us yields

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. Th

Fed Expectations Amid Mixed Data: Wishful Thinking or Practical Pause?

Japanese Yen (JPY) Being Healed, Nikkei Has Added 11%, Wheat Has Decreased By Ca. 8%

Marc Chandler Marc Chandler 30.03.2022 14:18
March 30, 2022  $USD, BOJ, China, Currency Movement, German, Inflation, Japan, Russia, Spain, Ukraine, Yield Curve Overview:  A pullback in US yields yesterday and the Bank of Japan's stepped-up efforts to defend the Yield Curve Control policy helped extend the yen's recovery.  This spurred profit-taking on Japanese stocks, where the Nikkei had rallied around 11% over the past two weeks.  Hong Kong, China, and Taiwan led the regional advance.  However, facing a surge in inflation (Spain and German states) and a jump in European natural gas prices (~9%) is snapping the Stoxx 600's three-day advance.  US futures are trading with a heavier bias.  The US 10-year yield has edged a little higher to 2.40%, while the two-year that briefly traded above the 10-year yield yesterday is off about four basis points.  European benchmark yields are 3-6 bp higher.  The greenback is trading lower against all of the major currencies, led by the yen's recovery.  After poking above JPY125 to start the week, the dollar fell to around JPY121.30 today before steadying.  The Canadian and Australian dollars are the laggards with minor gains.  Among emerging market currencies, the Turkish lira is the notable exception, and is posting a modest decline.  Gold appeared to post a bullish hammer pattern yesterday but there has not been much follow-through and the yellow metal is in around a $6 range on either side of $1922.  May WTI is also in a narrow range--mostly $105-$107 today. Copper and iron ore are trading firmer.  Wheat is still soft after losing around 8% over the past couple of sessions.   Asia Pacific The Bank of Japan stepped-up its efforts to cap interest rates earlier today.  It increased the amount of bonds it bought at its regular scheduled operation.  It offered to buy JPY600 bln (instead of JPY450 bln) 3–5-year bond, and JPY725 bln (instead of JPY425 bln) of 5-10-year bonds, in addition to the pre-announced defense of the 0.25% cap on the 10-year bond.  It did not increase the amount of longer-term bonds.  Tomorrow, the BOJ is expected to announce next quarters asset purchase plans.  Although BOJ Governor Kuroda, who met with Prime Minister Kishida earlier today, does not seem concerned about the yen's weakness, Finance Minister Suzuki seemed more cautious.  He suggested continuing to check if the yen's weakness is harming the economy.  For example, the weaker yen is aggravating the surge in energy prices, which Kishida was to cushion the blow to households and businesses. If intervention is best understood as an escalation ladder, as we suggest, then this might be seen as a low rung.  Separately, Japan reported that retail sales fell by 0.8% in February, which was more than twice the decline expected by the median forecast in Bloomberg's survey.  It also drove the year-over-year rate below zero (-0.8%) for the first time since last September.  Beijing has offered some economic support for Shanghai, but the surge in Covid there, and lockdowns there and elsewhere, are seeing economists slash growth forecast and lift inflation projections.  China's March PMI will be released tomorrow. A poor report is expected, and the risks are on the downside.  Thus far, though, officials have used targeted measures and have not provided the overall economy with new support. The dollar did not trade for long above JPY125 on Monday, but it seems to have completed something and the greenback has traded down to JPY121.30 today.   The (38.2%) retracement of this month's rally is around JPY121.10 and the next retracement (50%) is a little below JPY120.  Month-end and fiscal-year end considerations may also be at work but is often used as a catch-all narrative.  Note that reports suggested that Japanese retail accounts were beginning to buy yen toward the end of last week.  The Australian dollar bounced off four-day lows slightly below $0.7460 yesterday and settled above $0.7500.  It is firm today but below this year's high set Monday near $0.7540.  It still feels like it is consolidating.  The broad US dollar weakness was evident against the Chinese yuan today.  It is trading nearly 0.25% lower, the most in about two weeks.  The greenback is trading at a nine-day low near the 20-day moving average, slightly below CNY6.35.  That is also around the middle of this month's range (~CNY6.3080-CNY6.3860).  The PBOC set the dollar's reference rate at CNY6.3566.  The median projection in Bloomberg's survey was CNY6.3560.   Europe The common narrative now is that Putin initially anticipated a quick overwhelming victory over Ukraine and as it has stalled, he is falling back on Plan B.  Plan B is to secure the territorial claims of the two separatist regions and later incorporate them into Russia. Russia is curtailing the use of Hryvnia in the occupied areas and introducing the rouble. This military objective has not been met. Turning Clausewitz on his head, the political negotiations are a continuation of the war by other means. Putin has already achieved a key strategic goal; Ukraine will foreswear joining NATO.  One cannot help but wonder that if Zelenskiy accepted this more than a month ago, the course of events may have been different. The date for the next round of negotiations have not been set.  In a war, the losing side is more anxious for negotiations by definition. After consolidating its forces and enlarging the field of control of the separatist regions, Russia can then be in a position to negotiate.  This seems to be the key to the timeline that can lead to a sustainable cease-fire.  The cost of rebuilding Ukraine, which had serious developmental challenges before the war, will fall to the EU, IMF, World Bank, and UN.   A surge in eurozone inflation was expected, but the Spanish and German state figures are over the top. The market (Bloomberg median forecast) was for a strong 1.3% monthly increase in Spain, instead the national figure jumped 3%. The harmonized measure surged 3.9% this month and lifted the year-over-year rate to 9.8% from 7.6% in February.  Details are sparse in the initial estimate, but the Economic Minister suggested that three-quarters of the rise was due to food and energy.  Still, the core rate rose by 0.4% on the month. Most of the German states reporting CPI figures today showed a 2.6%-2.7% month-over-month increase in their CPI. The national and harmonized figures are due shortly.  There seems to be upside risk to the expectations that the year-over-year rate of the harmonized measures (HICP) will accelerate to 6.8% from 5.5% in February.  The aggregate preliminary estimate for the euro area is due Friday.  The euro rallied yesterday on the hopes that the Russian invasion of Ukraine may be near the endgame and is extending the gains today amid further positioning squaring.  We note that that the US premium over Germany on two-year money has reversed sharply lower.  It peaked on Monday above 245 bp and is testing 230 bp today.  The German two-year yield is up around seven basis points today and is again trying to secure a foothold above zero for the first time since 2014.  Yesterday's attempt was rebuffed.  The surging inflation will strengthen the hawks’ hands, many of whom see scope for two hikes this year that could bring the deposit rate to zero. The euro is trading at its best level since March 1, which was the last time it traded above $1.12. Its gains have now retraced a little more than half of this month's decline (~$1.1150).  The next technical target is the $1.1200-$1.1230 area.  Sterling is a laggard.  It is trading inside yesterday's range (~$1.3050-$1.3160). There may be scope for additional gains, albeit marginal, as the intraday momentum indicators are stretched.  We suspect the $1.3180-$1.3200 cap may suffice today.   America The US 2-10-year yield curve briefly inverted yesterday before finishing around three basis points.  It is drawing a great deal of attention, but like any statistic it needs to be placed in a context. Few believe the US is recession-bound.  The median forecast in Bloomberg's survey has the US economy growing 3.5% this year and 2.3% next year.  This is still above the Fed's estimates of the long-term growth trend (1.6%-2.2%.). The most pessimistic forecasts in Bloomberg's survey do have growth less than 1% this year or next.  That said, there are those who are warning of a recession, including ourselves, and the yield curve did not enter the picture.  Interest rates are not waiting for the Fed's meetings to increase, as the 93 bp increase in the 2-year yield this month.  The halving of the deficit (as a percentage of GDP) this year still strikes us as an under-appreciated drag.  The rise in energy and food prices cuts the purchasing power of households.  US inflation expectations are not just a function of what the Fed is or is not doing.  The correlation of the change in the 10-year breakeven (the difference between the yield of the inflation protected security and the conventional note) and oil (the front-month light sweet crude oil contact, WTI) over the past 30-days is nearly 0.65, the highest in seven months. The 60-day correlation is almost 0.55, a five month-high. The price of May WTI has risen by almost 25% ($20 a barrel) net since the US warned that a Russian attack could happen at any moment on February 11.  OPEC+ meets tomorrow and there still seems little chance that it will boost output.  Most of OPEC's spare capacity is in Saudi Arabia (~1.6 mln barrels a day) and the UAE (~1.3 mln barrels a day).   Today's ADP private sector jobs estimate is the data highlight. We remind that it is not a particularly useful guide to the BLS estimate for the particular month, though it gets the larger trend fairly right.  The median estimate for Friday's nonfarm payroll report has crept up in recent days to stand at 490k. The US also reports another revision to Q4 21 GDP.  It may be left at 7.0%.  With Q1 22 nearly over, the market will not be sensitive to Q4 data.  The economy is expected to have slowed to around 1.0%-1.5% this year from 7% last.  The Fed's Barkin and George speak today. While George is a voting member of the FOMC this year, Barkin, like Harker and Bostic, who spoke yesterday, do not.   Mexico reports February unemployment today.  It may have ticked up slightly.  Canada's economic calendar is light, but there is much talk about Ontario's imposition of a 20% tax on foreign purchases and real estate in the province.  The "speculation levy" is meant to slow the surge in house prices. Lastly, late yesterday Chile hiked its overnight target rate 150 bp to 7.0%.  This was a bit less than expected and the central bank indicated that it may not need to make such big moves going forward. Latam countries hiked rates early and many aggressively, and ideas that the tightening cycles may end later this year appears to be encouraging flows into local bond markets.  That said, the swaps market has about 300 bp of additional hikes over the next six months before a cut in rates toward the end of the year or early 2023.    The US dollar is near the recent trough against the Canadian dollar (~CAD1.2465-CAD1.2475).  Below there is the year's low around CAD1.2450.  A break targets the CAD1.2400 area. However, the intraday momentum indicators suggest the greenback may bounce first in early North American activity and a retest of CAD1.2500-CAD1.2515 would not be surprising.  Meanwhile, the greenback is slipping to new lows for the year against the Mexican peso (~MXN19.9120).  The next notable chart support is closer to MXN19.85, a shelf from last September. Here, too, the intraday momentum indicators favor a US dollar bounce in the North American morning.     Disclaimer
Rates and Cycles: Central Banks' Strategies in Focus Amid Steepening Impulses

