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: USD eyes CPI, Europe eyes energy prices.
John J. Hardy
Chief Macro Strategist
Summary: An important US CPI release up later today, which could extend the USD weakening move in the short term if we see a soft print, with JPY crosses likely the most sensitive to any jolt the data delivers to US treasury yields. Elsewhere, it is all about market sentiment, which has rushed higher on hopes that Ukrainian battlefield momentum will continue and change the game for the European energy outlook.
FX Trading focus: US CPI release and USD picture. AUDNZD in the spotlight.
Over the last few days, the US dollar has largely weakened as a function of brightening risk sentiment and hopes that the energy situation might eventually improve for Europe if Ukrainian battlefield successes compound further and prove a gamechanger for the medium term energy outlook for Europe. It’s impossible to predict developments there, but to get a more determined extension higher, we’ll need a steady stream of improvements and something that can bring the prospect of actual deliveries of Russian natural gas through the pipelines. I’m not sure I understand the path in that direction in the near term.
That brings us to today’s August US CPI release, which is expected to show headline inflation at -0.1% month-on-month and +8.1% year-on-year, with the more important core “ex Food and Energy” CPI reading expected at +0.3% MoM and +6.1% YoY (vs. +5.9% in July and a cycle peak of ). The core print, especially the month-on-month reading, is far more important than the headline data. Look for a significant reaction on a downside miss even of 0.1%, but the market may get very upset if we get a +0.4% or higher reading. It’s hard to know how the market is positioned for this data point, given that Fed expectations are pinned near the highs of the cycle, while the USD has backed off very sharply and risk sentiment has enjoyed a strong surge. The latter suggests that the surprise side is a hot core inflation reading.
Chart: GBPUSD
Sterling is trading a bit firmer as the currency is the most sensitive to prospects for an improved natural gas delivery outlook, with the markets hopes up on that front due to developments in Ukraine. The UK August payrolls data this morning was stronger than expected and the unemployment dropped to a nearly 50-year low of 3.6% versus expectations for 3.8% expected. And yet, August Jobless Claims posted their first positive reading since early 2021 and are trending very sharply higher. The Bank of England is rapidly seeing expectations repriced for a 75 basis point hike at next Thursday’s meeting, but it’s not fully there yet. Ahead of today’s US CPI release, GBPUSD is trading up close to the first important resistance, the major pivot low in July near 1.1760. The next few sessions should be pivotal for the pair.
AUDNZD update as the pair pushes on resistance again. The drumbeat of economic data out of Australia is not particularly encouraging, and the last Australian trade balance saw the surplus shrinking sharply after a string of record levels in recent months. That surplus relative to the new very large external deficits that New Zealand has been running due to its reliance on energy imports is one of the key factors favouring a significant break higher in AUDNZD into a new range above the 1.1250 that has held since 2017 (and on a weekly close basis since 2015, with the highest weekly close since 2013 only slightly above 1.1300). Watching that pair for a change of mentality, as fair price in the very long term perspective looks more like 1.2000+.
The Norwegian Regions Survey for August showed the first negative print (-0.16 vs. +0.80 in July) for the expected growth for the next six months since 2009, a fairly remarkable development suggesting that the oil and gas boom has not sufficiently offset concerns for real growth in the country. NOK trades a bit weaker this morning versus the euro and SEK, with NOKSEK only having a bit more than a figure to worth with before suggesting a reversal lower (1.0500 area versus current 1.0620 as of this writing).
Table: FX Board of G10 and CNH trend evolution and strength.
The USD is leaning lower – does the CPI deliver the coup de grace today? Elsewhere, the weak JPY will be very sensitive to the US treasury market reaction on the back of the CPI, as its weakness is reflection of US treasury yields pinned near the highs for the cycle.
Table: FX Board Trend Scoreboard for individual pairs.
USDCAD is trying to turn negative – let’s have a look at the US CPI release today and the close on the day before drawing conclusions. EURUSD flipped positive yesterday and needs to remain above 1.0100 after the US data today to keep the focus higher, perhaps to 1.0350 next.
Upcoming Economic Calendar Highlights
- 1000 – US Aug. NFIB Small Business Optimism
- 1230 – US Aug. CPI
- 1700 – US 30-year T-bond Auction
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