Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
EUR and AUD weak on growth concerns
John J. Hardy
Chief Macro Strategist
Summary: The euro is stumbling ahead of the Q1 GDP print as weak lending data and fresh populist agitation from Italy weigh on the single currency. AUD is also weak ahead of pivotal jobs data that could seal the deal for a coming RBA rate cut.
Risk appetite has generally bounced back on hopes that US and China can avoid fresh escalation for now in their showdown over trade issues. Apparently, the market feels confident after a sideways day, that the USDCNY rate will remain capped as long as negotiations haven’t entirely collapsed.
A couple of interesting tidbits that don’t support the market’s rather complacent stance: first, a speech by Xi Jinping overnight criticized those (implicitly the US) who think they can reform other nations, and second, the story that Trump is considering a blanket ban on Huawei for telecoms in the US.
The big news in the Asian overnight was China’s Industrial Production and Retail Sales data missing expectations for the year-on-year figures by more than a percent. The latter, at +7.2% year-on-year, is the lowest rate since 1999 save for a one-off spike in 2003. Even that rate is hard to accept, given the large absolute drops in car sales over the last few months. Markets took this in stride…
The euro is a shade lower (the euro only moves in shades these days, it seems) after yesterday Italy’s Salvini said he would be happy to ignore EU budget rules until the Italian unemployment rate, currently 10.6%, falls to 5%. Italy’s BTP yields have steadily risen of late in a falling yield environment for safe haven sovereign bonds and the 2-year BTP, at 0.70%, is at its highest yield this year. This noise comes ahead of the EU parliamentary elections next week, where the strength of eurosceptic results could drive further existential concerns. It seems EURCHF has finally woken up to the issue.
Recent EU lending data points to a rising risk of a growth slowdown dead ahead. I tweeted out a chart from Commerzbank pointing to the accelerating of the already cratering rate of lending to non-financial corporations and the household lending rate is dipping into negative territory as well. If export orders don’t pick up, shield your eyes for the coming couple of quarters’ EU growth data.
A couple of interesting tidbits that don’t support the market’s rather complacent stance: first, a speech by Xi Jinping overnight criticized those (implicitly the US) who think they can reform other nations, and second, the story that Trump is considering a blanket ban on Huawei for telecoms in the US.
The big news in the Asian overnight was China’s Industrial Production and Retail Sales data missing expectations for the year-on-year figures by more than a percent. The latter, at +7.2% year-on-year, is the lowest rate since 1999 save for a one-off spike in 2003. Even that rate is hard to accept, given the large absolute drops in car sales over the last few months. Markets took this in stride…
The euro is a shade lower (the euro only moves in shades these days, it seems) after yesterday Italy’s Salvini said he would be happy to ignore EU budget rules until the Italian unemployment rate, currently 10.6%, falls to 5%. Italy’s BTP yields have steadily risen of late in a falling yield environment for safe haven sovereign bonds and the 2-year BTP, at 0.70%, is at its highest yield this year. This noise comes ahead of the EU parliamentary elections next week, where the strength of eurosceptic results could drive further existential concerns. It seems EURCHF has finally woken up to the issue.
Recent EU lending data points to a rising risk of a growth slowdown dead ahead. I tweeted out a chart from Commerzbank pointing to the accelerating of the already cratering rate of lending to non-financial corporations and the household lending rate is dipping into negative territory as well. If export orders don’t pick up, shield your eyes for the coming couple of quarters’ EU growth data.
Chart: AUDUSD
We’ll run with an AUD chart again as the stakes are high for all AUD crosses over tonights April jobs report, as the Reserve Bank of Australia has intensified the focus on employment data after the most recent policy meeting linking a rate cut decision to the state of the labour market. The market is still on the fence on whether the RBA cuts at the early June meeting, but an ugly report could quickly increase conviction that the RBA caves.
We’ll run with an AUD chart again as the stakes are high for all AUD crosses over tonights April jobs report, as the Reserve Bank of Australia has intensified the focus on employment data after the most recent policy meeting linking a rate cut decision to the state of the labour market. The market is still on the fence on whether the RBA cuts at the early June meeting, but an ugly report could quickly increase conviction that the RBA caves.
