Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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US data today tests FOMC reaction
John J. Hardy
Chief Macro Strategist
Summary: Market direction today is highly contingent on the post-FOMC meeting narrative, as the latest round of US jobs and earnings data and ISM non-manufacturing either supports or casts doubt over the market’s interpretation of the “less dovish” Fed narrative.
After the less dovish than expected Federal Open Market Committee meeting Wednesday, US yields have risen all along the curve and the yield curve itself has flattened slightly. The USD has risen from the pre-meeting slump and now faces the test of this week’s critical economic data (and a bevy of Fed speakers later in the day).
So today will be all about confirming or rejecting the post-FOMC meeting narrative that the market has gotten ahead of the Fed’s willingness to deliver a lower tilt to its forward rate guidance. I find the ISM non-manufacturing survey more interesting for relevance as a more leading indicator than the erratic payrolls survey.
Payrolls change is only interesting if this is particularly low or particularly high and the earnings data needs to show solid strength after the prior month’s 0.1% advance to act as an upside US rate catalyst. The March figures were 0.1% MoM and 3.2% YoY, held down by an increase (random) in the Average Weekly Hours to 34.5. If the earnings figure comes in a bit hot with a weekly hours drop back to 34.4, the headline earnings number might look more impressive.
Regardless of the data quality, it's important to watch the behaviour of US yields all along the curve, with a weak treasury market (higher yields) pointing to further pressure on positively risk-correlated currencies as we have seen since the FOMC meeting.
Trading interest
USD traders have suffered whiplash all week – looking at ways to get long USD again if this latest firmness follows through.
Short AUDUSD and short GBPUSD if the latter heads below 1.3000 after the US data.
The latest spike higher in EURNOK has broken the bears’ back, we will look for long opportunities next week.
Chart: USDRUB vs. CFTC speculative positioning
This chart shows the speculative net long in RUB futures on the US CME futures exchange – as of last Tuesday at a record >35k contracts, or around USD 1.4 billion at the current exchange rate. If the US dollar continues to firm and oil prices come under further pressure, the squeeze risk could be amplified by heavy speculative long RUB positioning. The price is also just shy of the early March pivot high around 65.85 and the 100-day moving average just above there.
So today will be all about confirming or rejecting the post-FOMC meeting narrative that the market has gotten ahead of the Fed’s willingness to deliver a lower tilt to its forward rate guidance. I find the ISM non-manufacturing survey more interesting for relevance as a more leading indicator than the erratic payrolls survey.
Payrolls change is only interesting if this is particularly low or particularly high and the earnings data needs to show solid strength after the prior month’s 0.1% advance to act as an upside US rate catalyst. The March figures were 0.1% MoM and 3.2% YoY, held down by an increase (random) in the Average Weekly Hours to 34.5. If the earnings figure comes in a bit hot with a weekly hours drop back to 34.4, the headline earnings number might look more impressive.
Regardless of the data quality, it's important to watch the behaviour of US yields all along the curve, with a weak treasury market (higher yields) pointing to further pressure on positively risk-correlated currencies as we have seen since the FOMC meeting.
Trading interest
USD traders have suffered whiplash all week – looking at ways to get long USD again if this latest firmness follows through.
Short AUDUSD and short GBPUSD if the latter heads below 1.3000 after the US data.
The latest spike higher in EURNOK has broken the bears’ back, we will look for long opportunities next week.
Chart: USDRUB vs. CFTC speculative positioning
This chart shows the speculative net long in RUB futures on the US CME futures exchange – as of last Tuesday at a record >35k contracts, or around USD 1.4 billion at the current exchange rate. If the US dollar continues to firm and oil prices come under further pressure, the squeeze risk could be amplified by heavy speculative long RUB positioning. The price is also just shy of the early March pivot high around 65.85 and the 100-day moving average just above there.
The G10 rundown
USD – today is all about confirmation or rejection of the post-FOMC reaction. EM could be particularly vulnerable to higher US rates combined with a further sell-off in equities on the fears that the return of the Fed punch bowl has been excessively front-run. Fed speakers late today at a conference could provide a plot twist (a bevy of them, including Clarida of the Board of Governors, out speaking at a conference).
EUR – a close below 1.1150 in EURUSD puts the lows for the cycle back into focus for a run to 1.1000 and the lower targets like 1.0865 we have discussed previously, but momentum traders have been frustrated at every turn. A rally and close back above 1.1250 on a weak USD reaction to today’s data needed to point the needle back higher.
JPY – what is a JPY trader to do when US yields advance and risk sentiment weakens? Stay away? sell the JPY crosses? As long as any US yield rises are gentle, more focus may be on upside JPY potential if risk-correlated currencies find themselves under pressure. AUDJPY, for example, pressing down on interesting range support.
