks like investors will gladly be eating all the extra issuance that comes from the Treasury. After tomorrow, we will see if traders are nervous that inflation is proving to be a little sticky or overwhelming confident that inflation will fall to the Fed’s 2% target by year end.   Price action is tentatively breaking out above key trendline resistance that has been in place since the end of June.  Further upside for dollar yen could target the 145.00 level, which would be accompanied by some jawboning from Japan.  To the downside, 141.50 remains key support.   Risk appetite should remain healthy as deflation in China is also providing limited optimism that the more stimulus is coming and that disinflation pressures will steadily ease across Europe and North America.  Markets should see some lackluster moves until tomorrow’s US inflation report.       Oil Crude prices are rallying on expectations China will be forced to deliver more stimulus and after the EIA report showed an impressive rebound with diesel and gasoline demand.  The US is also refilling the Strategic Petroleum Reserve (SPR), so that should provide some underlying support. The SPR rose by almost 1 million barrels and should be poised to receive another 2 million before the end of summer. The EIA report was not all bullish as US production rose to the highest levels since March 2020 and crude exports fell to the weakest levels in four weeks. The oil prices should remain supported going forward as OPEC+ remains committed to keeping the market tight and as the Russia – Ukraine war could threaten Russian crude exports.   Gold Gold prices are weakening ahead of a pivotal inflation report that is expected to solidify a Fed hold in September.  Gold’s weakness occurs as Treasury yields edge lower, while European yields rise.  With a softer dollar, gold shouldn’t be weakening this much ahead of a key inflation report. Some big traders must be profit-taking over fears Wall Street will not react kindly to a slight rise with the headline annual inflation reading.      
Europe's Economic Concerns Weigh as Higher Rates Keep US Markets Cautious

US Interest Rate Speculation and Market Sentiment: Insights from July FOMC Minutes and Soft Landing Narrative

ING Economics ING Economics 11.08.2023 14:28
We expect the minutes from the July Federal Open Market Committee (FOMC) meeting will continue to exhibit hawkish sentiments with the Fed wary about signalling an imminent peak in US interest rates, with markets fully embracing the soft landing story. Meanwhile, in the UK, inflation and wage data will be released. US markets have fully embraced the soft landing story Markets have fully embraced the soft landing story in the United States whereby growth is respectable while inflation is slowing nicely, offering the Fed the opportunity to call time on interest rate hikes and eventually cut rates in early 2024 to cushion the economy from a hard landing, as high borrowing costs and tight lending conditions inevitably take their toll. There is a lot that could go wrong though, most notably the abrupt hard stop in credit expansion seen since March and its impact on economic activity – but that is a medium-term story. In the near term, the upcoming data is unlikely to support market sentiment, with retail sales looking set to post a decent figure thanks in part to Amazon Prime Day lifting spending, higher gasoline prices boosting the value of gasoline station sales, and vehicle sales ticking higher. However, there will be areas of weakness with chain stores seeing poor sales in recent months, suggesting a risk that the year-on-year rate of retail sales growth will slow to a crawl in the next couple of months. Meanwhile, the minutes of the July FOMC meeting will continue to exhibit hawkish sentiments with the Fed wary about signalling an imminent peak in US interest rates, fearing that this could intensify 2024 interest rate cut expectations and in turn trigger a sharp fall in Treasury yields that would be detrimental to the fight to get inflation back to target. Nonetheless, recent Fed comments have suggested that some members of the committee think they may have done enough with the latest inflation data likely to see more members thinking along those lines. The next big Fed event will be the Jackson Hole symposium between 24-26 August, where we expect to hear Fed Chair Jerome Powell give a bit more guidance on the potential near-term path for policy rates. Rounding out the numbers, we will likely see manufacturing production flat-lining after nine consecutive contraction prints from the ISM index. Industrial production overall may rise thanks to higher utility usage.   Retail sales vs weekly Johnson Redbook sales    
Euro Gets a Boost from ECB's Inflation Forecasts

Rates Spark: The Dis-inversion Trend Unveiled

ING Economics ING Economics 18.08.2023 08:37
Rates Spark: Dis-inversion in vogue If the Fed has peaked, then long tenor market rates would typically be falling – but they aren't, and we continue to point to the reduction in the rate cut discount as the rationale. Medium-term supply pressure pushes in the same direction. And so too do other lower-yielding core rates as they get pulled higher by the made in America bond bear market.   Dis-inversion set to continue as long tenors rates push on some more The dis-inversion of curves is an interesting outcome from the market rates movements of late. Longer tenor rates have been rising while shorter tenor rates have not being doing a lot. This is unusual at this stage of the cycle. Typically if the market sniffs a peak in official rates, then longer tenors rate tend to drift lower in anticipation of future cuts in official rates. Here, it seems the market is fine with the peak in rates narrative, as there has been no material build in the risk for a Fed hike in September, and so far the market is erring on the side of no more hikes. But the big change has been the discount for less rate cuts. This discount has continued to build in terms of fewer and fewer future rate cuts, and that continues to correlate with upward pressure on longer tenor rates.  We continue to view this dampening of the rate cut discount as the dominant driving force to higher Treasury yields, ultimately reflecting US macro robustness. The other ongoing feature is future supply of Treasuries. Bear in mind that the congressional budgetary office has the US debt/GDP ratio hitting 200% by 2050 on unchanged policies. That paints a picture of ongoing elevated fiscal deficits (currently in the 5% of GDP area or higher) and that typically would correlate with market rates being forced higher, all other things being equal. While that alone does not explain why the US 10yr snapped up to 4.3%, it is certainly a force that continues to push very much in the same direction.   USTs are leading the sell-off with spreads over Bunds widening   It’s also clear that the recent up-move in Treasury yields has been made in America. The Treasury – Bund spread has widened, illustrating that Treasuries are pulling Bund yields higher. The same holds true for the Treasury spread to Japanese Government Bonds (JGBs), supporting our view that the rise of the cap on 10yr JGBs was an ancillary development and not a driving force behind the up-move in Treasury yields – especially as spreads between Treasuries and JGBs have been re-widening of late.     Today's events and market view We may see some interim consolidation given that today's calendar does not hold data prone to further feeding the main narrative currently driving the market. The only notable release following this morning's UK retail sales is the final eurozone inflation reading for July. Looking into next week, however, the eurozone flash PMIs could further highlight the contrasting macro backdrops between the US and the eurozone. Only late next week will the focus shift back to Federal Reserve monetary policy, with the Jackson Hole conference starting on 24 August.  
Navigating the Path Ahead: Inflation, Catalysts, and Lessons from the 1970s

Forex Insights: Rising Real Yields, Evergrande Woes, and Dollar Strength

Ed Moya Ed Moya 21.08.2023 12:29
Soft landing hopes fizzle as real yields hit highest levels in a decade China jitters remain as Evergrande files for US bankruptcy Dollar index posts best win streak since May 2022  The Japanese yen is no longer acting like a safe haven currency. With global stocks having the worst week since March, dollar-yen appears poised to finish the week higher.  Wall Street has had a major reset, and now believes that interest rates will stay higher for longer, and is fearful that the Fed might have to deliver more tightly given the strength of the US economy. The global bond market selloff as taken treasury yields two levels that are forcing portfolio managers to adjust accordingly. Short term rates are too attractive, and that should provide some underlying strengths for the US dollar. Today, the yen is on firming footing but some of that is on profit-taking given the big week the dollar has had. With tech and communication stocks getting hit the hardest, expectations for a safe-haven trade could keep the dollar supported. The wildcard for the dollar trade will be Fed Chair Powell’s Jackson Hole speech, which could remain hawkish or possibly contain a dovish twist     The USD/JPY daily chart has already tested key levels that are making Japanese officials uncomfortable, but given the potential FX flows following Jackson Hole, it seems Japan will wait before intervening. This combination of a return of the king dollar and lagging Japanese yen has served to boost USD/JPY beyond 145.00 and towards major psychological support around the 150.00 level. As long as markets continue to bet on an inflation-fighting Fed and patient BOJ, USD/JPY could target the 148.00 region next week.  With any dovish surprises from Powell, a breakdown could occur below the noted 145.00 psychological support level.
Market Sentiment and Fed Policy Uncertainty: Impact on August Performance

Market Sentiment and Fed Policy Uncertainty: Impact on August Performance

InstaForex Analysis InstaForex Analysis 21.08.2023 14:03
It seems that August this year will remain the worst August month in history. Since early 2023, positive sentiment in the markets has increased significantly on a wave of expectations that inflation this year will fall in the US to the target level of 2% and, in turn, the Federal Reserve will stop further rate hikes. In practice, it became clear by August that such expectations are still not justified. What is the underlying reason for the deterioration of market investor sentiment? The theme of inflation in the US, which is projected onto other countries and financial hubs, and the Federal Reserve's future monetary policy proceeding from this, remains the crucial negative factor.   Recently, a slight rebound was recorded in the annual rate of the consumer price index (CPI) from 3.0% in June to 3.2% in July that assured the US central bank to raise interest rates by another 0.25%. Then, in Fed Chairman Jerome Powell and some policymakers of the rate-setting committee signaled another increase in the federal funds rate, although before that the regulator had refrained from raising rates. Of course, investors could not ignore such prospects in monetary policy, which led to a protracted downward correction in the stock markets and enabled growth in Treasury yields. At the same time, the ICE dollar index continues to move in a sideways channel, albeit slightly declining since the beginning of this year. Since mid-July, the index has notably recovered after a local breakout of a strong support level of 100 points. So, the investor community lack understanding about what will happen to inflation in America, whether it will continue to grow or resume its decline. Besides, investors are discouraged by regular threats from Fed policymakers about the possibility of further interest rate hikes.   Therefore, a fog of uncertainty descended on the markets, which set the stage for the decline in local and global stock indices. We believe that until the publication of August data on consumer inflation, which will serve as a benchmark for the Federal Reserve, the current market environment will not change. In this case, we expect a lower corrective decline in the US benchmark stock indices.   Treasury yields are likely to continue their growth. However, but at the same time, the ICE US dollar index may remain in a rather narrow range of 101.00-105.00 until the end of the month, unless, of course, Powell will not tell the markets anything new regarding the prospects for monetary policy at the symposium in Jackson Hole, Wyoming, which will be held later this week. An unexpected message may come as a big surprise for investors, since in general they do not foresee anything from the Federal Reserve's leader yet.     Intraday outlook USD/JPY The currency pair is consolidating above the level of 145.00. If the price falls below this level, there is a possibility of a limited decline towards 144.20. XAU/USD The price of gold remains under pressure due to the general negative market sentiment and expectations of another Fed rate hike, but the instrument may grow locally if it does not slip below 1,884.00. In this case, we should expect gold to rise to 1,900.50. 8
RBA Expected to Pause as Inflation Moves in the Right Direction

