Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Busy week ahead in politics, geopolitics and economic data
John J. Hardy
Chief Macro Strategist
Summary: The USD remains relatively bid, but not across the board as we await developments on a number of fronts globally this week, including impeachment proceedings against US President Trump, a Xi Jinping speech in China, the latest twists in Brexit with the UK Conservative party meeting underway, and heavy economic calendar.
There was quite a flap generated ahead of the weekend as Trump administration officials were said to be outlining new rules to limit US investments in Chinese companies and even delisting Chinese companies from US exchanges, a story that may have driven the weak risk sentiment in equities for much of Friday’s US session. Over the weekend, the story was downplayed by Trump administration officials and US Treasury Secretary Mnuchin’s office issued a statement saying there were no current plans to stop Chinese companies from listing on US exchanges, though other portions of the original story were not addressed in the statement. Clearly, there is a risk of a broadening of US efforts to confront China’s policies beyond tariff increases. This issue will return, though likely not before we know the outcome of this next round of US-China trade talks scheduled to start October 11.
Markets are in a fairly positive mood to kick of the week as well on stronger than expected Chinese survey data, both official and in the Caixin Manufacturing PMI for September, which registered a reading of 51.4 vs. 50.2 expected and 50.4 in August.
Opponents of UK Prime Minister Boris Johnson are hurling everything and the kitchen sink his way as the embattled prime minister finds himself accused of improprieties while mayor of London and on a sexual harassment accusation from 20 years ago. Sterling seems to be able to take it in stride for now, but sterling longs will need to hope for more concrete indications that the EU and Johnson are moving closer to a deal or that a delay is a sure thing if no deal is reached soon. There is speculation that Johnson may try to flout the new law requiring him to seek a delay if no deal is reached by October 19.
The slowdown in Germany industry is finally being felt in its labour market, as job losses started showing up consistently in recent months, though the September data showed a -10k reading. Note that Germany’s population bracket in the traditional 25-64 population bracket is shrinking at an accelerating pace, but the participation rate for the very broadly defined 15-74 year-old age bracket has picked up sharply from 62% around 2006 to over 69% today.
Chart: AUDNZD
The AUDNZD long case was reinvigorated overnight by a weak New Zealand Business Opinion survey overnight, the weakest since early 2008, and the survey included very low inflation expectations readings that are likely to get the RBNZ’s attention. This helped reinvigorate the AUDNZD bullish case and underline the importance of the 1.0700 area support. The pair needs to hold near or above 1.0800 through tonight’s RBA meeting to keep the focus higher here after this latest surge. If the RBA manages to impress on the dovish side tonight, on the other hand, we have the risk of a retrenchment into 1.0600 and even the 200-day moving average lower still before finding support.
The G-10 rundown
USD – the USD liquidity issue focus may fade once we slide into a new quarter, but will rise again at some ahead of year end, due to rising Trump deficits, and due to the regulation prompting major US banks to do all they can to shrink their balance sheets ahead of year end to avoid paying penalties related to their size.
EUR – the euro winning the race to the bottom at the moment, though as with every other break lower in EURUSD over the last year and more, momentum is so far lacking. AT any moment, beware the risk of President Trump lashing out on trade.
JPY – The Bank of Japan is warming up for a fresh easing move, likely aimed at yield-curve-control, perhaps by indicating a willingness to cut rates more deeply negative to lower the front-end of the curve. The 109.00 area in USDJPY shaping up as a critical one for the other side of this October’s key event risks, including the FOMC and BoJ on the last two days of October. BoJ announcements this morning on their latest purchase intentions suggest a focus on maintain a positive sloping yield curve, as the purchase range for longer term debt beyond 25 years lowered to zero and shorter maturity purchase ranges were raised.
GBP – sterling traders seem confident in a friendly outcome on Brexit that will bring a tsunami of capital back into the UK to prop up the currency, even as the UK economy is set for a recession, with or without Brexit.
CHF – The latest SNB sight deposit data were essentially flat, suggesting that the SNB was not throwing large amounts to cap the franc in its recent run at the lows in the cycle versus the EUR around 1.0850. Bond yields likely to provide directional cues here.
AUD – a very weak Private Sector Credit Growth number for August out over night at +2.9% year-on-year, lowest since 2011 and the trend is well entrenched and the RBA may be pushing on a string with rate cuts from already low levels. A majority looking for a 25-basis cut to the RBA’s cash target at tonight’s meeting.
CAD – the loonie doing its own thing by firming against a firm USD, looks a bit too firm relative to the backdrop – next important event risk for Canada with tomorrow’s July GDP release.
NZD – the weak ANZ Business Opinion noted in the AUDNZD chart comments above, with the next important risk event the Q3 CPI release on October 15.
SEK and NOK – still trying to find a pulse, with the general disappointment at the margin that the firm risk appetite hasn’t done more to support the Scandies this morning and in recent episodes.
Upcoming Economic Calendar Highlights (all times GMT)
- 1200 – Germany Sep. Flash CPI
- 2350 – Japan Q3 Tankan Surveys
- 0430 – Australia RBA Cash Target
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