Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: Market celebrates overture from China on IP
John J. Hardy
Chief Macro Strategist
Summary: Markets are in a hopeful mood to kick off the week on trade policy signaling from China. A couple of interesting Fed speakers are out this week ahead of the more important incoming data next week as the USD is already poking at important resistance in places. The euro and yen are weak across the board.
Hong Kong local elections saw strong support for pro-democracy candidates, a development that continues to cast a shadow over the city’s testy relationship with Beijing, although Hong Kong’s leader Carrie Lam said that “The government will certainly listen humbly to citizens' opinions and reflect on them seriously.” Hong Kong stocks rallied strong to start the week and the market is generally in a positive mood, perhaps additionally supported by China’s announcement that it will increase penalties on intellectual property violations, an obvious signaling in the ongoing US-China trade negotiations.
It’s a quiet week for US data and many US workers will be out Wed-Fri for the US Thanksgiving holiday, though the market is only fully closed on Thursday. But US Fed Chair Powell will be out today with prepared remarks and no Q&A, while tomorrow sees a possibly more interesting speech from Lael Brainard of the Fed Board of Governors as she is set to speak on the Fed’s Policy Framework Review and will include a question and answer session– this could throw off a signal or two on the Fed’s stance from here – beware.
Data-wise, I will focus most on the weekly initial jobless claims up a day early on Wednesday this week as a third bad print in a row could prove a warm up for an ugly miss in next week’s November jobs report. Stay tuned. Otherwise, it’s a technical focus on some of the major USD pairs in what has been a painfully quiet market, with EURUSD and AUDUSD the first USD pairs close to challenging pivotal levels (1.1000 and 0.6770) and the most burning question is how markets will deal with evidence that I suspect is incoming that the US economy is lurching into a recession.
Chart: EURSEK
One of the more interesting technical developments as the week gets underway is the breakdown in EURSEK that was already unfolding late Friday below the 10.62 area. Let’s see if the move sticks – it is certainly helpful for SEK fundamentals that Riksbank appears on course for hiking rates back to zero in December – but a fiscal signal from Sweden and a more support from the EU data would offer more SEK support. Sweden’s Household Lending data for October is up on Wednesday – not something the market traditional reacts to, but the last time it was dipping as low as it has been in recent months (September at new multi-year low at +4.9% YoY) back in 2012, Sweden was heading for a recession. Looking lower, the 10.50 and 10.40 areas were two prior zones of support.
The G-10 rundown
USD – The greenback looks firm here though volatility is incredibly constrained. Watching for technical developments, Brainard tomorrow and jobless claims on Wednesday with most interest.
EUR – the euro is weak, and not just versus the US dollar. Wondering if the market is slightly misreading Lagarde’s comments last week on a policy review, but will take some time to sort that out. For now, a daily close below 1.1000 could trigger a slide to the sub-1.0900 lows.
JPY – risk appetite up and bond yields up means tough sledding for the yen.
GBP – sterling looking firm as the market looks for a Boris Johnson win and bad data may ironically prove more supportive as it builds the energy behind the potential margin of victory and the eventual fiscal response.
CHF – backdrop looks CHF-negative, but EURCHF rather inert below the key 1.1050 area, while USDCHF getting a bit interesting and garner attention if it can poke above parity.
AUD – if the news overnight on China’s IP policy is supposed to indicate brighter hopes for a friendly US-China trade negotiation outcome, then AUD not paying attention. Lowe will be out speaking twice tonight.
CAD – USDCAD has done about all it can to the upside without a broader USD signal, which is likely needed if the range highs are to yield for a more notable push higher into 1.35, though CAD is also vulnerable in the crosses if our concerns on US recession risks are borne out.
NZD – Watching the Q3 Retail Sales report up late today – a bit tardy stuff, given we are more than halfway through Q4, but NZD looks a bit stretched to the upside in places and may be sensitive to bad news. As well, we’ve seen a bit of weak credit card spending data over the last few months. RBNZ out with its Financial Stability Review tomorrow late for us in Europe, with Governor Orr press conference to follow.
SEK – EURSEK is poking at new lows, a break of the very well established range above 10.60 – is SEK finally being rewarded for the Riksbank’s clear intent to hike rates back to zero? Next test is down into 10.50-40.
NOK – recent rejection of the attempt below 10.05 in EURNOK was rejected, but the pair is heavy again and the backdrop supportive (risk appetite, etc..) so another go may finally see the bears rewarded with a better confirmation that the top is in. The next zone of interest down into 9.85 area.
Today’s Economic Calendar Highlights (all times GMT)
- 0900 – Germany Nov. IFO
- 1330 – US Oct. Chicago Fed National Activity Index
- 1530 – US Nov. Dallas Fed Manufacturing Activity
- 1800 – ECB’s Lane to Speak
- 2145 – New Zealand Q3 Retail Sales
- 2350 – Australia RBA’s Debelle to Speak
- 0000 – US Fed Chair Powell to Speak
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