Fed's Outlook Shift: Hints of Dovish Turn and Market Implications

Ed Moya Ed Moya 25.08.2023 09:36
Atlanta Fed’s GDP estimate sees real Q3 GDP growth of 5.9%, up from last week’s 5.8% Fed Chair Powell’s Jackson Hole Speech is scheduled for tomorrow at 10:05 am EST Fed’s Harker (voter) says they’ve done enough with rates while Fed’s Collins (non-voter) more rate hikes may be needed   As Wall Street awaits Fed Chair Powell’s Jackson Hole speech, some traders shifted their focus to Federal Reserve Bank of Philadelphia Patrick Harker’s CNBC interview. When talking about interest Harker said, “Right now, I think that we’ve probably done enough.” Harker is a voting member of the FOMC and he appears to be positioning himself to turn dovish in the near future. He also noted that, “I’m in the camp of, let the restrictive stance work for a while, let’s just let this play out for a while, and that should bring inflation down.” He added that if inflation comes down quicker, they may cut rates sooner. A month ago, Harker was saying that they are making progress with inflation and that sometime next year the Fed will start cutting rates. Harker for most of this year has been viewed as a neutral FOMC voting member, one notch below Fed Chair Powell who has being leaning-hawkish.  Harker’s dovish comments don’t imply that is what we will get from Fed Chair Powell, but it does suggest the committee might be gaining confidence that they will be able to bring down inflation to the Fed’s 2% target. Fed’s Collins, a non-voter noted that “We may need additional increments, and we may be very near a place where we can hold for a substantial amount of time.”   Foreign Investment Flows US stocks initially rallied after Nvidia’s miraculous earnings reignited the AI trade.  If AI is the future, then Nvidia is the “fluxcapacitor” that will drive the biggest transformation in tech since the Back to the Future trilogy wrapped up in the 1990s.  With Europe looking more recession bound, foreign investment might steadily come to US equities and that should support US equities. It is clear that massive investments are coming AI’s way and that could keep stock market bulls very happy as long as we don’t have Fed Chair Powell spoil the party.  If the bond market selloff doesn’t resume after Powell’s speech, the stock market might have a bullish case to make a run at record highs, which should provide underlying support for the dollar.   US data keeps Fed rate hike expectations low for the September 20th This morning’s round of data didn’t really move the needle on Fed rate hike expectations.  Yesterday odds were at 12% and today they rose to 17% for the September 20th meeting. Filings for unemployment benefits came in less than expected, signaling that the labor market is slowly cooling.  Initial jobless claims fell by 10,000 to 230,000, while continuing claims dipped from 1.711 million to 1.702 million.  A surge in claims (+3.7K) came from Hawaii as they were heavily impacted by the devastating wildfires. Jobless claims will likely stabilize or rise going forward. Durable goods order data showed business spending activity barely increased as companies became more cautious with the budget. ​ Bookings for all durable goods tumbled ​ given softness with the volatile commercial aircraft orders. ​ Businesses are turning very cautious here given how high borrowing costs have gotten and over the deteriorating outlook for business equipment.   USD/JPY 60-minute chart   USD/JPY (60-minute chart) as of Thursday (8/24/2023) shows the bullish move that started yesterday has continued by respecting short-term trendline support(shown in purple).  If we see a substantial rally towards last October’s high, that could trigger intervention pressure from Japan.  If the surge in Treasury yields continues, that could provide some tactical bullish positioning between the 145.00-148.00 region. If risk aversion emerges post Jackson Hole, the 143.50  level provides major support and a possible re-entry for long-term bulls.  
China's Supportive Measures and Metals Market Outlook

China's Supportive Measures and Metals Market Outlook

ING Economics ING Economics 29.08.2023 10:10
Metals – Supportive measures from China China announced some measures on Monday to support the economy and financial markets. Beijing has reduced the stamp duty on stock trading by 50% (from 0.1% to 0.05%), with the Chinese Securities Regulatory Commission also approving new retail funds to increase capital inflow and tightening IPO regulations to boost confidence among investors. Meanwhile, the National Development and Reforms Commission also pledged to increase private investments in the construction of national and key infrastructure projects including transportation, advanced manufacturing, and modern agriculture facilities among others. In addition, China announced some measures to support the flailing property sector. These measures have helped broader sentiment in financial markets. This is likely to see LME metals opening stronger today, with yesterday a bank holiday in the UK. Spot gold has managed to edge higher in recent days with the market reacting to hints from Jackson Hole that the Federal Reserve will likely keep rates unchanged at its September FOMC meeting. However, we could see some renewed pressure later in the year, with the market still coming around to the idea that the Fed may have to hike rates at least one more time later in the year. This continues to support the US dollar and treasury yields. However, we will need to keep a close eye on US data releases in the coming weeks, which could shed more light on what the Fed may do. This starts with the US jobs report on Friday. Despite strength in recent days, gold ETFs have seen 13 consecutive weeks of outflows. In addition, CFTC data show that over the last reporting week, speculators cut their net long in COMEX gold by 20,845 lots over the week to 25,695 lots, the lowest levels since March.
Gold Trading Analysis: Technical Signals and Price Movements

Gold Trading Analysis: Technical Signals and Price Movements

InstaForex Analysis InstaForex Analysis 30.08.2023 13:31
Early in the European session, gold is trading around 1,936.52, below the high reached at 1,938.13, and below 4/8 Murray. Yesterday, the US consumer confidence data showed a worsening of sentiment. This survey displayed concerns among consumers about the prices of groceries and gasoline in particular. This negative data for the US dollar affected Treasury yields which caused a strong rally in gold, breaking the 200 EMA located at 1,925.     According to the 4-hour chart, we can see that gold is trading within an uptrend channel. It is expected to continue moving there until it reaches the daily resistance zone located at 1,943. According to the 4-hour chart, we can see that the Eagle indicator reached the 95-point area which signals an imminent technical correction. It is likely to happen in the next few hours if XAU/USD falls below 4/8 Murray. The metal could reach the 200 EMA located at 1,925 and could even drop as low as 3/8 Murray at 1,921.   Given that the trend remains bullish, we could expect a rally in the next few hours and gold could continue its rise. In case of a break above 1,945, gold could reach 5/8 Murray located at 1,953. This level could serve as a strong rejection. Up to that level, the instrument is considered overbought which could also be seen as a clear signal to sell. On the other hand, if gold falls below 1,937 (4/8 Murray), we could see a clear signal to sell which will give us an opportunity to take profits around the bottom of the uptrend channel located at 1,917. The daily pivot point is located at 1,930.   If gold trades around this price level of 1,930, we could expect an accumulation or consolidation in the next few hours. Below 1,930, we could see a clear signal to sell. Conversely, above this level, a technical bounce could be triggered. Our trading plan for the next few hours is to sell gold below 1,937. In case there is a pullback around 1,943, we could sell with the target at 1,920. The Eagle indicator is in an overbought zone which supports our bearish strategy.  
Assessing the Resilience of the US Economy Amidst Rising Challenges and Recession Expectations

Assessing the Resilience of the US Economy Amidst Rising Challenges and Recession Expectations

ING Economics ING Economics 01.09.2023 09:34
The US confounded 2023 expectations that it would fall into recession as households used pandemic-era savings and their credit cards to maintain lifestyles amidst a cost-of-living crisis. But with loan delinquencies on the rise, savings being exhausted, credit access curtailed and student loan repayments restarting, financial stress will increas.   Robust resilience in the face of rate hikes At the beginning of the year, economists broadly thought the US economy would likely experience a recession as the fastest and most aggressive increase in interest rates inevitably took its toll on activity. Instead, the US has confounded expectations and is on course to see GDP growth of 3%+ in the current quarter with full-year growth likely to come in somewhere between 2% and 2.5%. What makes this even more surprising is that this has been achieved in the face of banks significantly tightening lending conditions while other major economies, such as China, are stuttering and even entering recessions, such as in the eurozone.   Consumers still happy to spend with the jobs market looking so strong So why is the US continuing to perform so strongly? Well, the robust jobs market certainly provides a strong base, even if wage growth has been tracking below the rate of inflation. Maybe that confidence in job security has encouraged households to seek to maintain their lifestyles amidst a cost-of-living crisis by running down savings accrued during the pandemic and supplementing this with credit card borrowing. The housing market was another source of concern at the start of the year, but even with mortgage rates at 20-year highs and mortgage applications having halved, prices have stabilised and are now rising again nationally. Home supply has fallen just as sharply, with those homeowners locked in at 2.5-3.5% mortgage rates reluctant to sell and give up that cheap financing when moving to a different home and renting remains so expensive. This has helped lift new home construction at a time when infrastructure projects under the umbrella of the Inflation Reduction Act are supporting non-residential construction activity.   But lending is stalling and savings have been run down The Federal Reserve admits monetary policy is now restrictive, and while it could raise interest rates further, there is no immediate pressure to do so. With inflation showing encouraging signs of slowing nicely, this is fueling talk of a soft landing for the economy. With less chance of an imminent recession, financial markets have scaled back the pricing of potential interest rate cuts in 2024, with the resiliency of the US economy prompting a growing belief that the equilibrium level of interest rates has shifted structurally higher. This resulted in longer-dated Treasury yields hitting 15-year highs earlier this month.   Outstanding commercial bank lending ($bn)   Nonetheless, the threat of a downturn has not disappeared. We estimate that around $1.3tn of the $2.2tn of pandemic-era accumulated savings has been exhausted and at the current run rate all will be gone before the end of the second quarter of 2024. At the same time, banks are increasingly reluctant to lend to the consumer with the stock of outstanding bank lending flat lining since the banking stresses in March, having increased nearly $1.5tn from late 2021. We suspect that financial stresses have seen middle and lower income households accumulate the bulk of the additional consumer debt and have run down a greater proportion of their savings vis-à-vis higher income households so a financial squeeze for the majority is likely to materialise well before the second quarter of 2024.   Rising delinquencies will accelerate as student loan repayments resume Indeed, consumer loan delinquencies are on the rise, particularly for credit card and vehicle loans with the chart below showing data up until the second quarter of this year. Since then the situation has deteriorated further based on anecdotal evidence with Macy’s CFO expressing surprise at the speed and scale of the rise in delinquencies experienced through June and July on their own branded credit card (Citibank partnered). With credit card interest rates at their highest level since 1972 and with household finances set to become more stressed with the imminent restart of student loan repayments, something is likely to give. We see the risk of a further increase in delinquencies, which will hurt banks and lead to even further retrenchment on lending, together with slower consumer spending growth and potentially even a contraction.   Percent of loans 30+ days delinquent   Downturn delayed, not averted The manufacturing sector is already struggling and we see the potential for consumer services to come under increasing pressure too. On top of this there are the lingering worries about the demand for office space and the impact this will have on commercial real estate prices in an environment where there is around $1.5tn of loans needing to be refinanced within the next 18 months. With small banks the largest holder of these loans, we fear we could see a return to banking concerns over the next 12 months. Consequently, we are in the camp believing that it's more likely that the downturn has been delayed rather than averted. Fortunately, we think inflation will continue to slow rapidly given the housing rent dynamics, falling used car prices and softening corporate pricing power and this will give the Federal Reserve the flexibility to respond swiftly to this challenging environment. We continue to forecast the Federal Reserve will not carry through with the final threatened interest rate rise and instead will switch to policy loosening from late first quarter 2024 onwards.  
ECB Meeting Uncertainty: Rate Hike or Pause, Market Positions Reflect Tension

Global Market Insights: ECB Meeting, US Retail Sales, and Australia's Labor Report on the Radar