The G10 rundown
USD – the greenback near the top of the heap, but remains bogged down in a range in most pairs, likely held back by the USDCNY rate cap assumption.
EUR – mounting tactical risks for the euro, which may have a hard time piecing together any significant rally ahead of the EU parliamentary elections. GDP data up this morning.
JPY – maintaining a reasonable bid in the crosses even as risk appetite has improved a bit over the last couple of sessions. Strong safe haven bond markets likely to keep supported.
GBP – sterling suffering risk of a tactical breakdown to probe fresh supports as Brexit is going nowhere fast.
CHF – the now you don’t see it, no you do safe haven status of CHF suddenly in evidence and possibly linked to EU existential risks, EU peripheral spreads, Brexit, more than general risk off on the US-China trade tension theme. The latest EURCHF dip opens up for the range to the big 1.1200 support zone.
AUD – slow motion breakdown in AUD with the key test tonight over the latest April jobs report Down Under. How aggressively can a move extend, however, with the CNY floor in place?
CAD – the latest Canada CPI up today – likely more sensitive to a downside miss as we await a pulse in USDCAD.
NZD – watching for AUDNZD support at some point to prove the point that the chart has structurally turned. AU yield drop will have a very difficult time outpacing NZ yields.
SEK – EURSEK consolidating after the brutal run higher, but the trend remains higher as long as we trade above 10.60-65 and EUR weakness due to weaker growth fears can feed an even weaker SEK.
NOK – NOKSEK is interesting around the 10.00 level as we discussed in a post yesterday.
Upcoming Economic Calendar Highlights (all times GMT)
0900 – Eurozone Q1 GDP
0900 – Eurozone Employment
1230 – Canada Apr. CPI
1230 – US May Empire Manufacturing
1230 – US Apr. Retail Sales
1315 – US Apr. Industrial Production
1400 – US May NAHB Housing Market Index
1415 – ECB’s Coeure to speak
1630 – ECB’s Praet to speak
0130 – Australia Apr. Employment Change / Unemployment Rate
USD – the greenback near the top of the heap, but remains bogged down in a range in most pairs, likely held back by the USDCNY rate cap assumption.
EUR – mounting tactical risks for the euro, which may have a hard time piecing together any significant rally ahead of the EU parliamentary elections. GDP data up this morning.
JPY – maintaining a reasonable bid in the crosses even as risk appetite has improved a bit over the last couple of sessions. Strong safe haven bond markets likely to keep supported.
GBP – sterling suffering risk of a tactical breakdown to probe fresh supports as Brexit is going nowhere fast.
CHF – the now you don’t see it, no you do safe haven status of CHF suddenly in evidence and possibly linked to EU existential risks, EU peripheral spreads, Brexit, more than general risk off on the US-China trade tension theme. The latest EURCHF dip opens up for the range to the big 1.1200 support zone.
AUD – slow motion breakdown in AUD with the key test tonight over the latest April jobs report Down Under. How aggressively can a move extend, however, with the CNY floor in place?
CAD – the latest Canada CPI up today – likely more sensitive to a downside miss as we await a pulse in USDCAD.
NZD – watching for AUDNZD support at some point to prove the point that the chart has structurally turned. AU yield drop will have a very difficult time outpacing NZ yields.
SEK – EURSEK consolidating after the brutal run higher, but the trend remains higher as long as we trade above 10.60-65 and EUR weakness due to weaker growth fears can feed an even weaker SEK.
NOK – NOKSEK is interesting around the 10.00 level as we discussed in a post yesterday.
Upcoming Economic Calendar Highlights (all times GMT)
0900 – Eurozone Q1 GDP
0900 – Eurozone Employment
1230 – Canada Apr. CPI
1230 – US May Empire Manufacturing
1230 – US Apr. Retail Sales
1315 – US Apr. Industrial Production
1400 – US May NAHB Housing Market Index
1415 – ECB’s Coeure to speak
1630 – ECB’s Praet to speak
0130 – Australia Apr. Employment Change / Unemployment Rate
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