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: GBP shrugs off bad employment numbers.
John J. Hardy
Chief Macro Strategist
Summary: Some rather shocking payrolls data and higher jobless claims data from the UK today pushed UK short rates sharply lower, although sterling has rebounded after an initial sell-off. USD traders are awaiting the US April Retail Sales data and an opportunity to test the market reaction to the US debt ceiling limit issue as the White House and key congressional members are set for a powwow later today.
Today's Saxo Market Call podcast
FX Trading focus:
- Ugly UK payrolls data hits sterling and UK short rates. The latter stuck lower while sterling impressively rebounded. Key zone of uncertainty for GBPUSD here.
- USD traders awaiting US Retail Sales data today and debt ceiling talks.
Trading bias notes:
- USD: Key event risks today including Retail Sales and US debt ceiling talks. EURUSD bears will want 1.0900 to provide resistance, although no real reversal unless we pull back to 1.1000.
- NZD: After big reversal, bears may continue to fade NZDUSD rallies that stay short of 0.6300 area. AUDNZD heavy after Chinese data – needs to find support near 1.0700 or this bounce from recent lows looks endangered.
- GBPUSD: impressively brushed off very ugly numbers today. Risk reward for bears to test short case from here to perhaps 1.2575 (abandoning above 1.2600) or to wait for follow through below 1.2450.
- EURSEK: noted good risk/reward for testing short case yesterday in 11.30 area, but no follow through on sell-off and sub-11.25 attempt this morning. Now neutral.
Sterling: somehow ignores ugly employment data.
A few surprising UK employment numbers rolled in this morning, include a massive drop in the “payrolled employees” data that PAYE sends out to -136k. The number is so bad that one can’t help but imagine there might be a revision, but many job categories saw weakness, so there revision would have to be extreme to erase the concerning signal. The April Jobless claims number was also a worry, jumping unexpectedly to 46.7k vs. +26.5k in March. That’s the worst number since the volatile data of early 2021 and above the pre-pandemic range of monthly claims. UK 2-year rates were marked about 10 basis points lower and sterling initially dropped sharply, only to recoup all of its losses and then some even while the reaction in rates largely stuck lower. I am putting sterling on negative watch after this data point, but EURGBP certainly not cooperating yet on that account. More on GBPUSD thoughts below.
Chart: GBPUSD
GBPUSD once again found support, this time just before hitting on the critical 1.2450 area in the wake of the weak employment data today and rallying back to where it came from above 1.2500. To neutralize this recent sharp sell-off/bearish reversal, the pair needs to retake 1.2600+. Barring that development, the more compelling technical area now after this morning’s downside test is the 1.2450 zone that could open up for a deeper sell-off as newly arrived bulls will be disappointed that the recent attempt above the former cycle high of 1.2450 failed to hold, also stimulating fresh bearish interest.
USD: today’s Retail Sales and Debt ceiling talks are the next steps
The USD has backed off its recent strength this week, as EURUSD teased 1.0900 in this morning and USDJPY eased back after the rally extension yesterday. US Retail Sales for April on the docket today, with a slightly softer number expected (and reminder that this data is nominal). US home improvement giant Home Depot has been out reporting today saw its top-line results below expectation and guided for far revenue for this financial year to fall from 2 to 5 percent. Much of their current “struggle” is from the hangover after the incredible growth spurt from the pandemic-years scramble for new housing and home improvement on record low mortgage rates. More interesting for the broader and lower level retail picture is up over the next couple of days as Target reports tomorrow and Walmart on Thursday.
Today also features the latest debt ceiling talks between the Biden White House and Congressional members, with some Republican Senators apparently hoping that House Leader McCarthy can be brought to soften up his position, with the latter in an untenable situation as any softening might bring rebellion in the Republican ranks. It is very difficult to measure market stress around this issue, but at least today offers a chance to measure how reactive the market is to both developments and non-developments (another walkout with no progress…).
Table: FX Board of G10 and CNH trend evolution and strength.
FX trends are very weak, with frequent mean reversion. Strongest signals are still below an absolute value of 2, which is rare.
Table: FX Board Trend Scoreboard for individual pairs.
Little to point to in new developments – awaiting USD status after today’s important data release.
Upcoming Economic Calendar Highlights (All times GMT)
- 1200 – Poland Apr. Core CPI
- 1215 – US Fed’s Mester to discuss economic and policy outlook
- 1230 – Canada Mar. Manufacturing Sales
- 1230 – Canada Apr. CPI
- 1230 – US Apr. Retail Sales
- 1315 – US Apr. Industrial Production and Capacity Utilization
- 1400 – US May NAHB Housing Market Index
- 1400 – ECB President Lagarde to speak
- 1400 – US Fed’s Barr (Voter) to testify before House Financial Services Committee
- 1615 – US Fed’s Williams (Voter) to speak
- 1830 – US Fed’s Goolsbee (Voter 2023) to speak
- 1915 – US Fed’s Logan (Voter 2023) to speak
- 2350 – Japan Q1 GDP
- 0130 – Australia Q1 Wage Price Index
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