ING Economics ING Economics 14.09.2023 08:05
Asia Morning Bites Australia's labour market report is due out soon. Later today, the ECB meeting and US retail sales numbers should give investors more to ponder after yesterday's upside inflation misses.   Global Macro and Markets Global markets: We will start with Treasury yields today since they were most at risk from an upside miss to the inflation numbers, which we got on both the core and headline measures yesterday. But, contrary to everything you thought you knew about how markets worked, yields fell. The 2Y yield dropped by 5.1bp to 4.969%, and the 10Y yield fell by 3.2bp to 4.248%. Those declines in yield have had no impact on major FX rates. EURUSD remains roughly unchanged at about 1.0733 ahead of the ECB decision today, which still hangs in the balance. The AUD is also more or less unchanged at 0.6423, though it did have a look at sub-64 cent levels at one stage yesterday before recovering. Sterling is also about the same at 1.2491, though the JPY continued to nose higher and is now 147.28. In Asian FX, the main standout is the CNY, which is now down to 7.2717, in contrast to expectations for it to push above 7.35 which looked more likely only a few days ago. The PBoC is now using higher CNY funding costs in its battle to prop up the yuan, and right now, it seems to be working. Our end-of-month and quarter 7.25 forecast no longer looks quite so silly. This could change very rapidly though, and we have the China data dump tomorrow, though we are half-expecting this to be a little less negative than some of the recent data releases. The TWD was dragged stronger by the CNY, as was the SGD. SE Asian FX tended to lose ground yesterday, and the THB propped up the bottom of the table declining 0.34%. G-7 macro: The US CPI inflation release for August saw upside misses on both the headline inflation rate (3.7%YoY, up from 3.2%, and 3.6% expected) and the month-on-month figure for the core rate ex-food and energy, which rose 0.3% against expectations for a 0.2% rise. That still left core inflation falling to 4.3% which was in line with expectations, but progress in reducing core inflation will only be assisted by base effects for so long before it too will need to see the monthly rate need to drop to 0.1-0.2 to deliver a 2% target rate. James Knightley adds more detail in this note. It is also the ECB meeting today, and while we are looking for one, final rate hike, the market is totally split, and this decision could almost as easily result in no change. Our FX and rates strategists have put this cheat sheet together to highlight the potential market scenarios depending on what the ECB does, and more importantly, how it delivers its decision. We also get the August retail sales numbers for the US out today. The consensus expectation for the headline figure is 0.1%MoM, down from 0.7%MoM in July. We are beginning to see delinquencies on credit cards rising (as well as student loans and mortgages), and the latest consumer credit figures were also softer, so a bit more evidence of a consumer slowdown would vindicate the markets’ move to ignore the inflation figures overnight. The control group of spending is expected to decline 0.1% MoM after its 1.0% rise in July. US PPI data for August and weekly jobless claims round out the day. Australia:  August’s labour report remains an important piece of data while there remains some lingering doubt about whether or not the Reserve Bank of Australia has already delivered peak cash rates, or, as we suspect, maybe has one last hike left in the chamber to deliver before we can declare “job done”. And as ever, the outcome of this report is virtually impossible to call. We tentatively expect some unwinding of recent moves, with some modest job creation in the full-time segment, though this may be offset by some part-time employment declines, to deliver a +15K overall employment gain. This is a bit lower than the consensus +25K call. We are, however, in agreement that this will result in a drop back of the unemployment rate to 3.6% after the jump to 3.7% last month. What to look out for: ECB meeting and US retail sales Japan core machine orders and industrial production (14 September) Australia unemployment (14 September) ECB policy meeting (14 September) US initial jobless claims, PPI and retail sales (14 September) China medium term lending rate (15 September) Indonesia trade balance (15 September) China retail sales, industrial production (15 September) US University of Michigan sentiment (15 September)
Market Highlights: US CPI, ECB Meeting, and Oil Prices

Market Highlights: US CPI, ECB Meeting, and Oil Prices

Saxo Bank Saxo Bank 14.09.2023 08:09
US inflation remained firm both on headline and core, suggesting Fed will continue to push for higher-for-longer at next week’s meeting. Markets however shrugged off the report and USD also was largely unchanged. The yuan extended gains, and focus today will be on whether ECB can surprise hawkish, as well as the US retail sales. Oil prices saw another run higher before settling lower on inventory builds.     US Equities: The S&P500 ticked up 0.1% while the Nasdaq 100 added 0.4%. The CPI prints released were generally considered as not having an impact on a probable pause at the FOMC next week. Nvidia and Microsoft gained around 1.3% as the chipmaker’s chief scientist and the software giant’s President testified in Senate hearings about AI.     Fixed income: Treasuries sold off briefly following a higher-than-expected core CPI print but quickly reversed as buy-the-dip trades emerged. The 2-year yield ended the choppy session 5bps lower at 4.97% while the 10-year yield finished 3bps richer at 4.25%, near the day-low in yields in spite of a relatively weak 30-year auction.     China/HK Equities: Weaknesses in healthcare and technology stocks weighed on the benchmark indices, offsetting gains in China properties and financials. China properties were supported by news that Zhengzhou, a major city in eastern-central China, lifted restrictions on home purchases and lowered minimum down payment requirements. EV stocks sold off on EU anti-subsidy investigation news. The Hang Seng Index slid by 0.1% while the CSI300 dropped by 0.7%. Northbound net selling reached RMB6.6 billion.     FX: The US dollar wobbled on the CPI release but could not close the day higher with Treasury yields slipping. EUR in the spotlight today as ECB decision is due, and EURUSD has found support at 1.07 for now with a rate hike priced in with over 65% probability. USDJPY spiked to 147.73 but that remained short-lived and pair was back below 147.40 into Asian open. Yuan strengthened further with authorities increasing bill sales in Hong Kong to soak up yuan liquidity making it more expensive to short the currency. This could likely continue into the month-end National Day holiday, and USDCNH is seen testing 7.27 handle.     Commodities: Crude oil prices rose further with IEA estimates also looking at a supply deficit in Q4, although less so than the OPEC estimates. But gains were short-lived and prices fell after inventory data showing a crude build following weeks of drawdowns. US commercial inventories of crude oil rose 4 million barrels last week, according to EIA data. Gasoline inventories also rose by 5.6mn barrels. Meanwhile, Gold is back to threatening the $1900 handle with firmer US CPI.   Macro: US CPI surprised to the upside, but markets were not spooked as it did little to change the thinking around the Fed. Core CPI rose 0.3% MoM, or +0.278% unrounded, above the prior/expected +0.2%, with core YoY printing 4.3%, down from July's 4.7%, and in line with expectations. Headline print was in line with expectations at 0.6% MoM, up from +0.2% on account of energy price increases, with YoY lifting to 3.7% from 3.2%, above the expected 3.6%. The PBoC announced plans to issue RMB15 billion Central Bank Bills in Hong Kong on September 19, which is going to tighten CNH (offshore renminbi) liquidity. This issuance includes RMB5 rollover and RMB10 billion net issuance. According to PBOC's Financial Times, the PBoC will continue to issue bills in the offshore market to maintain ongoing control over offshore renminbi liquidity. The CNH HIBOR in Hong Kong reached 5.6% on Wednesday, marking its highest level since April 2022.   Macro events: US retail sales (Aug) exp 0.1% MoM (prev 0.7%), US PPI (Aug) exp 0.4% MoM and 1.3% YoY (prev 0.3% MoM, 0.8% YoY), US jobless claims exp 225k (prev 21k), ECB policy meeting exp 4.25% (prev 4.25%), Australia employment change exp 25k (prev -14.6k)   Adobe is scheduled to report Q3 results on Thursday after market close. Analysts' median forecast anticipates a 9.8% revenue increase and a 17% growth in adjusted EPS, reaching USD3.979. While Adobe has experienced steady revenue growth due to its shift to a cloud-based subscription model, recent trends indicate a plateau. Analysts remain skeptical about whether generative AI features in Adobe's content creation software will significantly contribute to growth.     In the news: EU launched an anti-subsidy investigation Wednesday against import of Chinese electric cars into the EU (Politico). Arm prices IPO at $51 per share, valuing company at over $54 billion (CNBC) Citigroup CEO shook up the management team (WSJ). For    
The ECB to Hike, But Euro Rally May Be Short-Lived as Dollar Strength Persists

US CPI Data Indicates Hawkish Stance Remains, Dollar Strengthens

Craig Erlam Craig Erlam 14.09.2023 10:11
September still a hold, while swap contracts suggest odds a 49.3% chance of a hike at the November 1st FOMC meeting Supercore inflation rate rises most since March Two-year Treasury drifts lower by 2.1 bps to 4.999% Inflation is not easing enough for the Fed to abandon their hawkish stance.  The upside surprises might be small, but that should keep the hawks in control.  Core inflation heated up for the first time in six months and that should have markets leaning towards one more Fed rate hike in November.  Inflation will likely still be running well above the Fed’s 2% target for the rest of the year, but a weaker consumer supports the case the disinflation process will remain intact. ​   US CPI   Source: BLS This was a complicated inflation report. Everyone knew that gas prices were sharply higher and that the housing market is still seeing elevated prices(house prices are now rising, while rents have eased).  The headline inflation read showed CPI increased 0.6% in August from a month ago, which was the highest reading since June 2022.  The annual inflation reading rose from 3.2% to 3.7%, a tick above expectations.   Market reaction A weakening US consumer will continue as they battle surging gasoline prices, stubborn shelter prices, and increasing medical costs. US stocks are wavering as this inflation report will keep the Fed pushing the ‘higher for longer’ narrative. If Wall Street remains convinced that the labor market is cooling, that will do the trick for getting inflation closer to the Fed’s target. The US dollar and Treasury yields were initially higher given the core CPI delivered an upside surprise, but once traders digested the entire report, the bond market reversed course. Core inflation rose 0.3%, which was due to the rounding of 0.278% which somehow makes it a lot less hot.  Rent makes up 40% of Core PCE and prices posted the smallest gain since the end of 2021. Expectations are elevated for the consumer to be significantly weaker and that we could have a soft holiday spending season, which should support the disinflation process.   Dollar  5-minute Chart The dollar is wavering as Wall Street wasn’t able to come up with any definitive stances on when the Fed will signal the all clear that policy is restrictive enough.  The dollar’s strength is most notably against the Japanese yen, while the euro will likely react to Thursday’s ECB rate decision.  Following yesterday’s Reuters report that the ECB will have inflation projections above 3%, markets appear to be leaning towards a rate hike.          
European Central Bank's Potential Minimum Reserve Increase Sparks Concerns

