Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Head of FX Strategy
Summary: King dollar remains heavily in demand, being the only relief in portfolios with both equities and bonds down. Momentum is likely to continue until US economic data or events signal risks to spending into Q4. We highlight the "Three S" risks stacking up into next week coming from student loan repayments, strikes and shutdown. These could make Gold outperform, but any hit to the USD will remain temporary for now. EUR and JPY face a double whammy of risks from USD strength and rising oil prices, while CAD outperformance continues.
The Fed’s higher-for-longer message is continuing to reverberate through the markets, and US 10-year Treasury yields have now climbed above 4.5% for the first time since 2007. That is weighing on risk assets, and as a result, the shift in inflation regime has come back to haunt asset allocators, questioning once again the relevance of the 60-40 portfolios. In this scenario, cash remains king and exposure to the US dollar remains key to hedge the downside risks in portfolios. Higher yields, US resilience and quarter-end flows can continue to support the dollar this week, but risks are seen increasing into October.
This week is light on data but heavy on event risks. Today’s consumer confidence data could be key in the US as higher gasoline prices along with high borrowing costs and increasing spending concerns could weigh. August consumer confidence plunged to 106.1 from July’s 114 as consumers’ assessment of the labor market deteriorated. Entertainment spending should also have started to taper into September and Bloomberg consensus expects US consumer confidence to plunge further to 105.5.
Still, clear deterioration in data may only start to come after all the September data has been reported and there may be some more room for USD strength to sustain. This week’s event risks, however, remain key to monitor and could bring some bumps. An adverse outcome could also risk a fast forward to stagflation concerns, and disrupt the USD rally momentarily. ‘Three S’ risks are lining up – including the student loan repayments that restart in October, the autoworker strikes that are now encompassing the supplier networks, and a potential government shutdown.
Federal student loan repayments are set to restart on October 1 after having been suspended since March 2020, and Moody’s estimates that 24 million borrowers will owe an average of $275 per month. This could curtail consumer spending, especially when pandemic-era savings are being exhausted. Meanwhile, the widening United Auto Worker (UAW) strikes against GM and Stellantis risk dampening US industrial output and could result in higher car prices, suggesting stagflation risks. Lastly, a US shutdown could arrive into the coming weekend if Congress fails to provide funding for the fiscal year starting October 1. This could mean thousands of federal workers may be furloughed without pay, again highlighting spending cut risks if the shutdown is prolonged.
While direct economic impact from strikes or shutdown could be limited, sentiment could turn around quickly with all these risks stacking up into the beginning of Q4. Dollar still remains attractive from a safe-haven perspective, given the cratering in yen and Swiss franc, however some consolidation may be likely with net positioning in the dollar also turning to a long after eight weeks. A look at previous shutdown from December 2018-Janauary 2019 showed that dollar declined for four consecutive weeks before gains returned when the resolution was reached. Gold could outperform on safe-haven demand, while sustained gains in oil prices could underpin CAD. If a shutdown is averted, USD bulls could come back stronger.
Eurozone’s PMIs were mixed on Friday with German economy seemingly at a turnaround but France slipping further. Overall, Eurozone PMIs remained in contraction, signalling risks for Q3 GDP. Germany’s Ifo also showed a marginal improvement, but remained insufficient to spark optimism. Focus is on monthly credit data due Wednesday and flash CPI later this week, and soft numbers could continue to put emphasis on peak ECB rates, bringing EUR downside. Break of key support at 1.0635 in EURUSD has opened the doors to 1.05.
Meanwhile, higher Treasury yields and oil prices continue to push the Japanese yen lower. USDJPY was at fresh 11-month highs, and is testing the 149 handle with verbal intervention remaining lacklustre. Near-term risks is seen at the 150 handle with any real intervention potentially bringing the pair lower towards 145 temporarily but unlikely to reverse the weakness of the yen in any material way.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)