Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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GBP advances, USD retreats ahead of FOMC
John J. Hardy
Chief Macro Strategist
Summary: The market is pricing a dovish FOMC outcome today, though Powell and company may save the fireworks at the June meeting. Elsewhere, sterling is resurgent despite the ongoing Brexit fog.
US equities recovered their footing and then some yesterday, and US treasuries rallied all along the yield curve after they came under early pressure. That pressure was applied by core EU sovereign bonds selling off heavily on stronger than expected Eurozone Q1 GDP data and especially German CPI data yesterday.
The German CPI surge was remarkable, with the flash headline CPI coming in at 2.1% year-on-year versus 1.7% expected, with travel and energy costs the chief contributor to the rise. The bund sell-off in response to the data was mostly erased by the European market close, so we’re not yet talking about a move that sticks in any meaningful way to the rate outlook. But euro bears were caught the wrong way around, and anyway, the euro speculative positioning was vulnerable to a short-term squeeze risk given that the good news for the single currency arrives just after an important range break in EURUSD.
The US-China trade negotiations remain a possible sword of Damocles over markets as the US side is expressing some frustration with the length of the process and a supposed willingness to walk away if a deal not done soon. Don’t know if this is a weak PR attempt to add a bit of leverage as another round of talks is set to get under way in Beijing, but the mention of hoping to get something done inside of two weeks provides hope that we can soon know something one way or another.
Trading interest
– All stop levels on USD longs violated save for AUDUSD – going flat on USD for now.
– Leaves us long EURSEK with raised stops not far below 9.60
– Long GBPCHF a way to express sterling resurgence, CHF weakness
Ahead of tonight’s Federal Open Market Committee Trump’s political limitations on Fed appointments becoming clearer as some GOP senators have now announced that they will not support his baldly political nominee Stephen Moore to the Fed.
The USD has suffered a technical reversal in several pairs – most importantly in EURUSD, and tonight’s FOMC meeting should be the decider for whether the reversal sticks and extends or whether this was a mere squeeze, with the USD set to regain its footing. I’m not sure what this meeting can bring on the dovish side beyond what March already accomplished on that front. There are some who believe the Fed will have to cut the IOER rate (interest on excessive reserves) a few basis points to regain control over the effective Fed funds rate, but the market may not know what to with such a move.
Otherwise, the usual place to look for surprises are changes to the policy guidance in the statement or in Powell’s press conference that the Fed is second guessing its long term policy target forecasts. But the June FOMC is more likely to provide firmer hints on the Fed policy outlook.
The US April Chicago PMI missed badly yesterday, at 52.6 vs. 58.5 expected. The other regional US manufacturing surveys were on the weak side of mixed, so we could be looking at a weak ISM Manufacturing today.
Chart: EURUSD
EURUSD has reversed above 1.1200, but needs to prove that it can hold above here and higher through the rest of this week’s event risks to point to an unfortunate return (for momentum traders, at least) back into the 1.1200-1.1500 swamp.
The German CPI surge was remarkable, with the flash headline CPI coming in at 2.1% year-on-year versus 1.7% expected, with travel and energy costs the chief contributor to the rise. The bund sell-off in response to the data was mostly erased by the European market close, so we’re not yet talking about a move that sticks in any meaningful way to the rate outlook. But euro bears were caught the wrong way around, and anyway, the euro speculative positioning was vulnerable to a short-term squeeze risk given that the good news for the single currency arrives just after an important range break in EURUSD.
The US-China trade negotiations remain a possible sword of Damocles over markets as the US side is expressing some frustration with the length of the process and a supposed willingness to walk away if a deal not done soon. Don’t know if this is a weak PR attempt to add a bit of leverage as another round of talks is set to get under way in Beijing, but the mention of hoping to get something done inside of two weeks provides hope that we can soon know something one way or another.
Trading interest
– All stop levels on USD longs violated save for AUDUSD – going flat on USD for now.
– Leaves us long EURSEK with raised stops not far below 9.60
– Long GBPCHF a way to express sterling resurgence, CHF weakness
Ahead of tonight’s Federal Open Market Committee Trump’s political limitations on Fed appointments becoming clearer as some GOP senators have now announced that they will not support his baldly political nominee Stephen Moore to the Fed.
The USD has suffered a technical reversal in several pairs – most importantly in EURUSD, and tonight’s FOMC meeting should be the decider for whether the reversal sticks and extends or whether this was a mere squeeze, with the USD set to regain its footing. I’m not sure what this meeting can bring on the dovish side beyond what March already accomplished on that front. There are some who believe the Fed will have to cut the IOER rate (interest on excessive reserves) a few basis points to regain control over the effective Fed funds rate, but the market may not know what to with such a move.
Otherwise, the usual place to look for surprises are changes to the policy guidance in the statement or in Powell’s press conference that the Fed is second guessing its long term policy target forecasts. But the June FOMC is more likely to provide firmer hints on the Fed policy outlook.
The US April Chicago PMI missed badly yesterday, at 52.6 vs. 58.5 expected. The other regional US manufacturing surveys were on the weak side of mixed, so we could be looking at a weak ISM Manufacturing today.
Chart: EURUSD
EURUSD has reversed above 1.1200, but needs to prove that it can hold above here and higher through the rest of this week’s event risks to point to an unfortunate return (for momentum traders, at least) back into the 1.1200-1.1500 swamp.
The G10 rundown
USD – the USD rally is no more and would require a strong reaction to the remainder of this week’s event risks to re-engage. The question for tonight’s FOMC is whether the market has overreached in pricing a further dovish shift from the Fed. The bar is lowest for a hawkish surprise, but “less dovish than expected” is about as hawkish as we may get.