Fed Likely to Pause with Potential for a Final Hike in Sight

ING Economics ING Economics 18.09.2023 09:09
Fed set to hold, but signal the potential for a final hike Mixed US data and Federal Reserve comments solidly back the market pricing of another pause at the 20 September FOMC policy meeting. However, inflation concerns linger and economic resilience suggest the Fed will continue to signal the potential for a final hike even if we don’t think it carry through with it.     Fed set to pause again on 20 September At the last Federal Reserve monetary policy meeting in July, the Federal Open Market Committee raised the Fed funds policy rate range 25bp to 5.25-5.5%. The minutes to the decision also showed officials continue to have a bias to hike further since “most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy". At the Fed’s Jackson Hole Conference in late August Chair Powell said that policymakers “are attentive to signs that the economy may not be cooling as expected”, indicating a sense that it may indeed need to do more to ensure inflation sustainably returns to target. Nonetheless, the FOMC minutes also suggested differences of opinion are forming. While all voting FOMC members backed the hike, there were two non-voting members who “indicated that they favoured leaving the target range for the federal funds rate unchanged”. Moreover, “a number of participants judged that… it was important that the Committee's decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”. In recent months we have had some encouraging news on core inflation with two consecutive 0.2% month-on-month prints with a third coming in at 0.278%, much better than the 0.4-0.5% MoM consecutive prints we got over the prior six months. There has also been evidence of moderating labour costs (the Employment Cost index and cooling average hourly earning growth) together with more modest job creation. Yet we have to acknowledge that the activity data has remained strong with the US economy on track to grow at an annualised 3% rate in the current quarter. The commentary from officials, including the hawks, such as Neel Kashkari, suggest a willingness to pause again in September (just as it did in June), but to leave the door ajar for a further hike at either the November or December FOMC meetings.  Given this situation economists are universally expecting the Fed funds target rate range to be left at 5.25-5.5% with markets not pricing even 1bp of potential tightening. While the European Central Bank hiked rates but indicated it may be done, the Fed is set to pause, but keep its options open.   The potential for further hikes remains As with the June hold decision, the Fed is set to suggest that the decision should be interpreted as part of its process of a slowing in the pace of rate hikes rather than an actual pause. While inflation is moderating, it is still too high and with the jobs market remaining very tight and activity holding firm, the Fed can’t take any chances. The scenario graphic above outlines the range of possibilities outside of our core view of no change, but the door left open for future hikes. However, the other options have very low probabilities attached to them. We simply cannot see the point of the Fed softening its stance on the outlook for policy and give the markets the green light to sell the dollar and drive Treasury yields lower given this will undermine their fight against inflation. At the same time, a 25bp hike would be such a shock it could be seen as inconsistent with the Fed’s attempt to engineer a soft landing and would hurt risk appetite.   Dot plot to retain a final hike – but we don't see it being implemented This brings us onto the updated Fed’s forecasts. The key change in June was the inclusion of an extra rate hike in their forecast for this year, which would leave the Fed funds range at 5.5-5.75% by year-end. It seems highly doubtful this will be changed given the data flow, while the unemployment and inflation numbers seem broadly on track. GDP for 2023 is likely to be revised up substantially though given the remarkable resilience of activity and the consumer spending splurge over the summer, much of which appears to have gone on leisure activities.   ING expectations for the Federal Reserve's new forecasts
Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Global Markets Shaken as Yields Soar: Dollar Surges, Stocks Slump, and Gold Holds Ground Amid Debt Concerns and Rate Hike Expectations

Saxo Bank Saxo Bank 26.09.2023 15:25
Asian stocks fell with US futures as yields on 10-year Treasuries reach a 16-year high above 4.54% while China Evergrande Group missed a debt payment adding to fears about the sectors massive debt pile. Broad dollar strength continues with the greenback trading at its highest level since December as another Fed member said another rate hike this year will be needed. Crude oil trades softer amid macroeconomic concerns and a stretched speculative long while gold holds support despite multiple headwinds. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events. Equities: S&P 500 futures are under pressure this morning with the US 10-year yield hitting 4.55% extending its relentless move higher. If the US 10-year yield moves to 4.75% we will most likely begin seeing widening cracks in equities as the prevailing narrative of falling inflation collapses. Yesterday’s session saw no meaningful rotation between defensive and cyclical sectors. Today’s key events are US consumer confidence figures and Costco earnings tonight after the market close. FX: Higher Treasury yields, particularly in the long end, pushed the dollar higher to extend its gains. USDCHF rose to near 4-month highs of 0.9136 with immediate target at 0.9162 which is 0.382 retracement level. EURUSD broke below 1.06 support despite better-than-expected German Ifo. USDJPY attempted a move towards 149 with verbal intervention remaining lacklustre. AUD slipped on China woes while NZD and CAD were relative gainers, and the outperformer was SEK with the Riksbank starting its FX hedging today. Commodities: Crude trades lower for a second day with macroeconomic concerns, a stronger dollar and a stretched speculative long and easing refinery margin weighing on prices. Gold prices continue to defy gravity, holding above $1900 support with demand for stagflation protection offsetting the current yield and dollar surge. LME copper is trading at the widest contango (oversupply) since at least 1994 as inventories expand and China demand concerns persist. Wheat continues to face downward pressure from huge Russian harvest despite weather related downgrades in Australia. Fixed Income. The Federal Reserve’s higher-for-longer message reverberates through higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening, and waning foreign investors demand, it’s likely to see yields continue to rise until something breaks. This week, our attention turns to US PCE numbers and Europe CPI data while the US Treasury will sell 2-, 5- and 7-year notes. It will be interesting to see if investors buy the belly of the yield curve as a sign that they are preparing for a bull rather than a bear-steepening. Overall, we continue to favour short-term maturities and quality. Volatility: VIX Index still sits at around the 17 level, but the downward pressure in equity futures this morning could push the VIX much higher. This could be a cycle where the market tests the 20 level. Macro: Fed’s Goolsbee (voter) kept the door open for more rate hikes while emphasizing higher-for-longer. Moody’s warned of a protracted government shutdown saying that it could weigh on consumer confidence and markets. Meanwhile, after PMIs, Germany’s Ifo also showed a slight improvement in business outlook to 85.7 vs. 85.2 expected, while the previous was revised higher to 85.8. There were several ECB speakers once again. Lagarde largely repeated what was said at the ECB Press Conference, noting policy rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to target. Schnabel said there is not yet an all-clear for the inflation problem. In the news: Interest rates will stay high 'as long as necessary,' the European Central Bank's leader says (Quartz), Teetering China Property Giants Undercut Xi’s Revival Push (Bloomberg), Russia dodges G7 price cap sanctions on most of its oil exports (FT), Global trade falls at fastest pace since pandemic (FT), Dimon Warns World Not Ready for 7% Fed Rate: Times of India via Bloomberg Technical analysis: S&P500 downtrend support at 4,328 & 4,200. Nasdaq 100 support at 14,687 &14,254. DAX downtrend support at 14,933. EURUSD below strong support, resuming downtrend to 1.05. GBPUSD downtrend strong support at 1.2175. Gold rangebound 1,900-1,950. Crude oil correction: WTI expect to 87.58. Brent to 80.62. US 10-year T-yields 4.55, uptrend but expect minor correction Macro events: US New Home Sales (Aug) exp 699k vs 714k prior (1400 GMT), US Consumer Confidence (Sep) exp 105.5 vs 106.1 prior. Speeches from Fed’s Bowman (voter) as well as ECB’s Lane, Simkus and Muller. Earnings events: Costco reports FY23 Q4 earnings (aft-mkt) today with estimated revenue growth of 8% y/y and EPS growth of 14% y/y. H&M reports FY23 Q3 earnings (bef-mkt) with estimated revenue growth of 7% y/y and EPS growth of 47% y/y. Micron Technology reports FY23 Q4 earnings (aft-mkt) with estimated revenue growth of -41% y/y and EPS of $-1.18 vs $1.37 a year ago. Accenture reports FY23 Q4 earnings (bef-mkt) with estimated revenue growth of 4% y/y and EPS unchanged from a year ago. Nike reports FY24 Q1 earnings (aft-mkt) with estimated revenue growth of 3% y/y and EPS growth of –20% y/y.
Turbulent Times for Currencies: USD Dominates, SEK Shines

Turbulent Times for Currencies: USD Dominates, SEK Shines

ING Economics ING Economics 27.09.2023 12:53
FX Daily: King dollar, queen krona The dollar is finding more strength thanks to a soft risk environment and attractive real rates after the bond selloff. We now see downside risks for EUR/USD potentially extending to 1.02 in a bond sell-off acceleration. SEK is emerging as a big outlier, and we suspect Riksbank FX hedging is behind that, watch for action around 10:00 am BST this morning.   USD: Unstoppable strength The dollar is enjoying another widespread rally, shrugging off yesterday’s unconvincing US consumer confidence figures while being boosted by a round of defensive re-positioning amid a deteriorating risk environment. Furthermore, the recent treasury selloff has kept fuelling the real rate attractiveness of the dollar, reinforcing the greenback’s role as the go-to currency in the current market’s environment. Federal Reserve speakers have also thrown some hawkish comments into the mix. Neel Kashkari confirmed his notably hawkish stance saying that one more hike is needed even in a soft-landing scenario, and Michelle Bowman has also pointed in the direction of more tightening. Market pricing has, however, remained stuck in a less hawkish position than the recent dot plot projections – less than a 50% chance of another hike this year and the effective rate being cut to 4.67%. So, there are two lingering upside risks for the dollar stemming purely from the rate market: one being generated from higher longer-dated yields, one from a potential hawkish repricing of short-term rate expectations upholding short-term swap rates. We discuss those risks from a EUR/USD perspective in this article, where we conclude there is more room for a USD rally coming from back-end treasury underperformance rather than another big move in USD short-term swap rates. That’s because the gap between the December 2024 Fed Funds rate market pricing and the 2024 dot plot is much smaller compared to what it was back in June (and throughout the summer). Today, the US calendar includes durable goods orders for the month of August and another speech by the arch-hawk Neel Kashkari. Fed Chair Jerome Powell will participate in a town hall tomorrow, although it is unclear whether he will touch upon monetary policy issues. The next level to watch in DXY is the 106.82 November 2022 highs, although we have seen the index rise comfortably through key levels, and upside risks now extend to the 107.00/107.50 area should the US bond market sell-off accelerate further.
The British Pound Faces Further Breakdown Amidst Dollar Strength and Government Shutdown Risks

The British Pound Faces Further Breakdown Amidst Dollar Strength and Government Shutdown Risks

Kenny Fisher Kenny Fisher 27.09.2023 13:41
UK Mortgage approvals expected to continue to drop No major revisions expected with Q2 GDP report BOE overnight index swaps price in a peak rate of 5.369% at the Feb 1st meeting US Government Shutdown risk remains as Senate negotiators propose stopgap solution The British pound looks like it is heading for a further breakdown as dollar strength appears to be resuming.  Technical traders trying to find a bottom are getting frustrated as oversold conditions deepen and on doubts that a DeMark Buy countdown might yield a meaningful rebound.  The bearish trend has steadily broken below several key technical levels and weekly support from 1.2114 seems to be the next target.         The recent surge with the dollar was also supported by safe-haven flows from rising American government shutdown fears, so a potential stopgap solution could allow for the dollar rally to pause.  After the NY close a tentative proposal between Senate Republicans and Democrats would keep agencies functioning through mid-November. The potential solution fund federal agencies at current levels for another 45 days, with little support given towards Ukraine or disaster relief.  It isn’t clear if they have enough votes to avert an October 1st showdown, but momentum is growing for a band-aid solution. If risk aversion remains the dominant theme of the week, it will be hard for the British pound to find key support.  Unless Treasury yields tumble and disinflation signs grow, short-term dollar strength seems likely.    
US Equities Slide 1.5% as Bond Yields Soar Amid Consumer Confidence Drop

