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: As we await USD status, JPY poking higher on plunging long yields.
John J. Hardy
Chief Macro Strategist
Summary: The JPY is challenging speculative positioning and rallying as global long safe haven yields have dropped sharply, particularly in the US on Friday after a nominally strong October jobs report. Elsewhere, the USD status is in focus this week ahead of the unknown, but imminent timing of the Fed Chair nomination, and sterling traders will wonder if the Bank of England trauma of last week was a one-off shock or something that will trigger a more extended move to the downside.
FX Trading focus: USD rally tripped up post-payrolls, but US long yields deserve most attention.
The US dollar rally was tripped up after the October US jobs report, one that showed much better than expected payrolls growth (+531k vs. 450k expected for the October number, but especially the +235k revision to the prior two months’ data. But the participation rate remaining steady at its September level, and October average hourly earnings only meeting expectations (of 0.4% MoM and +4.9% YoY) due to a 0.1-hour drop in the average weekly hours. It looks as if vaccine mandates may not survive a court battle, which could help improve the reabsorption of workers into the jobs market in coming months. Regardless – all of the above leaves the impression of a solid US jobs report, if one that didn’t shoot the lights out or threaten to raise the Fed’s blood pressure on wage-price spiral concerns.
In reaction to the report, besides the modest USD reversal back lower after a rally attempt, the most notable market move, and one that deserves far more attention, was the very sharp rally in US treasury market on at the long end of the curve. This sent the US 10-year yield benchmark back below 1.50% and the 30-year to new local lows south of 2.00%. This was far too large a move to have been a reaction to the surprises in the US jobs data and is a bit of a conundrum. Is this just some follow-on trauma after fixed income traders at the short end of the yield curve were apparently badly shaken by the recent repricing of the forward central bank expectations nearly everywhere? Or is this the market pricing poor prospects for longer term growth and no sustained inflation? Not entirely sure, but we’ll watch the follow-on action this week, especially in the wake of the US 10-year auction tomorrow and 30-year T-bond auction on Wednesday.
Chart: USDJPY
The USD pair most sensitive to long US treasury yields has historically been USDJPY, which is in our spotlight at the start of the week after the very steep rally in long treasuries on Friday in the wake of what nominally looked like a solid US jobs report. After rallying to just north of the key 114.50 area in October, a tight range has settled with the three-week low at 113.26 – a figure the pair could be set to challenge if US long yields continue to drop, which would challenge the inflation theme. Still, a proper reversal of the rally from the September base would require a move down through 112.00 and arguably 111.25.
Focus this week: US yields and USD status, GBP status after last week’s trauma
Friday finished with a note of uncertainty on the USD status. Was the market simply unwilling to drive the USD over the edge to more strength until the Fed nomination situation is cleared up (Apparently both Powell and Brainard were spotted separately at the White House on Friday) or is this a sign that the greenback is rolling over? Besides the US treasury auctions this week noted above, we have Vice Chair Clarida out speaking today and the October CPI print on Wednesday is the economic calendar highlight for the week for the US.
Elsewhere, besides tracking whether the JPY is set to back up more aggressively on long yields dropping, we’ll watch whether GBP has merely suffered a one-off adjustment after the market misread the BoE (and the BoE provided confusing and confounding guidance) or whether sterling is set to trend lower. On that note, watching the 1.3410 area lows in GBPUSD and the 200-day moving average (below 0.8600) in EURGBP and up to the prior pivot high above 0.8650. I suspect a sustained weak sterling would require negative risk appetite. BoE Governor Bailey is out speaking later today, though the market may be reluctant to trust anything he says after last week’s traumatic meeting.
Table: FX Board of G10 and CNH trend evolution and strength
As noted above, the status of the US dollar very much up in the air after the slightly weaker close last week, while sterling has worked up quite a head of steam to the downside. Elsewhere, the JPY consolidation from its former remarkable weakness is nearly complete as we watch the key USDJPY pair for next steps as noted above.
Table: FX Board Trend Scoreboard for individual pairs
In the individual pairs, AUDUSD nominally tipped lower to close last week, but is near a pivotal stand-or-fail area near 0.7400. Elsewhere, the USDCAD flip to positive has similarly unfolded near key resistance in that pair around 1.2500. The JPY is claiming its first victims in EURJPY, NOKJPY, and GBPJPY, but this are not yet real trends yet as seen in the JPY status for the JPY broadly above.
Upcoming Economic Calendar Highlights (all times GMT)
- 1310 – Euro Zone ECB Chief Economist Lane to speak
- 1400 – US Fed Vice Chair Clarida to speak on monetary policy
- 1530 – US Fed Chair Powell to make opening remarks at conference on diversity
- 1700 – US Fed’s Harker/Bowman out speaking (neither is an FOMC voter in Dec.)
- 1700 – UK Bank of England Governor Bailey to speak
- 1850 – US Fed’s Evans (voter) to speak.
- 2030 – Australia Oct. NAB Business Conditions/Confidence
- 0500 – Japan Oct. Eco Watchers Survey
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