EUR – speculative market not set up for supportive data like we saw yesterday. Next step is the EU CPI data up on Friday and the final Manufacturing PMI’s tomorrow and Services PMI’s on Monday.
JPY – the yen will not likely seize the spotlight unless risk sentiment fails and bonds rally hard simultaneously, or if bonds were to sell-off heavily. The combination of dovish expectations from the Fed and risk-on makes for a muddle through.
GBP – sterling is resurgent across the board on no real developments of note. Theresa May is sending signals that she hopes to wind up talks with the Labour opposition next week. The GBPCHF move and GBPUSD moves yesterday were the most noteworthy, particularly GBPUSD slicing back up through 1.3000, a technical reversal that turns the tables on the chart and favours the upside from here if 1.3000 can hold.
CHF – the positive Euro data yesterday and strong risk sentiment backdrop have EURCHF suddenly threatening the highs of the recent rally. The melt-up scenario and stable-to improving EU data could drive a further rally – 1.1500 is the important nut to crack in EURCHF on that account.
AUD – the Reserve Bank of Australia meets next Tuesday and rate cut odds are near 50/50 – so a decisive meeting one way or the other. We prefer finding ways to short AUD, for example, AUDCAD shorts and EURAUD longs if the RBA cuts.
CAD – the Feb. Canada GDP data came in weak, but the Bank of Canada’s Poloz expressed hope that there was a pick up in investment growth in Q1 and that there is good reason to hope for a growth pick up in H2. USDCAD suffered a steep retreat, neutralizing the recent rally.
NZD – the Q1 NZ employment and earnings data overnight rather confusing to interpret as the unemployment rate dropped even as employment change was negative – all due to a huge drop in the participation rate. Earnings also confused, with slower growth in wages than expected while the average hourly earnings were higher – so people are getting paid more per hour but working fewer hours than expected? Let’s call it a mildly negative surprise that adds to our long AUDNZD argument, even if the RBA next week could prove a tactical downside risk next week.
SEK – a recent Swedish data point we neglected to highlight was the Household Lending data, which showed a further steep drop to a growth rate of 5% year-on-year. Without a strong growth impulse from exports, this points to weaker growth and risks for SEK.
NOK – EURNOK in limbo, but has arguably neutralized the prior downtrend and could be vulnerable to a further squeeze if oil prices. The remarkable widening of rate spreads in Norway’s favour has done less good for the krone than we would have thought.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Mar. Mortgage Approvals
0830 – UK Apr. Manufacturing PMI
1215 – US Apr. ADP Employment Change
1400 – US Apr. ISM Manufacturing
1800 – US FOMC Rate Decision
1830 – US Fed Chairman Powell Press Conference
2015 – Canada Bank of Canada’ Poloz and Wilkins to speak
USD – the USD rally is no more and would require a strong reaction to the remainder of this week’s event risks to re-engage. The question for tonight’s FOMC is whether the market has overreached in pricing a further dovish shift from the Fed. The bar is lowest for a hawkish surprise, but “less dovish than expected” is about as hawkish as we may get.
EUR – speculative market not set up for supportive data like we saw yesterday. Next step is the EU CPI data up on Friday and the final Manufacturing PMI’s tomorrow and Services PMI’s on Monday.
JPY – the yen will not likely seize the spotlight unless risk sentiment fails and bonds rally hard simultaneously, or if bonds were to sell-off heavily. The combination of dovish expectations from the Fed and risk-on makes for a muddle through.
GBP – sterling is resurgent across the board on no real developments of note. Theresa May is sending signals that she hopes to wind up talks with the Labour opposition next week. The GBPCHF move and GBPUSD moves yesterday were the most noteworthy, particularly GBPUSD slicing back up through 1.3000, a technical reversal that turns the tables on the chart and favours the upside from here if 1.3000 can hold.
CHF – the positive Euro data yesterday and strong risk sentiment backdrop have EURCHF suddenly threatening the highs of the recent rally. The melt-up scenario and stable-to improving EU data could drive a further rally – 1.1500 is the important nut to crack in EURCHF on that account.
AUD – the Reserve Bank of Australia meets next Tuesday and rate cut odds are near 50/50 – so a decisive meeting one way or the other. We prefer finding ways to short AUD, for example, AUDCAD shorts and EURAUD longs if the RBA cuts.
CAD – the Feb. Canada GDP data came in weak, but the Bank of Canada’s Poloz expressed hope that there was a pick up in investment growth in Q1 and that there is good reason to hope for a growth pick up in H2. USDCAD suffered a steep retreat, neutralizing the recent rally.
NZD – the Q1 NZ employment and earnings data overnight rather confusing to interpret as the unemployment rate dropped even as employment change was negative – all due to a huge drop in the participation rate. Earnings also confused, with slower growth in wages than expected while the average hourly earnings were higher – so people are getting paid more per hour but working fewer hours than expected? Let’s call it a mildly negative surprise that adds to our long AUDNZD argument, even if the RBA next week could prove a tactical downside risk next week.
SEK – a recent Swedish data point we neglected to highlight was the Household Lending data, which showed a further steep drop to a growth rate of 5% year-on-year. Without a strong growth impulse from exports, this points to weaker growth and risks for SEK.
NOK – EURNOK in limbo, but has arguably neutralized the prior downtrend and could be vulnerable to a further squeeze if oil prices. The remarkable widening of rate spreads in Norway’s favour has done less good for the krone than we would have thought.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Mar. Mortgage Approvals
0830 – UK Apr. Manufacturing PMI
1215 – US Apr. ADP Employment Change
1400 – US Apr. ISM Manufacturing
1800 – US FOMC Rate Decision
1830 – US Fed Chairman Powell Press Conference
2015 – Canada Bank of Canada’ Poloz and Wilkins to speak
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