US Equities Slide 1.5% as Bond Yields Soar Amid Consumer Confidence Drop

Saxo Bank Saxo Bank 27.09.2023 14:55
The S&P 500 and Nasdaq 100 fell 1.5% amid weaker new home sales, consumer confidence, and elevated bond yields. Amazon dropped 4% due to an antitrust lawsuit. The DXY dollar index reached YTD highs above 105.80. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and the next target at 1.20. Gold tested $1900 amid rising yields, while Copper hit 4-month lows. The Hang Seng Index and CSI300 declined as news of China Evergrande's bond repayment failure weighed. The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.      US Equities: The S&P 500 and Nasdaq 100 tumbled by 1.5% due to softer readings on new home sales and the Conference Board consumer confidence survey, triggering selling in consumer discretionary and information technology. Amazon, impacted by news of an antitrust lawsuit, plummeted by 4%. Elevated bond yields also continued to weigh on market sentiment.     Fixed income: Treasury yields continued to hover at elevated levels, with the 30-year yield edging up by 2bps to 4.68%, while the 2-year and 10-year yields held steady at 5.12% and 4.54%, respectively. The selling pressure was particularly concentrated in the longer end of the curve as the high yield levels attracted strong demand in the 2-year auction.     China/HK Equities: The Hang Seng Index and CSI300 sank once again. The news that Hengda Real Estate Group, the mainland unit of China Evergrande, failed to make payments of RMB4 billion in principal and interest due yesterday further dampened market sentiment. The Hang Seng Index plummeted 1.5% to 17,467, marking a new low in 2023. The CSI300 slid 0.6%.     FX: The DXY dollar index broke higher to fresh YTD highs, having taken out the 105.80 resistance, as high-end Treasury yields continued to rise. Data remained soft, helping keep the short-end yields capped but Fed member Kashkari, who is usually a dove, noting he puts a 40% probability on a scenario where Fed will have to raise rates significantly higher to beat inflation and a 60% probability of a soft landing. USDCAD rose to 1.3520 while GBPUSD slid below 1.2150 and next target at 1.20. EURUSD plunged further to lows of 1.0562 while USDJPY is hovering close to the 150-mark and verbal jawboning continues to have little effect.     Commodities: The message on higher-for-longer was felt in the crude market as oil prices dipped earlier in the session with WTI falling to lows of ~$88/barrel and Brent going below $92. API inventory data also showed a crude build of 1.586 million barrels last week vs. expectations of a 1.65 million drop, but oil prices recovered later. Gold tests $1900 amid yield surge and Copper down to fresh 4-month lows at $3.62.     Macro: US consumer confidence fell for a second consecutive month to 103.0 from 108.7 (upwardly revised from 106.1) and beneath the expected 105.5. Present Situation Index marginally rose to 147.1 (prev. 146.7), while the Expectations Index declined further to 73.7 (prev. 83.3), falling back below 80 - the level that historically signals a recession within the next year. Inflation expectations for the 12 months ahead were unchanged at 5.7% in September. New home sales in the US fell 8.7% to 675k from 739k (upwardly revised from 714k), shy of the consensus 700k. Fed's Kashkari has published an essay where he says there is a 60% chance of a soft landing with a 40% chance the Fed will have to hike 'significantly higher'. Macro events:  BoJ Minutes (Jul), US Durable Goods (Aug)     In the news: FTC Sues Amazon, Alleging Illegal Online-Marketplace Monopoly (WSJ) Foreign brands including Tesla to face scrutiny as part of EU probe into China car subsidies (FT) Senate leaders agree on a short-term spending bill, aiming to avert a shutdown, extending government funding until November 17, pending House approval (CNN). For all macro, earnings, and dividend events check Saxo’s calendar.  
GBP: Approaching 1.2000 Level Amid Rate Dynamics

Commodities Under Pressure: Yields and USD Strength Dictate Trends

ING Economics ING Economics 05.10.2023 08:22
The Commodities Feed: It's all about the yields The ‘higher-for-longer’ narrative for rates is pressuring the commodities complex, while the accompanying USD strength is adding further pressure.   Energy - Steady OPEC output The oil market struggled yesterday. ICE Brent settled a little more than 1.6% lower on the day as rising treasury yields and USD strength proved to be too much of an obstacle for the market. Technically, the Brent December contract still needs to fill the gap left following the November contract expiry on Friday. If that happens, it would take the front-month contract back above US$95/bbl. Preliminary OPEC production data for September is starting to come through. The Bloomberg survey showed that output increased by 50Mbbls/d MoM to 27.97MMbbls/d. Nigeria showed the largest increase over the month. Their supply grew by 60Mbbls/d, while Iran saw a marginal pullback in output of 50Mbbls/d. Output is likely to remain relatively steady over October. Further out, the market will be focused on any sign that Saudi Arabia is starting to unwind its voluntary additional supply cuts. There was a bit more noise yesterday around the resumption of Northern Iraqi oil flows through the Ceyhan pipeline. Turkey has said that flows could resume this week. However Iraqi officials have thrown cold water on the idea, saying that there are still some issues that need to be resolved before this can happen. The pipeline can carry almost 500Mbbls/d of crude oil from the Kurdish region to the Ceyhan export terminal. Flows were suspended back in March after the Iraqi government won an international arbitration ruling, stating that these flows were occurring without approval from the Iraqi government Metals - Gold plunges to seven-month low Gold plunged to its lowest level since March yesterday - edging closer to US$1,800/oz, as treasury yields continued to move higher and the USD also strengthened.  The higher-for-longer narrative has been putting significant pressure on gold, which is leading to a significant reduction in investment appetite reflected by the large declines in gold ETF holdings in recent months. Fed policy will remain key to the outlook for gold prices in the months ahead.
Tesla's Disappointing Q4 Results Lead to Share Price Decline: Challenges in EV Market and Revenue Miss

Inflationary Crossroads: Analyzing US PCE Trends and the Fed's Next Move

ING Economics ING Economics 27.10.2023 14:55
US PCE inflation set to slow further, ahead of the Fed next week By Michael Hewson (Chief Market Analyst at CMC Markets UK) This week a raft of disappointing earnings numbers, and caution over guidance from the likes of Alphabet and Meta Platforms has helped overshadow concerns about an escalation of the conflict in the Middle East between Israel and Hamas. The combination of these two factors has also helped to undermine the previously resilient Nasdaq 100, sending it to its lowest levels since May, although it did find support at its 200-day SMA.     With US markets starting to look slightly more vulnerable to a broader correction and an increasingly uncertain geopolitical backdrop there has been little reason for investors to get overly enthusiastic about looking to get back into the market, instead moving into safer haven type plays like gold, the Swiss franc, and US treasuries. While the Nasdaq 100 fell through its previous lows from September, the S&P500 has looked even more vulnerable, sliding below its 200-day SMA, as well also sliding to 5-month lows.   It's also been another disappointing week for European markets with the DAX on course for its 6th successive weekly decline falling back to levels last seen in March, while the FTSE100 has also struggled for gains these past few days. Against such a backdrop it's therefore somewhat surprising that the US economy continues to look so strong, with last night's impressive Q3 results from Amazon serving to underscore that fact, with the shares rising in after-hours trade.   Q3 revenues comfortably beat expectations at $143.1bn, as did profits which came in at $0.94c a share, or $9.88bn. This included a gain of $1.2bn from its stake in Rivian. There was a strong performance from online stores with net sales of $57.27bn, while AWS saw revenues of $23.06bn which was slightly below expectations of $23.2bn. Operating margin was also better than expected at 7.8%.   For Q4 Amazon expects net sales of $160-167bn, while the company said it is going to hire 250k full and part-time employees to cover the holiday periods of Thanksgiving and Christmas. Amazon also said it expects to see operating income rise to between $7bn and $11bn.   Yesterday's US Q3 GDP numbers were an impressive set of numbers, the best quarterly performance for the US economy since Q4 of 2021, with growth of 4.9%, with a good proportion of that driven by personal consumption of 4%. The strength of these numbers showed the resilience of the US economy, while on the other side of the ledger with respect to core PCE inflation this slowed to 2.4% from 3.7% over the quarter.     Against such a strong economic backdrop the Federal Reserve will be very reluctant to signal that they are done as far as further rate hikes are concerned when they meet next week. Against such a strong set of numbers it was somewhat surprising to see US treasury yields fall back as sharply as they did, however part of the reason for yesterday's slide is perhaps the sense that if the Fed were to hike again, they will wait until December just to ensure another hike is needed, once more data becomes available. Today's core PCE inflation numbers could help inform that thought process further on whether to hike rates again by another 25bps.     With the latest economic projections citing a Fed funds rate of 5.6% by year end and another spike in oil prices exerting further upward pressure on prices, as well as wages, the Fed will want to keep markets thinking that another rate rise is on the table between now and the end of the year.     With a resilient US jobs market and wage growth looking sticky we do appear to be starting to see a split opening up on the FOMC, despite recent data showing that on the Fed's core measure, inflation is easing. The core PCE deflator inflation numbers showed a further easing of inflationary pressure in August, slipping to 3.9% from 4.3%. This is welcome news for those who worry that inflation in the US is proving sticky, with personal spending also slowing to 0.4% from 0.9%.     Today's September numbers are expected to show a further slowdown to 3.7% for PCE core deflator while personal spending is forecast to remain steady at 0.4%.       EUR/USD – slipping back towards the 1.0520 area with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – slipped below the 1.2100 area, before rebounding modestly from the 1.2070 area. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – failed at the 0.8740 area again yesterday. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – has pushed above the previous highs at 150.16, making a new high for the year, potentially opening up a move towards 152.20. Support at the lows last week at 148.75.   FTSE100 is expected to open 12 points higher at 7,366   DAX is expected to open 15 points higher at 14,746   CAC40 is expected to open 16 points higher at 6,905
EPBD Recast: A Step Closer to Climate-Neutral Buildings

Immobile Fed: Anticipating a Pause with a Nod to Higher Yields

ING Economics ING Economics 02.11.2023 12:28
FX Daily: Immobile Fed to give a nod to higher yields We expect the Fed to pause today, in line with expectations. There is a mild risk of a dollar correction, but that should be short-lived. Japanese authorities are stepping up efforts to contain unwanted volatility in rates and FX, but we suspect markets will keep pushing USD/JPY higher and into the new intervention level.   USD: A quiet Fed meeting The Federal Reserve is in a desirable position as it prepares to announce policy this evening thanks to the combined effect of rate hikes and higher Treasury yields keeping pressure on prices. The economy has proven resilient so far. In the art of central banking, inaction is action, and inaction is broadly what we expect from the Fed today as we discuss in our preview. A pause is widely expected by markets and economists, as numerous FOMC members signalled higher Treasury yields were adding enough extra tightening of financial conditions to stay put. One question for today is to what extent the statement and Fed Chair Jerome Powell will acknowledge this non-monetary tightening of financial conditions. It’s unlikely the Fed wants to drop any dovish hints at this stage, but a market that is well positioned for a broadly unchanged policy message could be rather sensitive to the wording on this topic and may interpret an “official” recognition of tighter financial conditions as an implicit signal more tightening is off the table. The typically cautious Powell may anyway try to mitigate any dovish interpretation of the statement during the press conference. After all, the Fed dot plot still says one more hike by year-end and has a strong commitment to higher rates for longer. The first of these two statements was never taken at face value, but the latter is what is contributing to higher yields. Expect no divergence from it. The Fed isn’t the only event in the US calendar today, and markets will likely move on the ADP payrolls release (although these are unreliable), JOLTS jobs openings and the ISM manufacturing figures for October. There is room for a short-lived dollar correction today as markets will be on the hunt for implicit admissions that another hike is actually off the table with higher yields. Positioning adjustments have favoured some dollar slips recently but they have not lasted, as the overall message by the Fed has been one of higher for longer with a hawkish bias. That message won’t change today (barring any great surprises) and we think that buying the dips in any dollar correction will remain a popular trade, especially given the more and more unstable ground on which other major currencies (JPY, EUR) are standing.
The Commodities Feed: Oil trades softer

Federal Reserve Holds Rates with Hawkish Tone: Navigating Peaks, Pitfalls, and Dollar Dynamics