The Average Hourly Earnings Adding To Inflationary Pressures

TeleTrade Comments TeleTrade Comments 08.11.2022 09:12
The US 10-year Treasury bond yield extends its gains ahead of the US Consumer Price Index (CPI) for October. The US 10s-2s yield curve inverted the most since the Paul Volcker era, and the spread widened the most, more than 60 bps. Money market futures have priced in a 50 bps rate hike, as shown by the CME FedWatch Tool. As the Asian Pacific session gets to an end, the US Treasury bond yields continued to advance, courtesy of the last week’s rate hike by the US Federal Reserve, lifting 75 bps to the Federal Funds rate (FFR) to 4%, while Fed officials laid the ground for additional increases though seen as a dovish rate hike. However, Federal Reserve Chair Jerome Powell commented that even though the pace of increases would be “less aggressive,” the peak would be higher. Therefore, the US 10-year benchmark note rate sits at a 4.229% gain of one bps. The US 10-year Treasury bond yield retreated on US jobs data US and European equity futures edge higher. Last week’s US employment data, which reflected that ha labor market is still tight, showed signs that it could be easing as the Unemployment Rate increased from 3.5% to 3.7%. Nevertheless, the Average Hourly Earnings, although lower than the previous month’s reading, they’re adding to inflationary pressures. The United States bond market reacted negatively to date, with the 10-year benchmark rate sliding from 4.209% to 4.163%.  Fed officials reiterated Jerome Powell’s message for higher rates, while the US 10s-2s yield curve further inverted Regarding inflationary pressures, the Boston and Richmond Fed Presidents Susan Collins and Thomas Barkin said that the United States economy needs more interest rate increases, but not at an aggressive pace. Collins said that the Federal Reserve might slow down the pace to balance growth and inflation risks as the Fed struggles to achieve a “soft landing.” Echoing her comments was Thomas Barkin, who added that the peak of rates would surpass the September projections. That said, the US 2-year Treasury bond yield, the most sensitive to the Federal Funds rate (FFR) adjustments, tumbled to 4.663%, following the jobs report after hitting a YTD high at 5.134%. It should be noted that the 2-year yield exceeded the 10-year benchmark note rate by 60 bps during the last week, as the 10s-2s yield curve inverted the deepest since the 1980s, which is usually seen as a leading indicator that precedes recessions by 12 to 18 months. Meanwhile, some sources cited by Bloomberg said that “Now it’s about the ultimate destination” of the policy rate, according to analysts at Bank of America Corp., whose forecast for the terminal level ranges from 5%-5.25%. Traders focus on October’s CPI, and expectations for a Federal Reserve 50 bps increase are at 52% In the meantime, investors are bracing for the October Consumer Price Index (CPI) report. Asides from this, money market futures expect that the US Federal Reserve would hike 50 bps, as shown by the CME FedWatch Tool, with odds of lifting 50 bps at 52%, while for 75 bps, chances lie at 48%.    
Hawkish comments and a decline in continuing unemployment claims below 1.8 mln boosted chances of a June rate hike rose rose to 37%

Franklin Templeton's Stephen Dover says that "History strongly suggests that at this juncture in the monetary policy and economic cycles, yield curves are nearing a point of normalization"

Stephen Dover, CFA Stephen Dover, CFA 23.02.2023 11:14
Tighter monetary policy can lead to inverted yield curves, but is a recession inevitable? Thoughts from Head of Franklin Templeton Institute Stephen Dover. Originally published in Stephen Dover’s LinkedIn Newsletter Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter. Normal is a term we see appear in the English language in the 17th century as a form to standardize measurement. The Latin word, normalis, is directly referencing something made with a carpenter’s square, forming a right angle. In the bond market, we also have a tool that defines normal: an upward sloping yield curve. That means that yields on longer-term bonds are higher than those on shorter-dated bank deposits, or Treasury bills and notes. Yield curves are upward sloping to compensate investors for the added risk of tying up their money for longer periods. Longer-term bonds carry greater risk of various potential losses, ranging from inflation to default. Investors therefore normally require an additional return, in the form of higher yields, to offset the risks of venturing out along the yield curve. Today, however, most parts of the US Treasury yield curve (and many foreign government-bond market curves) are inverted, meaning that short-dated deposits, bills and notes offer higher yields than those on longer-dated bonds. While a recession has not followed every instance of an inverted curve, the Federal Reserve (Fed) Bank of Chicago has shown that each time the yield spread between 10-year and two-year Treasuries has inverted since 1969, a recession has followed.1 So with today’s deeply inverted yield curve, I thought it was worth exploring three topics at the Franklin Templeton Institute (1) How does this inversion compare to previous episodes (2) What is the historical impact on equities? (3) What is the historical impact on bonds? Based on these observations from the past, we can better evaluate if there was a pattern and whether we can discern any reasons and or lessons for the future. Cause or effect? Inverted yield curves are often the by-product of tighter monetary policies. When central banks, such as the US Fed, deem it necessary to hike interest rates to cool overheated economies, their actions cause short-dated interest rates to rise faster than yields on longer maturities. One might ask why long-term interest rates don’t rise as much (or even more) than short rates when central banks are tightening. A key reason is that modern central banks have garnered considerable credibility in keeping inflation low. When they tighten to fight inflation, investors are quick to conclude that they will triumph, even if the cost of slaying inflation is weaker economic growth, perhaps even recession. Further along the yield curve, therefore, investors must not only discount higher short-term rates due to tighter monetary policy, but also its probable outcomes, above all lower inflation and economic weakness. As a result, when central banks tighten policies, yield curves initially flatten and then often invert, as is the case today. Presently, the US yield curve is inverted—as measured by the gap between the 10-year Treasury note yield and the two-year Treasury note yield— by nearly three quarters of a percentage point. Relative to history, that is a big negative spread (Exhibit 1). In all previous Fed tightening episodes since 1989, the yield curve has never been as inverted as it is today. The only time in the postwar period when the gap between long and short rates was even more negative was during the early 1980s, when the Fed under its super-hawkish chairman, Paul Volcker, hiked short-term interest rates to 20%! United States: Government Bond 10-Year/Two-Year Term Premium Exhibit 1: US Yield Curve Since 19761976-2023 As of February 15, 2023. Sources: US Department of Treasury, Macrobond.  Important data provider notices and terms available at www.franklintempletondatasources.com. As Exhibit 1 also demonstrates, inverted yield curves are aberrations, not frequent nor long-lasting. The average length of US Treasury yield curve inversion in the postwar era, for example, is eight months. Stocks and bonds react differently Accordingly, whenever the yield curve is inverted, investors ought to anticipate its normalization. Moreover, as our research shows, US Treasury yield curve normalization typically takes place in the context of falling interest rates, what Wall Street terms a “bull steepening.” In those instances, both short- and long-term interest rates fall, with the front end (shorter-dated maturities) rallying more than the long end. Unsurprisingly, therefore, a bull steepening is bullish for fixed income markets. Prices rise along the yield curve (and across many credit markets), boosting fixed income total returns in excess of coupon rates. One might conclude that equity investors would also be pleased with falling interest rates. All else equal, after all, lower interest rates should boost equity valuations. And US bond yields have fallen in recent months, giving stocks a lift despite slowing profits growth. However, history gives us a more nuanced picture. During periods when the yield curve shifts from inverted back to upward sloping, stock markets typically sag. In those same episodes, total returns on bonds top those on equities in absolute and risk-adjusted terms (Exhibit 2). Exhibit 2: Fixed income and equity returns and Sharpe ratios during periods of yield-curve normalization As of February 2023. Sources: Analysis by Franklin Templeton Institute, Federal Reserve, S&P Indices, Bloomberg, Macrobond.    Normalization of yield curve is defined as all periods when the two-year/10-year spread crosses above 10 basis points and stays above the threshold for at least 12 months. The annualized Sharpe Ratio is calculated as a difference in average monthly returns of equity (or bond) index and average monthly risk-free rate, divided by standard deviation of monthly returns of the index, and multiplied by square root of 12. US equity is represented by the S&P 500 Index while US fixed income is represented by the Bloomberg US Aggregate Bond (USD Unhedged) Index. The interest rate on a three-month US Treasury bill is used as a proxy for risk-free rate. Indexes are unmanaged and one cannot directly invest in them. Past performance is not an indicator or a guarantee of future results. Important data provider notices and terms available at www.franklintempletondatasources.com. That begs the question, why are equities prone to fall when the yield curve normalizes? After all, interest rates (and hence discount rates) are typically falling as the yield curve normalizes, which should be bullish for stocks. The answer resides in the earlier discussion about the predictive power of the yield curve for recessions and, by extension, for profits. As noted, in preceding cycles dating back to 1970, an inverted yield curve always pre-dated a recession. During those downturns, as the economy weakened and inflation pressures abated, the Fed eventually relented and cut interest rates. But by then it was typically too late to engineer a “soft landing,” where inflation fell but the economy continued to grow. Read next: Europe will not get a boost from Chinese tourism until 2024| FXMAG.COM For equities, the real killer is what then happened to corporate profits. Without exception, when the economy fell into recession, economy-wide corporate profits also fell (Exhibit 3). Importantly, as demand weakened, firms lost pricing power, meaning that revenues shrank even faster, especially relative to costs. The outcome was typically a nasty profits recession. That debacle is evident in Exhibit 3, which shows US corporate profits as a percentage of US gross domestic product (GDP)—a measure of profits to total sales in the economy and a good approximation of aggregate profit margins. In each recession (as indicated by the grey bars), except 1990, profits growth turned negative, exacerbated by a fall in profits relative to sales (i.e., relative to GDP). United States: Corporate Profits Exhibit 3: US profit growth, recessions and profits as a % of GDP1947-2022 As of third quarter 2022. Sources: Analysis by Franklin Templeton Institute, US Bureau of Economic Analysis, Federal Reserve Bank of St. Louis. Important data provider notices and terms available at www.franklintempletondatasources.com. So far in 2023, that is not happening. Indeed, quite the opposite is occurring. This year, despite falling S&P 500 profits at a -5% year-on-year rate for the fourth quarter 2022, equity markets have jumped higher, boosted by expectations of a pause in the Fed’s hiking cycle and hopes that a Fed “pivot” to lower rates will quickly follow.2 To an extent, this year’s rally makes sense. After all, the sooner the Fed pauses, the less damage it will do to the economy and profitability. So, equity investors are right to cheer a slowing in the rate-hiking cycle. And they are also pleased by signs that the economy is not yet buckling, as shown by solid US jobs growth and a remarkable drop in the unemployment rate to a 54-year low of 3.4%. But equity investors should be wary of becoming overly exuberant. As Fed Chairman Jerome Powell and his Federal Open Market Committee (FOMC) colleagues have repeatedly pointed out, inflation remains too high and, in their view, is unlikely to recede to its target level without some job losses.3 The abnormalities in today’s labor market (e.g., lower labor force participation rates) therefore, are keeping the Fed tighter for longer, which only increases recession risk later this year. In short, good news about the economy, which investors are ready to celebrate, could portend even harder times ahead. Conclusions History strongly suggests that at this juncture in the monetary policy and economic cycles, yield curves are nearing a point of normalization. Yield curve inversion is not a lasting feature of the capital markets landscape. History also suggests that during yield curve normalization, bonds outperform stocks in absolute as well as risk-adjusted terms. That’s our view for the next few quarters as well. A key reason is the risks that lie ahead for corporate profits, which are already falling. They are likely to remain weak for much of 2023. The powerful start for equities in the first six weeks of 2023 has pulled forward into valuations whatever meager good news profits can offer this year, leaving valuations exposed to weaker economic conditions. Yield curve normalization will only take place once the economy softens. That might take longer than usual, given a very tight labor market. But the risk for investors is a Fed that is “higher for longer,” with pain merely postponed. Still, equity markets might prefer a delayed normalization of the yield curve. After all, when it arrives, it is rarely good for them. For once, therefore, equity investors might be inclined to think that when it comes to yield curves, abnormal is worth relishing. Enjoy it while it lasts. Stephen Dover, CFAChief Market Strategist,Franklin Templeton Institute Endnotes Source: Federal Reserve Bank of Chicago, 2018. Source: FactSet, as of February 10, 2023. Source: US Federal Reserve.   WHAT ARE THE RISKS? All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio. This is not a complete analysis of every material fact regarding any industry, security or investment and should not be viewed as an investment recommendation. This is intended to provide insight into the portfolio selection and research process. Factual statements are taken from sources considered reliable but have not been independently verified for completeness or accuracy. These opinions may not be relied upon as investment advice or as an offer for any particular security. Source: Quick Thoughts: Is normal really what we want? | Franklin Templeton
Rates Spark: Yields are looking up again

