Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Fed fails to fuel dollar rally
John J. Hardy
Chief Macro Strategist
The Federal Open Market Committee statement has been picked over for significant hints, and the most significant of these was the insertion of the word “symmetric” to describe the Fed’s inflation target. The interpretation here is slightly dovish – it's basically an indication that the Fed isn’t about to lose its cool if inflation rises further in coming months now that the 2% target has effectively been reached.
Many leading indicators and basing effects suggest inflation could rise further over the summer.
Otherwise, there wasn’t much else in the statement in the form of takeaways, and the USD settled largely “unchanged” after rallying to new highs ahead of the statement and then weakening sharply – about 60-70 pips in EURUSD terms – before giving up much of the reaction. US yields pulled back slightly, with the 10-year benchmark off the day’s highs but remaining within the trading range of the last few sessions.
In short, the USD rally appears very much intact and ready to have a look at the next round of incoming data, including today’s April ISM non-manufacturing survey and the April jobs and, more importantly, earnings data on Friday. The useless (as an NFP change predictor) ADP payrolls data showed jobs growth in April of +204k , about par for the course. It’s hard to believe the ISM non-manufacturing can sustain the high 50s for much longer, but expectations are running to 58.0 for today’s number.
Today sees the latest Norges Bank announcement. The market is caught in a nervous area technically around the 9.70+ level in EURNOK and with a number of conflicting developments. The government cut the central bank’s inflation target to 2.0% from 2.5% to align Norway with other countries – a hawkish development if inflation nears the 2.0% level again, but that decision has recently come under fire politically.
As well, the most recent inflation report was a distinct disappointment and oil prices have suffered a couple of weak sessions. Given the technically pivotal levels, we could see considerable volatility on the back of the decision today if the Norges Bank wants to make a point.
Chart: EURJPY
Taking our eyes off the USD a bit, we note some interesting developments in EURJPY, which has posted a smart reversal around the 200-day moving average and the top of the Ichimoku daily cloud. There could be considerable room to run to the downside here, given the relative economic developments in the Eurozone in recent months relative to Japan and given the lack of a revaluation in the pair after the Bank of Japan long ago launched an undeclared, de facto taper. The cycle lows below 128.00 look pivotal for whether something quite large scale to the downside could develop.
The G-10 rundown
USD – the greenback rally is in fine form and looking for more until proven otherwise but we’ll soon need to see some separation from key pivot levels in major USD pairs like EURUSD at 1.2000, GBPUSD around 1.3600, USDJPY at 110.00, and AUDUSD at 0.7500.
EUR – the euro is awaiting proof that the economy won’t continue to weaken badly, a development that would take time; a weaker currency would help. The key for now is whether EURUSD is a buy here or if the USD rally is going to require patience and a second look in the 1.1500-1.1600 area.
JPY – the 110.00 level in USDJPY is a major milestone and could prove a tough nut to crack if exporter hedging arrives in force around here. Risk appetite and yield direction are additional considerations, as all of the above look pivotal (200-day moving average in the S&P 500 for former and the 3.00% level in the US 10-year benchmark for the latter.
GBP – sterling is struggling for oxygen ahead of next week’s Super Thursday Bank of England meeting/inflation report. Rate hike expectations have declined steeply from virtual certainty of a hike as recently as a couple of weeks ago to only 20% odds of a hike priced now. Sterling to find a local low around the meeting even if dovish as expected?
CHF – the franc is cutting no profile at the moment and in a holding pattern as long as it stays above 1.1900 and below 1.2000. Swiss National Bank governor Jordan is out speaking today.
AUD – the Aussie is refusing to slip the big 0.7500 level in AUDUSD just yet. and the pair is a reasonable proxy for the status of the USD rally.
CAD – USDCAD is steady in the 1.2800-1.2900 range and needing a boost soon to keep the rally going, though we prefer the USD against most other pairs even if the rally extends.
NZD – the 0.7000 level in NZDUSD is the local equivalent of 0.7500 in AUDUSD and AUDNZD has gone determinedly sideways and needs a rally through 1.0800-50 to get more structurally interesting for a rally extension.
SEK – the hapless krona is struggling to find a floor but getting to levels where the floor could be made of high-bounce rubber once it is found when the least ray of light is shone on the currency from a data or central bank angle.
NOK – Norges Bank today as EURNOK is banging on local range resistance – anything dovish could knock the currency sharply lower as it has been made more vulnerable by the recent weak inflation print.
Upcoming Economic Calendar Highlights (all times GMT)
• 0800 – Norway Deposit Rate
• 0830 – UK Apr. Services PMI
• 0900 – Eurozone Apr. Flash CPI Estimate
• 1100 – ECB’s Praet to speak
• 1200 – ECB’s Constancio to speak
• 1230 – Canada Mar. International Merchandise Trade
• 1230 – US Mar. Trade Balance
• 1230 – US Q1 Nonfarm Productivity / Unit Labor Costs
• 1230 – US Weekly Initial Jobless Claims
• 1400 – US Apr. ISM Non-manufacturing Survey
• 1400 – US Mar. Facory Orders
• 1600 – Switzerland SNB’s Jordan to speak
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