ING Economics ING Economics 02.11.2023 12:36
US Federal Reserve keeps its options open with another hawkish hold The Fed funds rate target range was held at 5.25-5.5% by a unanimous vote, with a hawkish tone retained to ensure financial conditions remain tight and aid in the battle to constrain inflation. Higher household and corporate borrowing costs are starting to bite though and we don’t expect any further hikes this cycle.   Rates held with a hawkish bias retained No surprises from the Federal Reserve today with the Fed funds target range held at 5.25-5.50% for the second consecutive meeting – the longest period of no change since before the tightening cycle started in early 2022. The accompanying statement acknowledges the “strong” economic activity – a slight upgrade on the “solid” description in September while there was explicit mention of “tighter financial and credit conditions”, which will weigh on the economy. Nonetheless, in the press conference Chair Powell recognises that the economy is starting to see the effects of tighter monetary policy, but that the committee still has a bias towards more hikes rather than seeing the prospect of cuts on the horizon. This is understandable since the Fed does not want to give the market the excuse to significantly backtrack on the recent repricing of “higher for longer” policy interest rates. While there does appear to be a slight softening in the degree of hawkishness the Federal Open Market Committee (FOMC) is expressing, they are careful not to provide a signal that policy has peaked, which could tempt traders to drive market rates lower in anticipation that the next move would be rate cuts. Such action could potentially reignite inflation pressures, but we doubt it.   Peak rates with cuts on the horizon for 2024 The surprise surge in longer-dated Treasury yields and the tightening of financial conditions it’s prompted will inevitably create more headwinds for activity in an environment where mortgage and car loan rates are already above 8% and credit card interest rates are at all-time highs. With Treasury yields staying at elevated levels, the need for further policy rate hikes is dramatically reduced and we do not expect any further Fed rate hikes. Consumer spending remains the most important growth engine in the economy, and with real household disposable income flat-lining, savings being exhausted and consumer credit being repaid – and this is before the recent tightening of lending and financial conditions is fully felt – means we see the primary risk being recession. If right, this will depress inflation pressures even more rapidly than the Fed is anticipating, giving it the scope to cut policy rates in the first half of next year.   Bond yields falling into the Fed meeting more to do with less (relative) supply pressure on the long end The bond market went into the FOMC meeting in a decent mood. The refunding announcement was deemed tolerable, partly as the headline requirement of US$112bn was US$2bn lower than the market had expected. Note, however, that 10yr issuance increases by US$5bn (to US$40bn) and 30yr issuance increases by US$4bn (to US$24bn), while 3yr issuance increases by just US$2bn (to US$48bn). As a stand-alone that is negative for the long end. But it’s the new December projections that has the market excited, as both 10yr and 30yr issuance is projected to fall by US$3bn (to US$37bn and US$21bn, respectively). In contrast, 2yr, 3yr and 5yr issuance volumes are to increase by US$8bn. So the issuance pressure morphs more towards shorter maturities and away from longer maturities as we head through the fourth quarter. Yields are down. The 10yr now at just under 4.8%. It has not materially broken any trends though. The big bond market story from the FOMC outcome is an underlying continuation theme. Higher real rates have been a feature since the last FOMC meeting, and the one before. And the Fed knows that this has a clear tightening effect. It’s a rise in market rates that cannot be easily diversified away by liability managers that need to re-finance in the coming few quarters. The Fed knows that both floating rate debt and all types of re-financings will amplify pain as we progress forward. Given that, it can let the debt markets do the last of the pain infliction for them. The rise in real yields has helped to push the curve steeper, and the 5/10yr has now joined the 10/30yr with a positive upward sloping curve. Only the 2/5yr spread remains inverted. This overall look does suggest the bond market is positioning for a turn in market rates ahead. The big move will come when the 2yr starts to anticipate cuts. We are not there quite yet; hence the 2/5yr inversion hold-out. That all being said, there is enough from the Fed today for the market to use the opportunity to test lower in yields. We still think we need to see the payrolls report first. If that is close to consensus then there is likely not enough to make the break materially lower. It is true that Powell has pointed to higher long rates as a pressure point. But does not have to mean that upward pressure on long rates suddenly goes away. There is still a path back up to 5% if the market decides not to use the double positive today of lower long-end supply (in relative terms) and a Fed that is pointing at long yields as something to get concerned by. We still feel that pressure for higher real rates remains a feature, despite the easing off on longer tenor issuance pressure. We need to see the economy really lurch lower, in particular on the labour market, before the bond bulls take over. The Fed is not quite pointing towards this just yet either.   FX: Too little to reverse the dollar momentum Markets perceived today’s Fed announcement and press conference as moderately dovish, and the drop in Treasury yields would – in theory – point to a softer dollar. The 2-year EUR-USD swap rate differential is around 8bp tighter than pre-meeting, but remains considerably wide at -128bp. As shown in the chart below, such a differential is consistent with EUR/USD trading around 1.05-1.06 and, despite the acknowledgement that financial conditions have tightened, there weren’t enough dovish elements to trigger a material dollar correction.   EUR/USD and 2Y swap rate gap     Looking ahead, we remain of the view that the dollar’s direction will be set by US data as the Fed’s reiteration of its higher for longer approach and threat of another hike still keep the big bulk of the bullish dollar narrative alive. Barring a negative turn in US activity data, our 1.06 EUR/USD year-end target remains appropriate. There are probably more downside risks in the month of November, although in December the dollar has negative seasonality.
EUR/USD Rejected at 1.1000: Anticipating Rangebound Trading and Assessing ECB Dovish Bets

US Dollar Rises as Bond Market Ignites: A Look at Dollar's Resurgence

ING Economics ING Economics 10.11.2023 10:03
FX Daily: Bond bears give new energy to the dollar A very soft 30-year Treasury auction and hawkish comments by Powell triggered a rebound in US yields and the dollar yesterday. Dynamics in the rates market will remain key while awaiting market-moving US data. In the UK, growth numbers in line with expectations, while in Norway, inflation surprised to the upside. USD: Auction and Powell trigger dollar rebound The dollar chased the spike in US yields yesterday following a big tailing in the 30-year Treasury auction and hawkish comments by Fed Chair Jerome Powell. Speaking at the IMF conference, Powell warned against reading too much into the softer inflation figures and cautioned that the inflation battle remains long, with another hike still possible. If we look at the Fed Funds future curve, it is clear that markets remain highly doubtful another hike will be delivered at all, but Powell’s remarks probably represent the culmination of a pushback against the recent dovish repricing. Remember that in last week’s FOMC announcement, the admission that financial conditions had tightened came with the caveat that the impact on the economy and inflation would have depended on how long rates would have been kept elevated. The hawkish rhetoric pushed by Powell suggests that the Fed still prefers higher Treasury yields doing the tightening rather than hiking again, and that is exactly what markets are interpreting. The soft auction for long-dated Treasuries also signals the post-NFP correction in rates may well have been overdone and could set a new floor for yields unless data point to a worsening US outlook. Today’s highlights in the US calendar are the University of Michigan surveys. Particular focus will be on the 1-year inflation gauge, which is expected to fall from 4.2% to 4.0%. On the Fed side, we’ll hear from Lorie Logan, Raphael Bostic and Mary Daly. Dynamics across the US yield curve will have a big say in whether the dollar can hold on to its new gains. Anyway, we had called for a recovery in DXY to 106.00 as the Fed would have likely pushed back against the dovish repricing. The rebound in yields should put a floor under the dollar, but we suspect some reassurances from the data side will be needed for another big jump in the greenback.
FX Daily: Fed Ends Bank Term Funding Program, Shifts Focus to US Regional Banks and 4Q23 GDP

The Dollar's Dramatic Drop: Is the Bear Trend Overdone?

ING Economics ING Economics 16.11.2023 11:17
FX Daily: Dollar bears may have jumped the gun The dollar plummeted yesterday after a softer-than-expected US CPI reading. But we still think a turn in activity data - more than the disinflation story - is needed to take the dollar sustainably lower, and the move appears overdone also from a short-term valuation perspective. US retail sales will tell us whether the dollar can start to recover today. USD: Dollar slump looks overdone We had pointed to the risk of a USD correction yesterday given the chances of a soft CPI reading, and the tendency of the dollar to underperform after key US data releases/events. The move was, however, quite extreme. If position-squaring did play a role in exacerbating the size of the dollar correction, the depth of the drop in Treasury yields means the FX shifts have taken their cues from a substantial repricing of monetary policy expectations. The Fed funds futures curve erased any residual bet of monetary tightening after the lower-than-expected October inflation report, and now prices in the start of the easing cycle in June and 50bp of cuts by July. We have no reason to argue against this pricing from a macro perspective: our US economist discusses here how disinflation has much further to go, and we currently forecast 150bp of Fed cuts in 2024, still more dovish than the 97bp priced in by the market. However, we’d be wary of jumping too aggressively on a dollar bear trend now. First of all, markets have moved a lot after a softer inflation reading, even though the narrative of disinflation being well underway is something that would hardly surprise the Fed. The month-on-month core print, by the way, came in at 0.227%, not too far from a rounded consensus 0.3%. Resilient growth is what's been keeping the dollar stronger, and while we expect the US to head into recession in 2024, there is no hard evidence just yet. In other words, strong US activity figures remain a very clear possibility in the near term and could trigger an inversion in the US bear run. Secondly, rates have moved significantly, but not enough to justify the huge dollar drop. According to our short-term fair value model, the dollar has moved into undervaluation (after the US CPI release) against all G10 currencies except for the Japanese yen, Canadian dollar and Norwegian krone. This is quite remarkable given the dollar had been generally overvalued in the short term for many months. Today, October retail sales will be watched closely after coming in very strong in September. Consensus is for a 0.3% MoM decline in the headline figure but a 0.2% increase in the index excluding auto and gas. The dollar should be very sensitive to the release. A soft reading may fuel speculation that softer growth is coming through and could add to disinflation to trigger more Fed dovish bets. However, US activity data has had a tendency to surprise on the upside, if anything, and it may be too early to see a slew of soft readings. Our view is that this USD bear run is overdone, and we expect another, or a few more rounds of dollar resilience into the New Year before a clear-cut dollar decline can emerge. PPI data will also be watched for confirmation that the disinflation process effectively accelerated in October. On the geopolitical side, keep an eye on headlines from the Biden-Xi Jinping meeting at the APEC summit.
Decoding Australian Inflation: Unraveling Base Effects and Market Perceptions

Asia Morning Bites: US-China Talks Show Progress, Treasury Yields Rise, and Global Markets React

