Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FOMC, geopolitics in focus
John J. Hardy
Chief Macro Strategist
Summary: The UN General Assembly meeting this week is guaranteed to generate new geopolitical waves with US president Trump set to address the assembly tomorrow. On Wednesday, a Security Council meeting is joined on the calendar by the Fed's latest outing.
The Federal Open Market Committee meeting would normally be the chief focus for the week ahead as we await a rate hike and a new set of accompanying materials, including the dot plot forecasts and inflation forecasts. The focus will prove especially keen on whether the Fed raises its forecasts for rates in 2019 (June forecast for two to three rate hikes assuming we get a December hike as well; the market is still a full 25 basis point hike below that forecast).
This week, however, we find oil prices and geopolitics vying for traders’ attention as well. On the US-China trade war theme, after the market last week attempted to look beyond the latest and largest round of US and China tariffs, China’s move to call off any further negotiations as long as the US side is constantly threatening new tariffs is an ugly development, as is the suggestion from an Axios piece that the US is planning a more profound anti-China push that goes far beyond the threat of a less-than-half-of-1% GDP impact from the so-far announced tariffs.
Also on the geopolitical front, and more likely a more urgent story for this week, is the UN General Assembly, which kicks off tomorrow and will feature a speech from President Trump. He will also participate in a meeting on Wednesday and has offered to talk to Iran’s leader Rouhani face-to-face at the UN, an offer that Iran has declined. With Israel’s Prime Minister also set to speak on Thursday the clear risk is of an escalation of the showdown between Iran after the US nixed the nuclear deal and re-imposed sanctions.
Brent crude has pushed above the $80/b level for the front month, a level that was only briefly crossed in May of this year for the first time since 2014.
Chart: GBPUSD weekly
The weekly candlestick for GBPUSD shows an ugly shooting star with a very long shadow, likely effectively capping the price action for now as we’re unlikely to see any friendly overtures from either side in the Brexit negotiations ahead of the Conservative party conference that kicks off this coming weekend. It looks like the situation could go all the way to the wire, so we may not see anything technically decisive until either a deal or an extension of the negotiation period under Article 50 is announced. Until then, endless headline risk and focal points are now 1.3000, the 1.3300 area top from last week, and the 61.8% Fibo retracement of the rally wave around 1.2900 and then the summer-time low below 1.2700.
This week, however, we find oil prices and geopolitics vying for traders’ attention as well. On the US-China trade war theme, after the market last week attempted to look beyond the latest and largest round of US and China tariffs, China’s move to call off any further negotiations as long as the US side is constantly threatening new tariffs is an ugly development, as is the suggestion from an Axios piece that the US is planning a more profound anti-China push that goes far beyond the threat of a less-than-half-of-1% GDP impact from the so-far announced tariffs.
Also on the geopolitical front, and more likely a more urgent story for this week, is the UN General Assembly, which kicks off tomorrow and will feature a speech from President Trump. He will also participate in a meeting on Wednesday and has offered to talk to Iran’s leader Rouhani face-to-face at the UN, an offer that Iran has declined. With Israel’s Prime Minister also set to speak on Thursday the clear risk is of an escalation of the showdown between Iran after the US nixed the nuclear deal and re-imposed sanctions.
Brent crude has pushed above the $80/b level for the front month, a level that was only briefly crossed in May of this year for the first time since 2014.
Chart: GBPUSD weekly
The weekly candlestick for GBPUSD shows an ugly shooting star with a very long shadow, likely effectively capping the price action for now as we’re unlikely to see any friendly overtures from either side in the Brexit negotiations ahead of the Conservative party conference that kicks off this coming weekend. It looks like the situation could go all the way to the wire, so we may not see anything technically decisive until either a deal or an extension of the negotiation period under Article 50 is announced. Until then, endless headline risk and focal points are now 1.3000, the 1.3300 area top from last week, and the 61.8% Fibo retracement of the rally wave around 1.2900 and then the summer-time low below 1.2700.
The G-10 rundown
USD – the US dollar must prove itself this week or else as we have an FOMC meeting that is likely to produce a relatively hawkish stance from Fed Chair Powell.