Rates Spark: Yields are looking up again

ING Economics ING Economics 18.05.2023 12:07
Headlines on the debt ceiling give rise to cautious optimism. Central bankers' consistent message is looking more credible and hikes are being considered again, bear-flattening yield curves. For now, all are within recent ranges US House Speaker McCarthy expressing confidence that there won't be a default Curves re-flatten on returning optimism The cautious optimism returning to the market is allowing a refocus on the relatively consistent message that has come from central banks in recent weeks. In the US the  2Y Treasury yield was pushed higher, by 7bp yesterday as markets priced out some of the tail risks surrounding the outlook. The near-term discount of the Fed policy has realigned a bit more with the Fed’s, on balance, still hawkish tones. Markets are now seeing a probability of around 20% again for a hike in June while the total amount of rate cuts seen by year-end was scaled back to less than 60bp. Not too long ago markets were looking at around 80bp, close but still below our own forecast of 100bp. Debt ceiling negotiations can be volatile, but banking tensions look set to simmer on It was not data releases that triggered this latest bear flattening of curves. It was combination positive headlines surrounding the two risk factors most closely monitored by markets. Reports of deposits growth at some US regional banks eased some of the fears around the simmering banking tensions. But the main driver appears to have been the more optimistic tones surrounding the ongoing debt ceiling negotiations, where House Speaker McCarthy expressed confidence that there won’t be a default. Yesterday may have given us a foretaste of what could be in store should there a be a quick resolution of the debt ceiling, but we also are wary of too much optimism, especially with regards to the effects of the banking tensions. The developments suggest some stabilisation and maybe lower tail risks of further default events, but there remain many other uncertainties such as exposures to commercial real estate to give rise to caution. The tightening of lending standards is not suddenly turning. Debt ceiling negotiations can be volatile, but banking tensions look set to simmer on. 2s10s curves bear flatten, but all are still within recent ranges Source: Refinitiv, ING Risk sentiment nudges up ECB pricing and narrows spreads, but not all The return of optimism also spilled over into EUR markets. In fact, the curve flattening was even more pronounced than in the US with the 2-10Y Bund curve flattening by more than 6bp on the day. At the front end money markets are now fully discounting two 25bp hikes by September. Optimism is also evident in the space of sovereign spreads where the benchmark 10Y spread of Italian government bonds versus Bunds has tightened to below 185bp to reach the narrowest levels in a month. Bund ASW are defying the optimism The only space where we not seeing the improved risk sentiment being reflected is Bund ASW levels. In particular the 2y Bund ASW shows little inclination of budging form the current 80bp area. While traditionally a risk measure, the wide spreads are currently more a reflection of returning collateral scarcity concerns after the European Central Bank has made the remuneration of government deposits on its balance sheet less attractive since early May. Since then some €115bn of government cash previously parked at the ECB has pushed back into the market. Bund ASWs defy the returning optimism reflected in other sovereign spreads Source: Refinitiv, ING Today's events and market views We are approaching the upper end of recent yield ranges with the 10Y UST yield marking a high above 3.58% yesterday. Curve-wise the 2-10y spread is close to -60bp and thus the lower end of the range since the Silicon Valley Bank debacle. We would not exclude that more positive headlines can see these thresholds being breached, but our hunch is that it would take more conviction to erase the impact of the banking turmoil on rates. Here data, in particular on inflation, should be more decisive. But markets will have to follow the slow beat of economic releases.   For today we expect a more quiet European session with many countries observing a public holiday. We will still be seeing auctions from Spain and a slate of ECB speakers including Vice President de Guindos and Estonia’s Muller. Read next: The Commodities Feed: Black Sea grain deal extended| FXMAG.COM Data highlights come out of the US where a particular focus should be on the initial jobless claims after their recent softness. Other releases cover existing home sales and the Philadelphia Fed regional index. Later in the day attention will turn to the weekly data on money market fund flows and the Fed release on its emergency lending to banks.   Read this article on THINK Tags Rates Daily Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns!  What if Russia didn't follow OPEC's output cuts?

Chinese Manufacturing PMI: Accelerating Contraction Raises Concerns! What if Russia didn't follow OPEC's output cuts?

Ipek Ozkardeskaya Ipek Ozkardeskaya 31.05.2023 08:15
The US 2-year yield fell sharply, while the S&P500 ended flat after hitting a fresh high since last summer on optimism that the US will finally agree to raise the debt ceiling.     The House will vote today to decide whether the debt limit bill gets approved at time to get a Senate approval by next Monday deadline.     The deal between Biden and McCarthy freezes discretionary spending for the next two years, which excludes weighty plans like Medicare or social care, and will only have a minor impact on around $20 trillion budget deficit projected for the next decade. Frozen spending means a spending cut in real terms as long as inflation remains high. The higher the inflation, the higher the spending cut in real terms.   But the problem is that at least 20 conservative Republicans of the House rejected Kevin McCarthy's compromise on debt ceiling, saying that spending cuts are not enough. One hardcore Republican, Dan Bishop of North Carolina, threatened to vote to oust McCarthy because he 'capitulated' to Democrats. Democrats, on the other hand, are not fully happy either as they don't want to freeze or to cut spending.     This is what a compromise is: accepting something without being fully satisfied to avoid a self-induced world economic crisis!    Anyway, any misstep at today's House vote could send the US yields higher and stocks lower.     So far, there has been a widening gap between the way the stock and bond markets priced the threat of a US government default. While the US sovereign bonds cheapened across the board, and violently at the short end, stock investors were confident that a ceiling deal would be reached and weren't discouraged by the rising US yields to stop buying.     And even the fact that the Federal Reserve's (Fed) hawkish stance has a material impact on yields' upside trajectory since the bank-stress dip, stock markets kept on climbing. Looking at how Nasdaq behaved since the bank stress rebound in yields, you could barely guess that there are rate-sensitive stocks in it.    But the reality check is that Nasdaq stocks are rate sensitive, and cannot be rate-hike proof if the Fed continues hiking the rates. It would, however, also be a good thing for the Fed members to consider pulling some liquidity out of the market as the Fed's balance sheet is still worth more than before the bank crisis.    What if Russia refuses to cut output?  In energy, US crude tanked nearly 5% yesterday, and tipped a toe below the $69 pb mark on worries that Russia may not follow OPEC's output cuts, in which case the internal conflict may prevent the cartel from reducing supply in a way to give a jolt to oil prices.   There is little chance that we see the kind of discord like back in 2020, as the Ukrainian war strengthen the ties between two allies. But any Russian veto could materially reduce OPEC's power of hit on oil prices.    Elsewhere, the Chinese manufacturing PMI showed that contraction in activity accelerated in May instead of stepping back to the expansion zone. The faster Chinese manufacturing contraction also weighs on the sentiment this morning.     We shouldn't expect China to post growth numbers comparable to levels pre-2020 because China under Xi Jinping's rule is willing to avoid euphoric, and unhealthy growth.   This is why the government put in place severe crackdown measures on real estate, tech and education. That does not mean that China won't get back in shape, but recovery will likely take longer, and growth will likely be more reasonable and a better reflection of the reality of the field.    
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Inflation Numbers Take Center Stage as Quarter Comes to a Close