ING Economics ING Economics 16.11.2023 12:15
Asia Morning Bites High-level communication to resume between the US and China as Biden hails meetings with Xi as making "real progress". Taiwan's main opposition parties are reported to be combining forces for the upcoming Presidential Election.   Global Macro and Markets Global markets:   A mixed run of US data yesterday resulted in Treasury yields pushing higher again. 2Y yields rose 7.6bp to 4.912%, while yields on 10Y US Treasuries rose 8.4bp taking them back above the 4.50% level to 4.531%. EURUSD has dropped slightly following this yield reversal but remains at 1.0849 for now. The AUD is reasonably stable at just over 0.65, but the GBP and JPY have both lost more ground. USDJPY is now 151.29. Most of the Asian FX pack made decent gains yesterday, but will probably revert to a weakening bias today. US stocks made only very small gains yesterday. Chinese stocks did far better. The Hang Seng rose 3.92% while the CSI 300 rose 0.7% on the slight improvement in activity data. On the political front, a resumption of high-level dialogue as President Biden hails talks with President Xi as making “real progress”, is probably the main win from the Pre-APEC session. Elsewhere, the Financial Times reports that the two main opposition parties in Taiwan will join forces against the DPP for January’s Presidential elections. It remains to be seen which party’s candidate will stand for the Presidential role. This, it is reported, will be determined by a third-party analysis of how the parties are polling. These parties are viewed as being more open to dialogue with Mainland China, so they could usher in a less tense election period than has historically been the case. G-7 macro: Yesterday’s US data stuck with the theme of price pressures waning, but activity remaining more resilient (see here for a more detailed note from JK). PPI inflation dropped to 1.3% YoY following a 0.5% MoM decline, and core PPI inflation also slowed to 2.4% YoY from 2.7%. Retail sales, however, were expected to fall 0.3% MoM in October, but only fell 0.1%. The control group of sales which strips out volatile items, rose 0.2%MoM – in line with expectations. UK inflation released yesterday showed a larger-than-expected fall. The CPI inflation rate tumbled to 4.6% from 6.7%. The news flow today won’t be quite as interesting. US export and import price data is rarely a market mover. Although we do also get industrial production, which is forecast to decline by 0.4% MoM, as well as the Philly Fed business survey and usual weekly jobs figures. Japan:  Exports for October rose 1.6%YoY – beating the forecast 1.0% gain, while imports were also a little less negative than expected at -12.5% YoY, though not enough to dent the trade balance. In adjusted terms, the deficit shrank to -JPY462bn. Alongside the trade figures, core machine orders data for September showed a decent 1.4% increase, beating expectations, though still leaving the annual rate down 2.2% YoY Australia: October employment was fairly strong. The total employment change from the previous month was +55,000, up from +7,800 in September. Most of the gain was due to a 37,900 rise in part-time jobs, so the total figure flatters the positive impact this will have on domestic demand. Full-time employment rose 17,000. There was a much bigger than usual increase in unemployment, which helped lift the unemployment rate to 3.7% from 3.6%.   Philippines:  The Bangko Sentral ng Pilipinas (BSP) is expected to keep rates unchanged today at 6.5%.  BSP hiked policy rates by 25bp two weeks ago in an off-cycle move so they are expected to hold today.  BSP Governor Remolona however could retain his hawkish rhetoric should inflation projections for 2024 point to another year of above-target inflation.    What to look out for: Australia jobs data and BSP meeting Japan trade balance (16 November) Australia labour report (16 November) Philippines BSP policy (16 November) US initial jobless claims and industrial production (16 November) Singapore NODX (17 November)
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

Asia Morning Bites: Singapore Inflation and Bank of Indonesia Policy Meeting in Focus amid Thanksgiving Holiday

ING Economics ING Economics 23.11.2023 13:01
Asia Morning Bites Asian highlights today include Singapore's October inflation and the Bank of Indonesia (BI) policy meeting. Markets may well be quiet with the US out for Thanksgiving.   Global macro and markets Global markets:  It was another quiet day in markets ahead of what will be an even quieter one today thanks to the US Thanksgiving holidays. This may well stretch to the weekend as Turkey-stuffed US traders may extend their time off to Friday too. Treasury yields rose slightly on Wednesday. The 2Y yield went up 2.7bp to 4.95%, while the 10Y yield barely rose, going up just 1.2bp to 4.404%. EURUSD retraced some of its recent rises, dropping back to 1.0887. The AUD was also slightly softer, at 0.6542, and Cable had a sharp dip in late trading, before partially recovering to 1.2493. The JPY crept higher and is back up to 149.49 now. Other Asian FX pairs were also mostly weaker against the USD. The KRW, IDR and TWD were between -0.49% and -0.87% softer. USDCNY was 0.33% weaker, and moved back up to 7.1648. US stock markets had a modestly positive day, with both the S&P 500 and NASDAQ rising a bit more than 0.4%. Chinese stocks were flat to down. The Hang Seng was unchanged on the day. The CSI 300 fell 1.02% and is down 8.45% year-to-date. G-7 macro:  It was not a particularly exciting day for Macro on Wednesday. The US Durable goods orders numbers came in softer than had been expected. But there was some better news from the University of Michigan consumer sentiment survey, although the inflation expectations surveys it contains were a bit higher than had been expected. US jobless claims also dropped, following their recent jump, which now looks as if it was just noise. The UK Chancellor, Jeremy Hunt, delivered a GBP21bn stimulus to the UK economy in his Autumn Statement yesterday, estimated to deliver a 0.3pp boost to GDP growth over the coming 5 years. The boost was more than had been expected and has raised concern that the Bank of England may not ease next year as soon or as fast as had previously been imagined. Today we get some preliminary PMI data out of the Eurozone. Singapore: October inflation is set for release today.  Inflation is expected to pick up to 4.5%YoY (from 4.1% previous) for headline while core inflation could move higher to 3.1%YoY (from 3.0% previous).  Although price pressures have moderated over the past few months, core inflation remains above the MAS' inflation target which suggests they could extend their current policy stance well into 2024.      Indonesia:  Bank Indonesia (BI) meets to discuss policy today.  Although BI is tipped to keep rates unchanged, IDR slipped by roughly 0.9% yesterday, which could provoke a surprise rate hike from BI.  BI was also expected to pause at their October meeting but substantial pressure on the IDR the day ahead forced Governor Warjiyo to hike rates to 6%. We would not rule out a rate hike if pressure on IDR persists today.  What to look out for: Bank Indonesia policy meeting and Singapore inflation Singapore CPI inflation (23 November) Bank Indonesia policy (23 November) Japan CPI inflation (24 November) Singapore industrial production (24 November)
Federal Reserve's Stance: Holding Rates Steady Amidst Market Expectations, with a Cautionary Tone on Overly Aggressive Rate Cut Pricings

Turbulent Markets: Powell's Hawkish Turn Sparks Rate Cut Speculations

ING Economics ING Economics 04.12.2023 13:42
Global Macro and Markets Global markets:  Fed Chair, Jerome Powell, tried to sound a hawkish tone at his speaking event on Friday, talking down the likelihood of rate cuts. But markets latched onto a remark that policy was now “well into restrictive territory” as a clue that there was a greater chance of rate cuts next year than Powell was letting on. 2Y Treasury yields plunged 14.2bp to 4.538%, while the yield on 10Y Treasuries dropped 13.1bp to 4.196%. So far, there has been no obvious response from EURUSD, which you’d imagine would rise given the magnitude of this fall in US bond yields. However, the falls were matched very closely by falls in European bond yields on Friday too, as markets seem to be swinging around to the idea of meaningful ECB cuts as well.  The AUD rose sharply though, rising to 0.6687. Cable was also up to 1.2721. And the JPY has plunged to 146.33, its strongest since 11 September. Asian FX was mixed on Friday, though we can expect the laggards (KRW, TWD and MYR) to make up ground today. The rest of the pack will also likely follow the G-10 lead. Rising rate cut expectations gave US stocks another reason to rally on Friday, though the gains were relatively muted. The S&P 500 and NASDAQ rose slightly over half a per cent. G-7 macro:  Friday’s main data release was the manufacturing ISM index. This was unchanged at 46.7, a weaker outcome than had been expected. With non-farm payrolls due on Friday, the drop in the employment index from 46.8 to 45.8 probably carried more weight than the increase in the new orders index from 45.5 to 48.3. Both indices, as well as the headline, remain in contraction territory. Today is relatively light for macro data. We get the final US durable goods orders figures for October, along with the October factory orders figures which are derived from them. China:  China Evergrande Group is due to have its future determined today by a Hong Kong court hearing to determine whether a creditor request for the company to be wound up will be granted. The Group has outstanding liabilities of around $327bn. Liquidation will place China’s housing market, which has been showing signs of declining at a more rapid pace in recent months, under further downward pressure.   India:  Ahead of next year’s lower house elections, India’s ruling BJP party has won three state elections at the weekend, taking two of them from opposition parties.   What to look out for: South Korea GDP and China Caixin PMI services later in the week US durable goods and factory orders (4 December) South Korea GDP (5 December) Japan Tokyo CPI inflation and Jibun PMI services (5 December) Philippines CPI inflation (5 December) China Caixin PMI services (5 December) RBA meeting (5 December) Singapore retail sales (5 December) US JOLTS and ISM services (5 December) Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December)China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)
Crude Oil Eyes 200-DMA Amidst Positive Growth Signals and Inflation Concerns

Soft Australian 3Q23 GDP and Moody's Negative China Outlook Shape Market Sentiment

ING Economics ING Economics 12.12.2023 12:36
Asia Morning Bites Australian 3Q23 GDP comes in soft; Moody's negative China outlook will likely dominate risk sentiment today. Taiwan CPI out later.   Global macro and markets Global markets:  US Treasury markets continued to rally on Tuesday, helped by declines in Eurozone bond yields as one of the ECB’s more hawkish board members (Isabel Schnabel) noted that further hikes were “unlikely”. US yields were then given an additional downward push by some soft JOLTS job opening figures. 2Y Treasury yields fell 5.9bp to 4.577%, while 10Y yields fell 8.8bp to 4.165%. The slightly bigger falls in Eurozone bond yields helped EURUSD to decline to 1.0793 and that has also led AUD to decline to 0.6553, Cable to drop to 1.2593, while the JPY stayed fairly steady at 147.18. As the EURUSD move has more to do with EUR weakness than USD strength, these G-10 moves look unnecessary, and a case could probably be made for these other currencies to appreciate against both the EUR and USD, especially those where rate cuts are not on the agenda (JPY) or will be later and probably less than in the US (AUD). The KRW also weakened on Tuesday, rising back to 1311.20. The IDR was also softer at 15505, as were most of the other Asian FX pairs. There may be a bit of further weakness today, though for the same arguments as for the G-10, the rationale for this is quite weak, and we wouldn’t be totally surprised to see this go the other way. Equities didn’t know which way to turn yesterday, given the weak labour demand figures but the lower bond yields, and the S&P 500 ended the day virtually unchanged. The NASDAQ made a small gain of 0.31%. Chinese stocks were battered by the outlook shift to negative from Moody’s, which pointed to the rising debt levels and higher deficits China is adopting to try to underpin the property sector. Though the decision on Evergrande’s winding up was postponed until January, which could have provided some relief. The Hang Seng fell 1.91% and the CSI 300 fell 1.90%.   G-7 macro:  As mentioned, the JOLTS job openings data showed a large decrease in vacancies, to 8733K in October (for which we already have non-farm payroll data) from 9553K in September. The service sector ISM index was actually a little stronger than in October, rising to 52.7 from 51.8, and the employment subindex rose to 50.7 from 50.2, though this has little correlation with month-on-month directional payrolls trends. After a rare “hit” with its weak reading last month, attention may revert back to the ADP employment data later today.  A 130K  increase is the latest consensus estimate. The consensus for Friday’s non-farm payrolls is higher at 187K, with an unchanged unemployment rate of 3.9%. Outside the US, German factory orders and Eurozone retail sales are the main releases, along with a Bank of Canada rate decision (no change expected to the 5% policy rate).   Australia: 2Q23 GDP slowed from a 0.4%QoQ pace in 2Q23 to only 0.2% in 3Q23, weaker than the 0.5% consensus estimate (ING f 0.3%). A more negative contribution to GDP from net exports in data revealed yesterday was the main clue that the figure was going to undershoot. Yesterday’s RBA no change statement showed no additional sign that the RBA is done hiking rates and merely repeated the previous language. Today’s GDP data slightly increases the probability that rates have peaked – however.   Taiwan:  November CPI inflation should show a further moderation, dropping to 2.80% from 3.05% in October. We don’t see this having any impact on the central bank’s policy rates for the time being though.   What to look out for: Australia GDP and US jobs numbers Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December) China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)
The Yen's Rocky Start to 2024: Impact of Earthquake and Bank of Japan's Caution