EUR – the EURUSD break higher last week the key development here – a move that was partially reversed on Friday as the latest Brexit debacle serves as a partial drag on the euro in the crosses as well.
JPY – with global risk appetite dipping to start the week, global bond yields also dipped and so did JPY crosses. JPY bears need for the rising yields story to get back on track this week – possibly a tough call with geopolitical risks afoot, so tactical risk of backfilling in JPY crosses.
GBP – an action packed week ahead as Conservatives will stake out their positions ahead of the party conference this weekend and as Labour is under pressure to make its stance more clear on whether it supports a second referendum on Brexit or an election. At least one UK paper suggests the risk of a snap November election.
CHF – EURCHF fibrillating in the range – direction likely to be found on negative correlation to any moves in sterling over Brexit and on risk appetite more broadly on the geopolitical risks this week.
AUD – the AUD rally capped by China’s harsher stance on trade negotiations with the US and AUDUSD turned lower just at the edge of the descending channel.
CAD – oil prices and a solid CPI driving Canadian short rates to fresh highs for the cycle, but USDCAD may be unwilling to commit significantly below the 1.2900 level as long as risk aversion is afoot or before we get a look at the FOMC this week.
NZD – an RBNZ meeting this week after the kiwi has backed up a bit off recent lows – RBNZ Governor Orr likely to remind how “two-way” his outlook is on risks, given the alarming trade showdown ,but technically, kiwi bears have new hurdles to overcome after last week’s squeeze.
SEK – the EURSEK sell-off pausing a bit over the last couple of sessions – weak risk appetite is perhaps the chief risk for SEK bulls eyeing the 10.00 level in EURSEK as an eventual destination.
NOK – we remain construction on NOK despite last week’s Norges Bank as oil prices could be set for a break higher here – a breakdown back through 9.50 in EURNOK could set something more in motion toward at least 9.40.
Upcoming Economic Calendar Highlights (all times GMT)
• 1300 – ECB’s Draghi to Speak
• 2350 – Japan BoJ Minutes
USD – the US dollar must prove itself this week or else as we have an FOMC meeting that is likely to produce a relatively hawkish stance from Fed Chair Powell.
EUR – the EURUSD break higher last week the key development here – a move that was partially reversed on Friday as the latest Brexit debacle serves as a partial drag on the euro in the crosses as well.
JPY – with global risk appetite dipping to start the week, global bond yields also dipped and so did JPY crosses. JPY bears need for the rising yields story to get back on track this week – possibly a tough call with geopolitical risks afoot, so tactical risk of backfilling in JPY crosses.
GBP – an action packed week ahead as Conservatives will stake out their positions ahead of the party conference this weekend and as Labour is under pressure to make its stance more clear on whether it supports a second referendum on Brexit or an election. At least one UK paper suggests the risk of a snap November election.
CHF – EURCHF fibrillating in the range – direction likely to be found on negative correlation to any moves in sterling over Brexit and on risk appetite more broadly on the geopolitical risks this week.
AUD – the AUD rally capped by China’s harsher stance on trade negotiations with the US and AUDUSD turned lower just at the edge of the descending channel.
CAD – oil prices and a solid CPI driving Canadian short rates to fresh highs for the cycle, but USDCAD may be unwilling to commit significantly below the 1.2900 level as long as risk aversion is afoot or before we get a look at the FOMC this week.
NZD – an RBNZ meeting this week after the kiwi has backed up a bit off recent lows – RBNZ Governor Orr likely to remind how “two-way” his outlook is on risks, given the alarming trade showdown ,but technically, kiwi bears have new hurdles to overcome after last week’s squeeze.
SEK – the EURSEK sell-off pausing a bit over the last couple of sessions – weak risk appetite is perhaps the chief risk for SEK bulls eyeing the 10.00 level in EURSEK as an eventual destination.
NOK – we remain construction on NOK despite last week’s Norges Bank as oil prices could be set for a break higher here – a breakdown back through 9.50 in EURNOK could set something more in motion toward at least 9.40.
Upcoming Economic Calendar Highlights (all times GMT)
• 1300 – ECB’s Draghi to Speak
• 2350 – Japan BoJ Minutes
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