Michael Hewson Michael Hewson 30.06.2023 09:50
Inflation numbers a key focus as we round off the quarter       European markets continued their recent patchy performance, as we come to the end of the week, month, quarter, and half year, with the FTSE100 sliding back while the likes of the DAX and CAC40 were slightly more resilient, after German inflation came in slightly higher than expected in June.   US markets were slightly more positive, but even here the Nasdaq 100 struggled after a sizeable upward revision to Q1 GDP to 2%, and better than expected weekly jobless claims numbers sent US yields sharply higher to their highest levels since March, while the US dollar also hit a 2-week high.   The surprising resilience of US economic data this week has made it an absolute certainty that we will see another rate increase in July, but also raised the possibility that we might see another 2 more rate increases after that.   The resilience of the labour market, along with the fact that core inflation remains sticky also means that it makes the Federal Reserve's job of timing another pause much more difficult to time. Today's core PCE Deflator and personal spending numbers for May could go some way to making that job somewhat easier.   Core PCE Deflator is forecast to remain unchanged at 4.7%, while personal spending is expected to slow from 0.8% to 0.2%. While the Federal Reserve isn't the only central bank facing a sticky inflation problem, there is evidence that it is having slightly more success in dealing with it, unlike the European Central Bank which is seeing much more elevated levels of headline and core prices. Yesterday, we saw CPI in Germany edge higher from 6.3% in May to 6.8%, while in Spain core prices rose more than expected by 5.9%, even as headline CPI fell below 2% for the first time in over 2 years.   Today's French CPI numbers are expected to show similar slowdowns on the headline rate, from 5.1% to 4.6%, but it is on the core measure that the ECB is increasingly focussing its attention. Today's EU flash CPI for June is forecast to see a fall to 5.6% from 6.1%, however core prices are expected to edge back up to 5.5% after dropping to 5.3% in May. Compounding the ECB's and other central banks dilemma when it comes to raising rates is that PPI price pressures are falling like a stone and have been since the start of the year, in Germany and Italy. In April French PPI plunged -5.1% on a monthly basis, even as the year-on-year rate slowed to 7% from 12.8%.   If this trend continues today then it might suggest that a wave of deflation is heading our way and could hit sometime towards the end of the year, however while core prices remain so resilient central banks are faced with the problem of having to look in two different directions, while at the same time managing a soft landing. The Bank of England has an even bigger problem in getting inflation back to target, although it really only has itself to blame for that, having consistently ignored regular warnings over the past 18 months that it was behind the curve. The risk now is over tightening just as prices start to fall sharply.   Today's Q1 GDP numbers are set to confirm that the UK economy managed to avoid a contraction after posting Q1 growth of 0.1%, although it was a little touch and go after a disappointing economic performance in March, which saw a monthly contraction of -0.3% which acted as a drag on the quarter overall.   The reason for the poor performance in March was due to various public sector strike action from healthcare and transport, which weighed heavily on the services sector which saw a contraction of -0.5%. The performance would have been worse but for a significant rebound in construction and manufacturing activity which saw strong rebounds of 0.7%.   There is a risk that this modest expansion could get revised away this morning, however recent PMI numbers have shown that, despite rising costs, business is holding up, even if economic confidence remains quite fragile.     One thing we do know is that with the recent increase in gilt yields is that the second half of this year is likely to be even more challenging than the first half, and that the UK will do well to avoid a recession over the next two quarters.       EUR/USD – slid back towards and below the 50-day SMA, with a break below the 1.0850 area, potentially opening up a move towards 1.0780. Still have resistance just above the 1.1000 area.     GBP/USD – continues to come under pressure as we slip towards the 50-day SMA at 1.2540. If this holds, the bias remains for a move back to the 1.3000 area. Currently have resistance at 1.2770.       EUR/GBP – currently being capped by resistance at the 50-day SMA at 0.8673, which is the next resistance area. Behind that we have 0.8720. Support comes in at the 0.8580 area.     USD/JPY – briefly pushed above 145.00 with the November highs of 147.50 beyond that.  Support remains at the 142.50 area, which was the 61.8% retracement of the 151.95/127.20 down move. A fall below this support area could see a deeper fall towards 140.20/30.    FTSE100 is expected to open 18 points higher at 7,489     DAX is expected to open 12 points higher at 15,958   CAC40 is expected to open 8 points higher at 7,320      
Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Strong Jobs Data Spurs Fed Rate Hike Expectations, Pressures Equities

Ipek Ozkardeskaya Ipek Ozkardeskaya 07.07.2023 08:52
Jobs surprise.  497'000 is the number of private jobs that the US economy added last month. 497'000. The number of quits rose to 250'000. But happily, the job openings fell by almost half a million, and more importantly for the Federal Reserve (Fed) – who is fighting to abate inflation and not necessarily jobs, the sector that saw the biggest jobs gains – which is leisure and hospitality which accounted for more than 230'000 of the jobs added – also saw the sharpest decline in annual pay growth. The pay for this sector's workers grew 7.9% last year, down from 8.4% printed a month earlier. But that detail went a bit unheard, and under the shadow of the stunning 497'000 new jobs added. And the too-strong ADP report that, again, hinted at a too-resilient US jobs market to the Fed's very aggressive rate hikes, ended up further fueling the Fed rate hike expectations. The US 2-year yield spiked above 5%, and above the peak that we saw before the mini banking crisis hit the US in March, while the 10-year yield took a lift as well, and hit 4%, on indication that, recession doesn't look around the corner... at least if you follow the US jobs numbers.  So today, the official US jobs data could or could not confirm the strength in the ADP figures, but we are all prepared for another month of strong NFP data, and lower unemployment. If anything, we could see the wages growth slow. If that's the case, investors could still have a reason to see the glass half full and bet that the US economy could achieve the soft landing that it's hoping for.     Equities pressured.  The S&P500 and Nasdaq fell yesterday as the US yields spiked on expectation that the Fed won't stop hiking rates with such a strong jobs data, as such a strong jobs market means resilient consumer spending, which in return means sticky inflation.   Other data confirmed the US' economy's good health as well. ISM services PMI showed faster-than-expected growth and faster-than-expected employment, and slower but higher-than-expected price growth in June. If we connect the dots, the US manufacturing is slowing but services continue to grow, and services account for around 80% of the US economic activity, so no wonder the US jobs data remains solid and consumer spending remains resilient, and the US GDP growth comes in better than expected, and we haven't seen that recession showing up its nose yet.   But the darker side of the story is, this much economic strength means sticky inflation, and tighter monetary conditions, and the dirty job of pricing it is done by the sovereign markets. And many investors think that when there is such a divergence of opinion between stock and bond traders, bond traders tend to be right.   But at the end of the day, the stock market's performance  will depend on how much pain the Fed will put on the Wall Street from the balance sheet reduction. If the Fed just continues hiking the rates and do little on the balance sheet front, it will only hit Main Street, and there will be no reason for the equity rally to stall. Voila.    By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  
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FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
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FX Daily: Dollar Bears Urged to Be Patient as Dollar Reconnects with Rate Differentials - 24.07.2023

ING Economics ING Economics 24.07.2023 09:26
FX Daily: Dollar bears being asked for patience Quiet summer markets are seeing dollar pairs consolidate in new, slightly lower ranges. It will be another quiet session today ahead of a big week for G3 central bank meetings. Dollar bears may find some reassurance from emerging markets, where the PBoC is trying to limit USD/CNY gains and the South African rand is holding up despite the lack of a rate hike.   USD: Dollar reconnects with short-term rate differentials As my colleague Francesco Pesole has been writing this week, the dollar has made a modest comeback as both US yields adjust higher and short-term rate spreads stay in the dollar's favour. In fact, one could argue that the dollar should even be a little higher given that two-year US yields have retraced about 50% of their drop in the first half of July and the DXY has only retraced one-third of its losses. Price action over the past week probably shows that a switch to the disinflation trade will not be easy and will require a constant drip feed of supporting evidence – be it softer price or weaker activity data. Yesterday's drop in US initial claims clearly did not help here. Casting around the world in quiet FX markets we see the People's Bank of China (PBoC) continuing to fight a weaker renminbi by printing lower USD/CNY fixings than model-based estimates suggest. Despite credible calls for a lower renminbi to support growth and battle deflation, it seems Chinese policymakers prefer to keep renminbi losses contained and prevent a 'sell China' mentality building. The PBoC's battle against a stronger USD/CNY is a slight dollar negative in quiet summer markets – especially should it extend to outright dollar sales. Today's session should be a quiet one as the market prepares for US Federal Reserve, European Central Bank and Bank of Japan (BoJ) meetings next week. Regarding the BoJ, expectations of any Yield Curve Control policy tweak seem very low (perhaps too low) given that the 30-year Japanese government bond (JGB) yield is drifting lower and the forward market prices 10-year JGB yields at 50bp in three months and at only 55bp in six months. These 10-year yields should be priced a lot higher were the market expecting a policy change. USD/JPY may well drift to the 141.15/142.00 area before next Friday's BoJ meeting.
CHF/JPY Hits Fresh All-Time High in Strong Bullish Uptrend