Federal Reserve Outlook: Navigating Monetary Policy in the Face of Market Expectations and Economic Signals

ING Economics ING Economics 12.12.2023 14:11
We expect another Fed hold, but with pushback on rate cut prospects The Fed last raised rates in July and we think that marked the peak. There is growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, the Fed will not want to endorse the market pricing of significant rate cuts until they are confident price pressures are quashed   Fed to leave rates unchanged, oppose market pricing of cuts The Federal Reserve is widely expected to leave the fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign MoM% inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here.   Markets pricing 125bp of cuts, the Fed will likely stick to 50bp prediction There has been a big swing in expectations for Federal Reserve policy since the last FOMC meeting, with markets firmly buying into the possibility of some aggressive interest rate cuts next year. Back on November 1st, after the Fed held rates steady for the second consecutive meeting, fed funds futures priced around a 20% chance of a final hike by the December FOMC meeting with nearly 90bp of rate cuts expected through 2024. Today, markets are clearly of the view that interest rates have peaked with 125bp of rate cuts priced through next year. Underscoring this shift in sentiment, we have seen the US 10Y Treasury yield fall from just shy of 5% in late October to a low of 4.1% on December 6th.   Federal Reserve rhetoric has certainly helped the momentum of the moves. Chief amongst them is the quote from Fed Governor Chris Waller suggesting that if inflation continues to cool “for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower”. The real Fed funds rate (nominal rate less inflation) is indeed now positive and we expect it to move above 3% as inflation continues to fall. Does it need to be this high to ensure inflation stays at 2%? We would argue not, and so too, it appears, do some senior members of the Fed. Other officials, such as Atlanta Fed president Raphael Bostic, suggest that the US hasn’t “seen the full effects of restrictive policy”. However, there are still some residual hawks. San Francisco Fed President Mary Daly is still contemplating “whether we have enough tightening in the system”.   ING's expectations for what the Federal Reserve will predict   Fed to talk up prolonged restirctive stance In that regard, the steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year. For example, mortgage rates have been swift to respond, with the 30Y fixed-rate mortgage dropping from a high of 7.90% in late October to 7.17% as of last week. With inflation still well above the 2% target despite recent encouraging MoM prints, we expect the Fed to be wary of anything that could be interpreted as offering an excuse to price in even deeper Fed rate cuts for next year and result in even lower longer-dated Treasury yields.   Consequently, we expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen.Fed Chair Jay Powell’s assessment in a December 1st speech is likely to be the template for the tone of the press conference. There, he argued, “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so”. Similarly, NY Fed president John Williams expects “it will be appropriate to maintain a restrictive stance for quite some time”.   But the Fed will eventually turn dovish We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. The consumer is key, and with real household disposable incomes flatlining, credit demand falling, and pandemic-era accrued savings being exhausted for many, we see a risk of a recession during 2024. Collapsing housing transactions and plunging homebuilder sentiment suggest residential investment will weaken, while softer durable goods orders point to a downturn in capital expenditure. If low gasoline prices are maintained, inflation could be at the 2% target in the second quarter of next year, which could open the door to lower interest rates from the Federal Reserve from May onwards – especially if hiring slows as we expect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.   The Fed will try to keep the market rates impact to a minimum There may be some interest from the press on money market conditions following the spikes seen in repo around the end of the month and reverberating into the early part of December. It comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT likely ends around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn but will hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him - they'll need to ask the question(s)! In terms of expectations for market movements, we doubt there will be much. If, as we expect, the Fed sticks to the hawkish tilt and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to.   Fed pushback could dent recent high-yield FX rally As mentioned above, a Fed pushback against market pricing of the easing cycle in 2024 should be mildly supportive of the dollar. Even though EUR/USD has performed poorly through the start of December and could get some mild support a day later from the ECB, this FOMC meeting could prompt losses to the 1.0650 area. We have had 1.07 as a year-end target for a few months now and expect the more powerful, dollar-led, EUR/USD rally to come through in 2Q when we expect those short-dated US yields to collapse. Perhaps more vulnerable to a decent Fed pushback against lower rates might be what we call the 'growth' currencies, such as the high beta currencies in Scandinavia and the commodity sector (Australian and Canadian dollars). These currencies have had a good run through November on the lower US rate environment. However, as per our 2024 FX Outlook, these currencies are our top picks for next year and should meet good demand on pullbacks this month. As to the wild ride that is USD/JPY, higher US yields could provide some temporary support. However, we doubt USD/JPY will sustain gains above the 146/147 area as traders re-adjust positions for a potential change in Bank of Japan (BoJ) policy on December 19th. We suspect that USD/JPY has peaked, however, and are happy with our call for USD/JPY to be trading close to 135 next summer after the BoJ starts to dismantle its ultra-dovish policy in the first half of next year. 
Worsening Crisis: Dutch Medicine Shortage Soars by 51% in 2023

Key Developments in Developed Markets: Fed's Potential Pushback and Rate Cut Expectations"

ING Economics ING Economics 12.12.2023 14:18
Key events in developed markets and EMEA next week There's growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, neither the Federal Reserve nor Bank of England will want to endorse the recent ramping up of rate cut expectations in financial markets as both prepare to release decisions next week.   US: Pushback from the Fed The Federal Reserve is widely expected to leave the Fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here. The steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year.  We expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen. We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.
UK Inflation Dynamics Shape Expectations for Central Bank Actions

The Finish Line: Reflections on 2023 and a Glimpse into 2024

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.01.2024 12:48
The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year. 
Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

ING Economics ING Economics 25.01.2024 15:02
FX Daily: Unwinding the spurious dollar rally The dollar strengthened across the board yesterday with no clear catalyst. We suspect that in an environment that keeps pricing large Fed cuts, USD rallies aren’t very sustainable. We’ll be awaiting the next leap higher in short-term USD rates to endorse a dollar rebound. Today, the focus is on PMIs and the Bank of Canada, which may disappoint dovish bets.   USD: Sticky Fed cut bets hinder USD rebound The dollar rebounded sharply yesterday as the risk-on mood generated by Beijing’s reported stock support package evaporated during London trading hours. The Hang Seng is having another good day today, even though Beijing’s measures appear an emergency and temporary solution, more a symptomatic treatment rather than addressing fundamental economic concerns. European and US equities failed to follow the Hang Seng's gains yesterday but also showed broad resilience. The rise in US rates did not look large enough to justify the rotation from European FX (EUR and GBP) back into the dollar. In all, we admit the dollar jump was quite surprising, and without a clear catalyst, and therefore see room for the dollar correction initiated overnight to extend today. One dynamic to keep an eye on – however – is the impact on markets of US Republican Primaries. The underperformance of the Mexican peso since the start of the week may be indicating markets are pricing in a larger chance of Donald Trump winning the presidency after Ron DeSantis endorsed him. Trump won the New Hampshire primary yesterday, securing 55% of votes and casting serious doubt on the future of Nikki Haley’s campaign. It all seems rather premature, but Banxico is also on the brink of a rate cutting cycle – as discussed here by our rates team – which can compound to keeping the peso soft. This should not translate into a one-way direction for the peso though, we still expect to see high demand in the dips, not least due to the preserved carry attractiveness and our view of a US dollar decline. Today, the focus will be on S&P Global PMIs across developed countries. Markets have become gradually more sensitive to this US survey, even though the ISM remains the main reference. Expectations are for a tiny decline in manufacturing PMIs (already in contraction area) and a stabilisation in services. We don’t have a strong bearish view on the dollar in the short-term, but yesterday’s moves did appear overdone in an environment where Fed funds futures still price in 130/140bp of cuts this year. We’ll be more convinced of the sustainability of a near-term dollar rebound once short-term Treasury yields take another leap higher (two-year rates are down nearly 10bp since yesterday). Revamped rate hike bets in Japan are pushing USD/JPY lower this morning, favouring a broader dollar correction which could have legs today. Francesco
Rates Spark: Navigating US CPI Data and Foreign Appetite for USTs

Rates Spark: Navigating US CPI Data and Foreign Appetite for USTs

ING Economics ING Economics 15.02.2024 11:01
Rates Spark: Treasuries need better than the consensus CPI outcome Markets are awaiting Tuesday’s US CPI release which should give confirmation that the disinflation trend continues. But that's not enough, as a consensus month-on-month outcome would still be a tad too hot for comfort. Looking further ahead, foreign buyers aren't absorbing large UST supply, putting upward pressure on term premium.   US CPI inflation will fall, but Treasury yields are still at risk of rising We're a bit troubled about Tuesday’s CPI report. On the one hand, year-on-year rates will fall, with practical certainty. That's because of a base effect. For January 2023 there was a 0.5% increase on the month, so anything less than this will bring the year-on-year inflation rate down, for both headline and core. So why are we troubled? It's the size of the month-on-month increases. Headline is expected at 0.2% and core at 0.3% MoM. The 0.2% reading is just about okay, especially if it is rounded up to 0.2%. But the 0.3% on core is not okay. That annualises to 4%, which is clearly too high. And it's been at 0.3% MoM for the past two months, and if repeated it would be three of the last four months. Again, that annualises to 4%. If we get the anticipated 0.3%, we doubt there can be a positive reaction. At the other extreme, a 0.4% outcome would be a huge negative surprise, one that would likely cause the probability for a May cut to move comfortably south of 50%. That would throw the easing inflation story up in the air, bringing US Treasury yield with them. But this is unlikely, as the tendency has been for inflation to dip as opposed to spike. We assume a consensus outcome for inflation, and given that, we'd expect to see the 10yr Treasury yield creeping towards 4.25%. For the market to conjure up a positive reaction to the inevitable fall in year-on-year rates, there needs to be a 0.2% MoM outcome for core   Foreign UST appetite not enough to absorb issuance The ECB's Lane spoke about financial flows and shared data that showed renewed interest by foreign investors in eurozone debt securities. Lane notes that foreign investors were a significant seller of eurozone government debt securities in 2021-2022, which matches the period of significant ECB balance sheet expansion. The trend reversed in 2023 when the ECB started unwinding its balance sheet and foreigners became net buyers again. With high debt issuance and a shrinking ECB balance sheet, the growing interest of foreign buyers is welcomed to keep long-end euro yields from rising too much.   In the US the amount of government debt to absorb in the coming years is even larger and foreign investors do not seem to come to the rescue. Looking at US foreign holding statistics in the figure below, we see that foreign holdings are diminishing as a share of total USTs. The significant issuance during the pandemic was not matched by an uptake from foreigners. Instead, as Lane also argued, in the eurozone the central bank was the big buyer. Looking at the downward trend of relative foreign holdings, it seems unlikely that foreign buyers have enough appetite to absorb the increase of USTs from the Fed and the Treasury in the coming years. Low demand from foreign buyers for USTs will have an upward effect on term premia, leading to structurally steeper curves.   Foreign UST holdings as share of public debt in decline   Tuesday's key data and events The main driver of markets will be the US CPI numbers of January. In the shadow of this we have Germany's ZEW survey in the eurozone. The UK's data-heavy week will kick off with employment figures on Tuesday, followed later this week by CPI and GDP data.  We have Italian 3y, 6y and 20y auctions totalling EUR 8.5bn, a GBP 1.5bn 9y Gilt Linker, and a EUR 5bn German Bobl auction.

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