Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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This is the most important chart ahead of the NFP report
Christopher Dembik
Head of Macroeconomic Research
Summary: The whisper number for today's jobs report is dropping fast. Based on the latest ISM employment index, we look for a big miss.
The official estimate for September NFP report is 146,000. Based on the ADP report and the latest ISM employment index (which has a very decent correlation of 0.6 with MoM NFP change), we look for a big NFP miss today.
If our forecast is right, be ready for a very negative market reaction and higher pressure on the Fed to cut rates this month. Ahead of the NFP release, the implied probability of Fed rate cut in October is standing at 87% on the back of the ugly ISM manufacturing index and ISM Non-Manufacturing index.
On the top of that, it’s never good news when Fed hawks become dovish. Look at what Fed’s Kaplan said yesterday confirming that he is inclined to take action if economic deterioration continues: “I would rather use adjusting the Fed funds rates…when it matters, which I think is doing it sooner rather than late”.
To conclude, this is a quick sum up of what we have learnt this week on the US economy:
- The strong consumer narrative is done.
- There is obvious contagion from manufacturing weakness to the service sector.
And, we will probably have the confirmation in a couple of hours that risk of higher unemployment is on the rise due to high business uncertainty related to trade war and fear of recession. This is the perfect set up for risk aversion and higher XAUUSD.
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