Fed Set to Raise Rates to a 22-Year High Amidst Cautiously Positive Market Sentiment

Michael Hewson Michael Hewson 26.07.2023 08:18
Fed set to raise rates to a 22 year high   European markets have seen a cautiously positive start to the week, buoyed by hopes of further stimulus measures from Chinese authorities in the wake of recent poor economic data. The FTSE100 has been a key beneficiary of this, putting in a two-month high yesterday.   The modest improvement in sentiment has also been helped in some part by the recent retreat in short term yields which is being driven by the hope that central banks won't have to hike rates as aggressively as thought a few weeks ago. Both German and UK 2-year yields have fallen sharply from their highs this month on this basis, helped by inflation which appears to be slowing more quickly than expected.     US markets have also put together a strong run of gains with the Dow and S&P500 hitting their highest levels since April 2022, on the back of optimism that the start of this week's earnings numbers will live up to the high expectations place on them.   Last night's initial reaction to the numbers from Microsoft, and Google owner Alphabet would suggest that optimism might be justified against a backdrop of a still resilient US economy, and a Federal Reserve that looks set to be close to the end of its rate hiking cycle.           Today's expected 25bps Fed rate hike, after last month's pause, looks set to be the last rate rise this year, whatever Fed policymakers would have you believe.   We may hear officials try and make the case for at least one more between now and the end of the year but given recent trends around US inflation its quite likely that PPI will go negative in July.   While Powell will try and make the case for further rate hikes, his time would be better spent in making the case for rates remaining higher for longer, and projecting when the FOMC expected the 2% target to be met. Core prices remain too high even with headline CPI at 3%, and it is here that the Fed will likely focus its and the market's attention.     If headline CPI continues to fall in the way, it has been doing the Fed will struggle to convince the markets that it would continue hiking rates against such a backdrop.   As things stand markets are already pricing in the prospect that this will be the last rate rise in the current hiking cycle given recent declines in the US dollar and US yields. With the next Fed meeting coming in September the market will have to absorb two more inflation reports and two more jobs' reports. Nonetheless the Fed will be keen to prevent the market pricing in rate cuts which was one of the key challenges earlier this year.   With inflation slowing and the jobs market resilient the US economy is currently in a bit of a goldilocks moment. This will be the challenge for Powell today, as he tries to steer the market into believing that the Fed could hike rates some more. We also shouldn't forget that we will get fresh messaging at the end of August at the Jackson Hole annual symposium.     EUR/USD – retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move, with the next key support at the 1.0980 level.  Currently have resistance at the 1.1120 area.   GBP/USD – appears to have found a base at 1.2795/00, breaking a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.     EUR/GBP – last week's failure at the 0.8700 area has seen the euro slip back, with the risk that we could revisit the recent lows at 0.8500/10.   USD/JPY – the rebound from the 200-day SMA at 137.20, appears to have run out of steam at the 142.00 area, however the bias remains for a move lower while below the recent highs of 145.00.   FTSE100 is expected to open 10 points lower at 7,681   DAX is expected to open 25 points higher at 16,236   CAC40 is expected to open 35 points lower at 7,380  
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ECB Set to Follow the Fed with 25bps Rate Hike as European Markets Look to React

ING Economics ING Economics 28.07.2023 08:25
ECB set to follow the Fed and raise rates by 25bps   European markets underwent a disappointing session yesterday, while US markets also underperformed after the Federal Reserve raised interest rates by 25bps as expected, pushing them to their highest level in over 20 years. At the ensuing press conference chairman Powell reiterated his comments from June, that additional rate rises will depend on incoming data.     In the statement it was restated that inflation remained elevated, and that the committee was highly attentive to the risks that prices might remain high. Powell was non-committal on whether the Fed would raise rates again in September, merely restating that if the data warranted the central bank would do so. US yields finished the day mixed, as did US stocks with little in the way of surprises from last night's meeting, as we look ahead to today's ECB rate meeting. If the Fed is close to the end of its rate hiking cycle which appears to be looking increasingly likely, despite Powell's determination to keep markets guessing, the pressure on the ECB to be more aggressive in its own battle against inflation, is also looking as if it might recede.     We've already seen the euro rise sharply against the US dollar in the last few weeks, which is deflationary and will help. Furthermore, factory gate prices in German and Italy have been in freefall for months now, so while core CPI has remained sticky and close to record highs at 5.5%, it's also important to remember that the ECB has pushed rates from 2% to 4% this year already.     We expect to see another 25bps later today, however the consensus that was so prevalent at the start of this year of more aggressive rate hikes is already starting to fray on the governing council, with Stournaras of the Bank of Greece pushing back strongly against the idea of more aggressive action.     He hasn't been the only one however, and we've also started to see more vocal political opposition to further tightening from Italian Prime Minister Giorgia Meloni who has been publicly critical of the ECB when it comes to recent rate hikes. If, as expected last nights Fed hike is the last one then it is entirely feasible that the ECB could similarly be close to the end of its own rate hiking cycle.     EUR/USD – we've seen a modest rebound from levels just above the 1.1000 level, having retreated from the 1.1275 area which is 61.8% retracement of the 1.2350/0.9535 down move.  A break below 1.0980 could see a move towards 1.0850. Currently have resistance at the 1.1120 area.     GBP/USD – continues to pull away from the recent lows at 1.2795/00, having broken a run of 7 daily losses. While above the 50-day SMA the uptrend from the March lows remains intact with the next resistance at the 1.3020 area.         EUR/GBP – continues to look soft with support remaining at the recent lows at 0.8500/10. Resistance currently at the 0.8600 and the highs last week at 0.8700/10.     USD/JPY – continues to drift down away from the 142.00 area, with support at 139.70. A move below 139.50 opens up the risk of a move back towards the 200-day SMA at 137.20.     FTSE100 is expected to open 18 points higher at 7,695     DAX is expected to open 52 points higher at 16,183 CAC40 is expected to open 35 points higher at 7,350
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FX Daily: Fed Patience Supports Risk Assets, Eyes on ECB Meeting

ING Economics ING Economics 28.07.2023 08:26
FX Daily: Fed patience provides breathing room for risk assets The market reaction to last night's FOMC statement was a mildly positive one, as Chair Powell's acknowledgement that the Fed could afford to be a little patient saw US yields and the dollar soften slightly. Today, all eyes will be on the ECB, where a 25bp hike is widely expected along with the door being left open for another hike in September.   USD: A little early to chase the dollar lower In the end, the dollar tracked US yields and marginally softened after yesterday's FOMC rate decision and press conference. Fed Chair Jerome Powell delivered another credible performance, and it seemed that markets – perhaps because of positioning – latched onto comments that the Fed "could afford to be a little patient" as a result of all the tightening implemented so far. US two-year yields edged some 7-8 bps lower, and December 2024 futures contracts priced Fed Funds some eight ticks lower at 4.07%, embracing five 25bp cuts in 2024. One of the clearest messages coming through from the press conference was that Chair Powell felt the Fed was "not in an environment where we want to provide a lot of forward guidance". In other words: listen to the data, not the Fed. On that subject, he highlighted that by the time of the next meeting on September 20th, the Fed would have two new CPI reports, two new job reports, and the Employment Cost Index (which will be released tomorrow).  While the dollar is a little lower today post-Fed, we would not chase the move just yet and prefer to take our cue from the data, starting with tomorrow's ECI. As we discussed in our FOMC review, the carry trade environment will still be popular and with overnight deposit rates at 5.25%, the dollar is clearly not a funding currency. Beyond the ECB meeting today, the US calendar should see some downward revisions to second quarter GDP, durable goods orders, and initial jobless claims. Of these, claims might be the most important given the ongoing need to see tight conditions ease in the US labour market. Barring any hawkish surprise from the ECB today, DXY should trade within a 100.60-101.20 range.
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European Markets React to US Rating Downgrade and Economic Concerns

Michael Hewson Michael Hewson 02.08.2023 08:22
European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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European Markets React to US Rating Downgrade and Economic Concerns - 02.08.2023