GBP – the Bank of England was both dovish and hawkish yesterday, with inflation forecasts for this year and next lowered, although Governor Carney suggested that more rate hikes than currently priced will be needed if the scenario plays out as expected (including a smooth Brexit). “If the world unfolds broadly as consistent with this forecast, then it will require greater withdrawal of monetary stimulus than is currently implied,”
CHF – CHF retaining a slight safe haven premium on the latest sell-off in equities, but USDCHF champing at the bit just ahead of the highs for the cycle. EURCHF needs to remain above 1.1350-ish to keep the interest in the recent rally alive.
AUD – AUDUSD having a look below 0.7000 already ahead of next week’s Reserve Bank of Australia. Significant risk of a cut at that meeting, and even not, an indication that the bank is ready to cut at the following meeting. Not seeing the upside scenario for AUD unless we get a sudden parting of the clouds on the US-China trade negotiations.
CAD – oil price drop helping USDCAD back higher, but need a firm USD post-today’s data and retaking of 1.3500 to keep the focus higher for the pair.
NZD – Looking at next week for AUDNZD long opportunities if price action remains orderly after a possibly dovish RBA. The Reserve BAnk of New Zealand meets the day after the RBA on Wednesday.
SEK – EURSEK mulling the highs for the cycle at 10.70+ and could carve out new territory to the upside if the market remains concerned about the Eurozone growth outlook and risk sentiment rolls over.
NOK – an ugly squeeze in EURNOK on the latest weakness in oil prices and as market confidence in the Norges Bank rate normalisation message has eased a bit. The pair could go on to test 10.00 and beyond if the risk mood sours and crude suffers a deeper rout. Norges Bank and Norway CPI next week.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – US Apr. Change in Nonfarm Payrolls
1230 – US Apr. Average Hourly Earnings
1230 – US Apr. Unemployment Rate
1400 – US Apr. ISM Non-manfacturing
1530- – US Fed speakers at Policy Conference
USD – today is all about confirmation or rejection of the post-FOMC reaction. EM could be particularly vulnerable to higher US rates combined with a further sell-off in equities on the fears that the return of the Fed punch bowl has been excessively front-run. Fed speakers late today at a conference could provide a plot twist (a bevy of them, including Clarida of the Board of Governors, out speaking at a conference).
EUR – a close below 1.1150 in EURUSD puts the lows for the cycle back into focus for a run to 1.1000 and the lower targets like 1.0865 we have discussed previously, but momentum traders have been frustrated at every turn. A rally and close back above 1.1250 on a weak USD reaction to today’s data needed to point the needle back higher.
JPY – what is a JPY trader to do when US yields advance and risk sentiment weakens? Stay away? sell the JPY crosses? As long as any US yield rises are gentle, more focus may be on upside JPY potential if risk-correlated currencies find themselves under pressure. AUDJPY, for example, pressing down on interesting range support.
GBP – the Bank of England was both dovish and hawkish yesterday, with inflation forecasts for this year and next lowered, although Governor Carney suggested that more rate hikes than currently priced will be needed if the scenario plays out as expected (including a smooth Brexit). “If the world unfolds broadly as consistent with this forecast, then it will require greater withdrawal of monetary stimulus than is currently implied,”
CHF – CHF retaining a slight safe haven premium on the latest sell-off in equities, but USDCHF champing at the bit just ahead of the highs for the cycle. EURCHF needs to remain above 1.1350-ish to keep the interest in the recent rally alive.
AUD – AUDUSD having a look below 0.7000 already ahead of next week’s Reserve Bank of Australia. Significant risk of a cut at that meeting, and even not, an indication that the bank is ready to cut at the following meeting. Not seeing the upside scenario for AUD unless we get a sudden parting of the clouds on the US-China trade negotiations.
CAD – oil price drop helping USDCAD back higher, but need a firm USD post-today’s data and retaking of 1.3500 to keep the focus higher for the pair.
NZD – Looking at next week for AUDNZD long opportunities if price action remains orderly after a possibly dovish RBA. The Reserve BAnk of New Zealand meets the day after the RBA on Wednesday.
SEK – EURSEK mulling the highs for the cycle at 10.70+ and could carve out new territory to the upside if the market remains concerned about the Eurozone growth outlook and risk sentiment rolls over.
NOK – an ugly squeeze in EURNOK on the latest weakness in oil prices and as market confidence in the Norges Bank rate normalisation message has eased a bit. The pair could go on to test 10.00 and beyond if the risk mood sours and crude suffers a deeper rout. Norges Bank and Norway CPI next week.
Upcoming Economic Calendar Highlights (all times GMT)
1230 – US Apr. Change in Nonfarm Payrolls
1230 – US Apr. Average Hourly Earnings
1230 – US Apr. Unemployment Rate
1400 – US Apr. ISM Non-manfacturing
1530- – US Fed speakers at Policy Conference
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