Michael Hewson Michael Hewson 02.08.2023 08:22
European markets set to open lower after US rating downgrade     We saw a negative start to August for European markets with the DAX leading the way lower, having only put in a new record high the day before, after poor manufacturing PMIs and disappointing earnings prompted profit taking.   Yesterday's weakness appears to have been prompted by concern that the economy is a little bit weaker than perhaps people would like, raising concern for earnings growth heading into the second half of the year. US markets also finished the day lower, although closing well off the lows of the day with the Dow managing to eke out a gain. US yields also finished the day higher, on the rising realisation that rates may well have to stay at current levels for quite a while yet.     This profit taking has continued overnight after Fitch downgraded the US credit rating to AA+ from AAA, while simultaneously boosting demand for haven assets, with Asia markets falling sharply, and which looks set to translate into a sharply lower European open.   The increase in crude oil prices over the past 4 weeks is also raising concern that the falls in input prices that we've seen over the last few months might start to hit a floor and start rising again. Yesterday we got another snapshot of the US labour market as US job openings (JOLTS) fell to their lowest levels since April 2021, although they are still well above the levels, they were pre-pandemic. The latest employment component in the July ISM manufacturing survey also slowed to its lowest level since July 2020.     Today we get the latest insight into private sector hiring with the ADP employment report for July which is unlikely to repeat the bumper 497k seen in the June numbers. We should also be prepared for a downward revision to that report with July expected to see a more moderate 190k, as we look towards Friday's more important non-farm payrolls numbers. While stocks slipped back yesterday the US dollar rose to a 3-week high, gaining ground across the board on the grounds of the broader resilience of the US economy.     EUR/USD – still finding support at the 1.0940 lows from last week with further support at the 50-day SMA as well as the 1.0850 area. Resistance currently at last week's high at 1.1150.     GBP/USD – has continued to slide lower towards trend line support from the March lows at 1.2710, and the 50-day SMA at 1.2700. While above this key support the uptrend from the March lows remains intact. Resistance at the 1.3000 area.         EUR/GBP – popped briefly above the resistance at the 0.8600 area, before slipping back again, with the risk of a return to the recent lows at 0.8500/10. We need to see a concerted move above 0.8620 to target the July highs at 0.8700/10.     USD/JPY – continues to move through the 142.00 area, with the next target at the previous peaks at 145.00. Support comes in at this week's lows at 140.70.     FTSE100 is expected to open 30 points lower at 7,636     DAX is expected to open 88 points lower at 16,152     CAC40 is expected to open 36 points lower at 7,370   By Michael Hewson (Chief Market Analyst at CMC Markets UK)  
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UK Q2 GDP Forecast: Potential Stall Amid Economic Outlook Uncertainty - Analysis by Michael Hewson

Michael Hewson Michael Hewson 11.08.2023 08:07
UK economy expected to stall in Q2. By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets enjoyed their second successive day of gains yesterday, boosted by the announcement by China to end its ban on overseas travel groups to other countries has also helped boost travel, leisure, and the luxury sector. The gains were also helped by a lower-than-expected rise in US CPI of 3.2%, with core prices slipping back to 4.7%, which increased expectations that we could well have seen the last of the Fed rate hiking cycle, which in turn helped to push the S&P500 to its highest levels this week and on course to post its biggest daily gain since July.     Unfortunately, San Francisco Fed President Mary Daly had other ideas, commenting that the central bank has more work to do when it comes to further rate hikes, which pulled US yields off their lows of the day, pulling stock markets back to break even.   This failure to hang onto the gains of the day speaks to how nervous investors are when it comes to the outlook for inflation at a time, even though Daly isn't a voting member on the FOMC this year, and she's hardly likely to say anything else. Certainty hasn't been helped this week by data out of China which shows the economy there is in deflation, despite recent upward pressure on energy prices.     It also means that we can expect to see a lower open for markets in Europe with the main focus today being on the latest UK Q2 GDP numbers, as well as US PPI for July. Having eked out 0.1% growth in Q1 of this year, today's UK Q2 GDP numbers ought to show an improvement on the previous two quarters for the UK economy, yet for some reason most forecasts are for zero growth. That seems unduly pessimistic to me, although the public sector strike action is likely to have been a drag on economic activity.     Contrary to a lot of expectations economic activity has managed to hold up reasonably well, despite soaring inflation which has weighed on demand, and especially on the more discretionary areas of the UK economy. PMIs have held up well throughout the quarter even as they have weakened into the summer. Retail sales have been positive every month during Q2, rising by 0.5%, 0.1% and 0.7% respectively. Consumer spending has also been helped by lower fuel pump prices, and with unemployment levels still at relatively low levels and wage growth currently above 7%, today's Q2 GDP numbers could be as good as it gets for a while.     Despite the resilience shown by the consumer, expectations for today's Q2 are for a 0% growth which seems rather stingy when we saw 0.1% in Q1. This comes across as surprising given that Q2 has felt better from an economic point of view than the start of the year, with lower petrol prices helping to put more money in people's pockets despite higher bills in April. This raises the prospect of an upside surprise, however that might come with subsequent revisions.       Nonetheless, even as we look back at Q2, the outlook for Q3 is likely to become more challenging even with the benefit of a lower energy price cap, helping to offset interest rates now at their highest levels for over 15 years. With more and more fixed rate mortgages set to get refinanced in the coming months the second half of the year for the UK economy could well be a lot more challenging than the first half.     Yesterday US CPI came in slightly softer than expected even as July CPI edged up to 3.2% from 3% in June. Today's PPI numbers might show a similar story due to higher energy prices, but even here we've seen sharp falls in the last 12 months. A year ago, US PPI was at 11.3%, falling to 0.1% in June, with the move lower being very much one way. We could see a modest rebound to 0.7% in July. Core prices have been stickier, but they are still expected to soften further to 2.3% from 2.4%. 12 months ago, core PPI was at 8.2% and peaked in March last year at 9.6%.       EUR/USD – squeezed above the 1.1050 area yesterday, before failing again, and sliding back below the 1.1000 area. Despite the failure to break higher we are still finding support just above the 50-day SMA. Below 1.0900 targets the 1.0830 area.     GBP/USD – popped above the 1.2800 area yesterday and then slipped back. We need to see a sustained move back above the 1.2800 area to ensure this rally has legs. We have support at the 1.2620 area. Below 1.2600 targets 1.2400. Resistance at the 1.2830 area as well as 1.3000.         EUR/GBP – pushed up to the 100-day SMA with resistance now at the 0.8670/80 area. Support comes in at the 0.8580 area with a break below targeting the 0.8530 area. Above the 100-day SMA targets the 0.8720 area.     USD/JPY – closing in on the June highs at the 145.00 area. This is the key barrier for a move back towards 147.50, on a break above the 145.20 level. Support now comes in at the 143.80 area.     FTSE100 is expected to open 42 points lower at 7,576     DAX is expected to open 70 points lower at 15,926     CAC40 is expected to open 30 points lower at 7,403
Metals Exchange Inventories in China Decline: Copper, Aluminium, and Nickel Stocks Fall

US Banks React to Fresh Rating Downgrades as Nvidia Earnings Take Center Stage

Ipek Ozkardeskaya Ipek Ozkardeskaya 23.08.2023 10:05
US banks fall on fresh rating downgrades, Nvidia earnings in focus  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank     The market mood turned sour again, and the S&P500 fell after a short relief. S&P's bank rating downgrades – which came a few days after Moody's downgraded some US small and mid-sized banks and Fitch downgraded the US' rating, came as a reminder that the rising rates won't be benign for banks as depositors move their funds into higher interest-bearing accounts, increasing banks' funding costs. The decline in bank deposits squeezes liquidity, while the value of securities that they hold in their portfolios decline. Plus, regional banks continue to face the risk of a sharp decline in commercial real estate loans. As a result, the S&P500 fell 0.28% on Tuesday, Invesco's KBW bank ETF dived more than 2.50%.       Elsewhere, the rising rates and declining purchasing power finally start showing in some retailers' quarterly announcements. Macy's for example sank 14% yesterday on rising credit card delinquencies and Dick's Sporting Goods slumped more than 24% on 'elevated inventory shrink – in particular theft. Both companies gave a morose outlook for consumer demand moving forward. Could that be a sign of potentially slower consumer spending in the next few months? We will see that. For now, the latest US data remains strong, the Fed expectations are hawkish, no one sees Jerome Powell back off with the Fed's tightening policy, and the US yields are rising. The US 2-year yield pushes higher above the 5% mark, while the 10-year yield struggles near 4.30%, where it sees decent resistance. In one hand, there is a strong demand for US 10-year papers at these levels as many asset managers consider that the levels are good entre points. On the other hand, the hawkish Fed expectations, prospects of – maybe – higher rates, which will be held for a prolonged period of time continue pressuring the yields higher along with the US Treasury's plan to issue more bonds in H2 – as they issued too many T-bills so far to fund their deficit.       And there is one more thing weighing on US treasuries and that's China. Yes, the sluggish Chinese growth is tempering energy and commodity prices and doesn't add to inflationary pressures. But Beijing adds on the US Treasury selloff as it fights against a softer yuan. The People's Bank of China (PBoC) set its daily yuan fixing surprisingly higher than expected this week in a move that Bloomberg described as the most forceful on record.       When the USD/CNY rallies due to higher US and lower Chinese yields, the Chinese sell their US denominated assets to defend yuan. And doing so, they contribute to the further strengthening of the US yields, and the US dollar is pressured higher on the back of stronger yields. Then, the cycle starts all over again. A stronger dollar, and weaker yuan forces the PBoC to sell USD assets. The UST selloff pushes US yields higher and strengthens the dollar and the yields.   
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FX Focus: Turkey in the Spotlight Ahead of Jackson Hole Symposium

ING Economics ING Economics 24.08.2023 11:02
FX Daily: Attention turns to Turkey Ahead of tomorrow's main event of the week – speeches at the Fed's Jackson Hole symposium – attention today will turn to Turkey. In focus will be whether the Central Bank of Turkey accelerates its policy tightening in a return to a more orthodox policy. Consensus suggests probably not. Elsewhere, the dollar should remain steady, with jobs in focus.   USD: Focus on the jobs market The dollar and US yields were knocked off their highs yesterday as an annual benchmark revision (up to March 2023) deducted 306,000 from the reported US payroll growth figures. Several expectations had in fact looked for a 500,000 reduction. The market reaction (a 10bp drop in the US yield curve) looked a little exaggerated but perhaps proves a reminder that the employment story is the most important US variable right now. In other words, US disinflation is welcome, but if the unemployment rate remains at its lows and consumption stays strong, inflation may never make it back to 2% on a sustainable basis.    For that reason, look out for the weekly initial jobless claims data today, where any tick higher to the 250,000 area could slightly weigh on US yields and the dollar. We would not expect big moves, however, before Federal Reserve Chair Jerome Powell's 1605CET speech tomorrow at the Fed's Jackson Hole symposium. Given that the risk environment is a little better bid today – with Nvidia's results keeping the tech boom alive – DXY could trade slightly offered in a 103.15 to 103.50 range.
Assessing the Factors Behind Dollar Strength and Future Projections for EUR:USD Real Rates

Assessing the Factors Behind Dollar Strength and Future Projections for EUR:USD Real Rates

ING Economics ING Economics 01.09.2023 10:01
Stubborn resilience in US activity data and risk-off waves from China have translated into a strengthening of the dollar over the summer. We still think this won’t last much longer and see Fed cuts from early 2024 paving the way for EUR:USD real rate convergence. Admittedly, downside risks to our EUR/USD bullish view have grown.   Still awaiting the turn in US activity data The underlying factors driving FX markets became "crystallised" over the summer, as investors waited in vain for a negative turn in US economic activity that would justify a dovish shift in both the Federal Reserve's rhetoric and market pricing. However, since forward-looking indicators and evidence from the job market have not shown enough reason to cast doubt on the resilience of the US economy, US yields have faced limited resistance once again. This has made it increasingly discouraging, particularly in real terms, to play the long bearish game through dollar shorts. At present, the US dollar index finds itself at a critical juncture, trading close to 104 (a multi-month high), and is about to face a month where decisions made by the central banks of both the US and the eurozone will determine whether it can break through to the March peaks (105.60) and beyond. Our economists expect no further interest rate hikes by the Federal Reserve, and while it is a close call, we anticipate the European Central Bank to deliver one final 25bp raise in September. In other words, we have reason to believe that the dollar may have reached its peak around current levels. Another reason for the dollar's resilience has been the influx of negative news from China. The dollar typically benefits from a deterioration in Chinese sentiment through two channels: directly through yuan depreciation (to which USD is highly correlated) and indirectly through the risk environment channel. It is conceivable that there could be a further deterioration in investor sentiment regarding China in the coming months. However, the People's Bank of China's determined defence of the renminbi means that the dollar may only gain indirectly from these developments. Looking beyond the near term, monetary policy divergence is expected to remain the overwhelmingly predominant factor driving currency trends into the next year. Another way to consider this is through short-term real rates. For example, EUR/USD has closely followed its short-term real rate spread since 2020. If nominal rate fluctuations have been the primary force behind these real rate changes thus far, the end of tightening cycles may result in a period where the inflation rates, on the right side of the subtraction, gain more significance.   Our EUR:USD real rate forecast    
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FX Markets React as Saudi Oil Cuts Boost Energy Prices

ING Economics ING Economics 06.09.2023 12:19
FX Daily: The Saudi squeeze brings energy back into the FX mix If the beleaguered euro and yen did not have enough to worry about already, they now have to cope with Brent oil trading above $90/bl as the Saudis extend their supply cuts through to year-end. Unless the US ISM services index somehow collapses today, expect the dollar to remain in demand. EUR/JPY, however, could start to turn lower based on positioning.   USD: ISM services the only threat to an otherwise bullish story The relentless rise of the dollar continues. The DXY yesterday pushed up to the highest levels since March as US yields once again edged higher. While the busiest day in US investment-grade corporate issuance in three years has surely been weighing on US treasuries, the FX market has also come under the spell of higher energy prices. The Saudis have this week confirmed their plan to roll over their 1mn barrels per day supply cut into December. This is keeping conditions tight in crude energy markets and now sees Brent trading over $90/bl. To FX markets, that provides an unwelcome reminder of the spike in energy prices last summer which had hit the energy-importing currencies in Europe and Asia. US energy independence and its net exporter status leave the dollar well-positioned for higher energy prices. It would seem the only real threat to the dollar in the near term would be some dramatic re-assessment of growth prospects. That brings us to the key piece of US data this week – today's release of the ISM services index for August. A sharp fall in this series did weigh on the dollar at the tail end of last year, but unless this really surprises with a sub-50 reading today, expect the dollar to hold onto recent gains and consolidate at these high levels before the US August CPI release this time next week. In terms of G3 currencies, we might see some re-adjustment, however. Speculators still seem to be holding onto long euro positions, while they continue to run very short positions against the yen on the carry trade. USD/JPY upside now looks more limited as rhetoric from Tokyo threatens imminent intervention. Positioning suggests EUR/USD support levels are more vulnerable. EUR/JPY may now struggle to get over the 158.50 area and may be about to embark on a correction to the 155 area.
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

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

US Bond Market Sell-Off Sets Tone for FX and Risk Assets

ING Economics ING Economics 26.09.2023 14:48
FX Daily: US bond market sets the FX tone The ongoing sell-off in the US bond market continues to set the tone – not just for FX markets but for risk assets in general. A heavy slate of US Treasury auctions this week and rising concern over a US government shutdown on Saturday is sending implied volatility higher and may trigger some more profit-taking on carry trade strategies.   USD: Focus on Treasuries again The dollar continues its grind higher and probably the biggest market talking point is the ongoing bearish steepening of the US Treasury curve. Speaking to our bond strategists, they think this is currently being driven by two factors. The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years's time. Rather incredibly, at the start of this year, the market had seen the low point for Fed Funds in three years' time down at 2.70%. The second factor weighing on Treasuries is this week's $134bn auction of two, five and seven-year notes – which takes place over the next three days. This comes ahead of a potential US government shutdown this Saturday, where hard-right Republicans in the House seem to be holding out against a stop-gap spending bill. In the background remains a threat of another downgrade of US sovereign rates on the back of an 'erosion of governance'. Apart from the rise in US yields, we have now started to see a rise in implied volatility in the US Treasury market. This will prove a headwind to carry trade strategies and could prompt the unwinding of some of the most heavily invested positions. We would worry about the Mexican peso here, which also faces Banxico unwinding its dollar forward book in less than benign conditions. Another popular target currency in the carry trade – the Hungarian forint – may actually find some support from the local central bank today (see below).  In general, however, the continued rise in US yields is making for a less benign environment and favours risk reduction. Whilst higher US yields may push USD/JPY close to 150, they also increase the risk of an equity setback. That is why we think an instrument like the one-month USD/JPY downside risk reversal may be too conservatively priced. And in general, we would say commodity currencies remain vulnerable, especially those like the South African rand and Latam currencies – this latter group were hit hard during the early August sell-off in Treasuries. DXY can probably stay bid through this if activity currencies come under pressure and technical analysts will be dusting off calls for a move to the 107.20 area.
Uncertain Waters: Saudi's Oil Production Commitment and Global Economic Jitters

Uncertain Waters: Saudi's Oil Production Commitment and Global Economic Jitters

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.10.2023 08:17
Saudi's commitment is not written into a law By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Markets are on an emotional rollercoaster ride this week. The slightest data is capable of moving oceans. Yesterday, the significantly softer-than-expected ADP report, and the announcement that 75'000 healthcare workers at Kaiser went on strike sparked a positive reaction from the market in a typical 'bad news is good news' day. The US economy added only 89K new private jobs in September, much less than 153K penciled in by analysts. It was also the slowest job additions since January 2021. The rest of the data was mixed. US factory orders were better than expected in August, but the services PMI came close to slipping into the contraction zone, and the ISM's non-manufacturing component also hinted at slowing activity. Mortgage activity in the US fell to the lowest levels since 1995, as the 30-year mortgage rates spiked higher toward 8%. Housing and services are among the biggest contributors to high inflation besides energy prices, therefore, seeing these sectors cool down has a meaningful impact on inflation expectations, hence on Federal Reserve (Fed) expectations. As such, yesterday's soft-looking data tempered the Fed hawks, after the stronger-than-expected JOLTs data triggered panic the day before. The US 2-year yield took a dive toward the 5% mark, the 10-year yield bounced lower after flirting with the 4.90% level, while the 30-year hit 5% for the very first time since 2007 before bouncing lower on relieving news of soft job additions. Hallelujah.  The US dollar index retreated across the board, and equities rebounded. The S&P500 jumped from the lowest levels since the beginning of June. The score is now one to one. One good news for the US jobs market, and one bad news. Everyone is now holding his or her breath into Friday's jobs data, which will determine whether we will end this week with a sweet or a sour taste in our mouth. Sweet would be loosening jobs data, sour would be a still-strong jobs data which would fuel the hawkish Fed expectations and further boost US yields while the US yields are at a critical moment.   For the first time since 2002, the US 10-year yield comes at a spitting distance from the S&P500 earnings. The index is just about 60 points above its critical 200-DMA. Looking at the seasonality chart, the S&P500 could dip at about now. In this context, there is a chance that soft jobs data from the US marks a dip in the S&P500 selloff. But one thing is sure: the yields and the US dollar must come down to keep the S&P500 on a rising path. Profits at the S&P500 companies are inversely correlated with the US dollar as their international profits account for about a third of the total. If the yields and the US dollar continue to rise, the S&P500 will face severe headwinds into the year end.    Oil fell nearly 6%!  Rising suspicions that the global economy is headed straight into a wall didn't spare oil bulls yesterday. The barrel of American crude dived almost 6%, slipped below the 50-DMA ($85pb), and below the positive trend base building since the end of June. The 6.5-mio-barrel build in gasoline stockpiles last week helped bring the bears back to the market even though the data also showed a more than 2-mio-barrel draw in crude inventories over the same week.   Yesterday's move shows that what matters the most for intraday moves is the rhetoric. This summer, the market focus was on the tightening global oil supply and how the US will 'soft land' despite the aggressive Fed tightening. Now we start talking about slowing economies and recession worries.   OPEC decided to maintain its oil production strategy unchanged at yesterday's decision. Saudi and Russia repeated that they will keep their production restricted to maintain the positive pressure on oil. But if global demand cools down and volumes fall, both Saudi and Russia will be tempted to increase profits by selling more oil at a cheaper price. Saudi Arabia shouldering all the production cuts for OPEC is not written into a law, it could become uncertain if market conditions turn sour.
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Market Jitters: Strong US Jobs Data Sparks Fear of Tightening Labor Market and Rising Yields

Michael Hewson Michael Hewson 05.10.2023 08:54
The fear of strong jobs By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Even a hint of an improving US jobs market sends shivers down investors' spines.  This is why the stronger than expected job openings data from the US spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the US jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep US growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising US yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the US jobs market will continue to loosen.  But the market reaction to yesterday's JOLTS data was sharp and clear. The US 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the US House Speaker McCarthy lost his position after last week's deal to keep the US government open certainly didn't help attract investors into the US sovereign space. The US blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.  In the FX, the US dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in US private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an - God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.   The EURUSD consolidates below the 1.05 level, the USDJPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold.  The barrel of American crude remains under pressure below the $90pb level. US shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak. 
Brazilian Central Bank (BCB) to Proceed with 50bp Interest Rate Cut Today Amidst Challenging External Environment

Brazilian Central Bank (BCB) to Proceed with 50bp Interest Rate Cut Today Amidst Challenging External Environment

ING Economics ING Economics 02.11.2023 12:31
BRL: BCB to push ahead with 50bp cut today Brazil’s central bank (BCB) meets to set rates today. Economists and investors are unanimous that, unlike Chile last week, the BCB will not be blown off course from its forward guidance. Here a 50bp cut has been well-telegraphed, which would take the selic policy rate to 12.25%. Since embarking on its easing cycle in August the BCB’s statement has consistently guided for 50bp cuts at future meetings. We would expect that phrasing to re-appear today. However, market pricing now only looks for a 44bp cut at the December meeting and the depth of the 2024 easing cycle has been re-priced 125bp higher over recent months. This has largely been down to higher US yields and the strong dollar, but more recently has been a function of President Lula late last week questioning his government’s commitment to a zero budget deficit next year. The fiscal side has long been Brazil’s Achilles heel and the BCB has not been shy about emphasising fiscal risks in its statements. We think the BCB will have to acknowledge the more difficult external environment. And that could see the BCB easing cycle priced a little shallower still. That could be seen as a mild Brazil real positive. Yet, fiscal risks look set to hold the real back and we much prefer exposure to the Mexican peso. Look for BRL/MXN to drop back to 3.50 later this year.
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Asia Morning Bites: Currency Retreat Amid Lower US Yields and Global Market Insights - November 8, 2023

ING Economics ING Economics 08.11.2023 14:13
Asia Morning Bites Asian currencies retreat despite lower US yields.   Global Macro and Markets Global markets:  US Treasury markets reversed their bounce on Tuesday and resumed their decline. Yields on 2Y US Treasuries fell 1.7bp, while those on the 10Y UST fell 7.7bp to 4.566%. Better demand helped yields to drop, with a decent 3Y auction. There is 10Y supply today.  Strangely, despite hiking rates by 25bp, a move that had not been fully priced in by markets, even if it was widely predicted by economists, Australian 10Y government bond yields fell 10.9bp to 4.584%. The accompanying statement was not particularly dovish, merely maintaining the data dependency of previous statements. See here for our note on the Reserve Bank’s decision, which includes a link to the statement itself.  Despite yields declining, EURUSD moved lower yesterday, reaching 1.0664 before bouncing back to just below the 1.07 mark. The AUD is all the way back to 0.6430 from just below 0.65 the previous day. Cable has slid back to 1.2292 from about 1.2380 this time yesterday, and the JPY is back above 150. The rest of the Asian FX pack was largely weaker against the USD on Tuesday. The KRW gave back some of its recent gains, rising back to 1308, and followed closely by the IDR and MYR.  USDCNY is fairly stable at about 7.28. US stock markets made small gains yesterday. The S&P 500 rose 0.28%, while the NASDAQ rose 0.9%. Equity futures are not giving much of a directional steer about today’s open. Chinese stocks were down yesterday, possibly responding to the shrinking trade surplus, though there were potentially more positive spots of light in that data set (see also here for our take). G-7 macro:  It was a relatively quiet day for macro yesterday. German industrial production weakness was one highlight and raises the probability that Germany finishes the year in a technical recession. US trade data also showed the American trade deficit widening. Today is also very quiet, with final Eurozone CPI inflation data for October, as well as US mortgage applications. The Fed speaker calendar hots up today, with 4 Fed speakers. Yesterday, Neel Kashkari repeated his fairly hawkish comments of the day before. South Korea:   The current account surplus widened in September to USD5.4bn (vs revised USD5.0bn in August). The merchandise surplus widened but was partially offset by a widening of the services deficit. Looking ahead, we expect some monthly ups and downs but expect the surplus to continue for the time being, supporting the KRW. Apart from the recent UST fluctuations and volatile movements centred on domestic equity market regulation issues, we look for an improvement in the KRW’s fundamentals.  This afternoon, data on Korean bank lending to households will be announced. We expect this to show an increase with the recent revival of jeonse and property prices. Authorities have tightened some mortgage rules since September to curb the rapid increase in household debt, so the pace of growth is expected to decelerate. The BoK is closely watching household debt as a major risk factor, and if debt grows faster than anticipated, the BoK’s hawkish comments will likely strengthen. What to look out for: Fed speakers South Korea BoP current account balance (8 November) Japan leading index (8 November) US wholesale inventories and MBA mortgage applications (8 November) Fed Chair Powell and Fed official Cook speak (8 November) Japan BoP current account balance (9 November) China CPI inflation (9 November) Philippines 3Q GDP (9 November) US initial jobless claims (9 November) US University of Michigan sentiment (10 November)
Taming Inflation: March Rate Cut Unlikely Despite Rough 5-Year Auction

US Yields Surge, Equities Drop, and Oil Rebounds: A Market Recap

Ipek Ozkardeskaya Ipek Ozkardeskaya 10.11.2023 09:58
US yields spike, equities fall, oil rebounds By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Bad. Yesterday's 30-year treasury auction in the US was bad. And this time, the bad auction got the anticipated reaction. The US Treasuries saw a sharp selloff - especially in the 20 and 30-year papers. The US 30-year yield jumped 22bp, the 20-year yield jumped more than 20bp, while the 10-year yield jumped 18bp to above 4.60%.   Then, the Federal Reserve (Fed) Chair Jerome Powell's speech at an IMF event was hawkish. Powell repeated that the FOMC will move 'carefully' and that the Fed won't hesitate to raise the interest rates again, if needed. The US 2-year yield is back above the 5% level.   Of course, the sudden jump in US yields hit appetite in US stocks yesterday. The S&P500 fell 0.80%, and Nasdaq fell 0.82%. The US bond auction brought along a lot of volatility, questions, and uncertainty.  At 5%, the US 2-year yield is still 50bp below the upper limit of the Fed funds target range. Therefore, if the Fed could convince investors that the rates will stay high for long, this part of the curve has potential to shift higher. On the longer end, we could reasonably expect the US 10-year yield to remain below the 5% mark – and even ease gently if economic growth slows and the job market loosens. A wider inversion between the US 2-10-year yield should boost the odds a higher of US recession. But hey, we are used to the inverted yield curve, and we believe that it won't necessarily bring along recession. Goldman sees only a 15% chance of US recession next year. 
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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.
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The Dollar Index Extends Losses Below 200-DMA Despite Yields Rebound: Weekly Market Analysis

Ipek Ozkardeskaya Ipek Ozkardeskaya 27.11.2023 15:12
The dollar index extends losses below 200-DMA   Friday's rebound in the US yields couldn't give a bullish shift to the US dollar. The dollar index slipped below its 200-DMA, closed the week below this level and is under renewed selling pressure this morning despite positive pressure on the yields. The broad-based dollar weakness helps the EURUSD extend gains to 1.0950, with solid resistance seen into the 1.10 level given weaker growth perspectives for the European economies compared to the US in the coming months. Cable trades past the 1.26 level, while the USDJPY remains offered near the 50-DMA, near the 149 level. The yen is benefiting from rumours that a growing number of institutional players are turning long yen on expectation that the Bank of Japan (BoJ) will one day normalize its rate policy. Every day that goes by brings the BoJ closer to normalization and there is a great upside potential for the yen at the current levels – hence a great downside potential for the USDJPY. Yet the right time for getting long yen is anybody's guess. What we know however is that the upside potential in the USDJPY is certainly limited above the 150 level.   In commodities, gold pulled out offers at the $2000 per ounce and is trading above this level this morning. The softer dollar gives support to the yellow metal, yet the rebound in the US long-term yields, news of a potential extension of cease fire in Gaza beyond today and the fact that the precious metal is worth just shy of its ATH levels hint at a limited upside potential at the current levels.   In energy, appetite in oil is nowhere to be found this morning. The barrel of US crude trades below the $75pb level despite news that OPEC+ is nearing a resolution of the disagreement on output quotas, which led to the group delaying a crucial meeting last weekend. Officials said that discussions with the African nations over the production quotas continue and agreement is within reach – in which case Saudi will likely announce at least 1mbpd extra supply cut to prevent oil bulls from leaving the battlefield. But oil traders need more effort to reverse the selloff in oil prices. The barrel of US crude sees strong resistance around the 200-DMA, near the $78pb level, and the price should rally past the $81pb level for the current bearish trend to reverse. 
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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. 

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