Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Risk sentiment eyes US data, EU reply to BoJo Brexit plan
John J. Hardy
Chief Macro Strategist
Summary: Key US data over the next couple of sessions, with USDJPY likely the most sensitive USD pair to data surprises. EURUSD is trying to turn the corner back higher, but is some way from doing so just yet, while USDCAD has undergone a major reassessment after the most recent rally and could be headed much higher if the price action sustains above 1.3300.
The narrative here is that weak data is driving the latest sell-off in risk sentiment, even if a number like yesterday’s small miss on the US ADP payrolls number is far too insignificant a data point to have driven the degree of weak risk sentiment we saw yesterday. I would suspect that the move through technical, flow-generating levels are behind the scale of the move yesterday and can’t help but think that the beginning of the quarter may be involved here as well (remember last years major sell-off began on trading day 1 of Q4).
Regardless, if the US data is driving the narrative, then we have two more important data points dead ahead, today’s US ISM Non-manufacturing survey, which registered a large bounce to 56.4 in August and is expected today at 55.0, and tomorrow’s Nonfarm Payrolls Change. On the ISM non-manufacturing survey, I would lean for more risk of a negative surprise, given the odd jerk higher in the August survey from July’s 53.7 and the Markit survey showing a weak 50.9 in August. Safe to say that anything lower than 53 or so will spook the market, as it re-establishes the downward trend suggesting decelerating growth in the services sector. On the US payrolls change tomorrow, a consistent pattern of negative revisions of prior months’ data and the very weak ISM Manufacturing employment subcomponent could drive the first significant miss in the payrolls number in a few months (remember that the private payrolls number is gaining in important for a time as 2020 US census hiring is picking up into next year.)
Judging from the last two days of action, continued weak risk sentiment will drive a strong G3 trio, with the USD the weakest within that trio, while seeing various degrees of weakness elsewhere, and especially EM at risk if the general deleveraging keeps up pace. One interesting thing to note is that the US yield curve has steepened the most in a while on the last couple of days of market action as the market prices in more aggressive rate cuts. The Fed struggling to keep up with the needed amount of easing and a steepening yield curve have often been associated in the past with bear markets in equities.
The September UK Services PMI out this morning dipped below 50 again after doing so in March before dribbling back above 50 for a few months. This is likely not the last time we see a sub-50 print suggesting a contracting UK services sector, judging from the weak credit impulse that suggest weak growth out at least another two-three quarters.
Chart: EURUSD
The EURUSD is trying to turn around here, but bulls really need a sharp leg higher into 1.1075-1.1100 to reverse the downward momentum and argue for a turn in the chart. We are open-minded here, as US data risks dragging the US dollar down versus the other highly liquid currencies, chiefly the EUR and JPY.
The G-10 rundown
USD – bad data will likely be bad for the USD, but likely only versus other highly liquid alternatives. An October 30 FOMC rate cut is already guaranteed, in our view, and risks ballooning to a 50 bp move if US equity markets suffer a very deep correction.
EUR – If EU rates have more or less reached absolute zero, the convergence of US rates lower together with the Fed riding to the rescue on balance sheet expansion may mean EUR is trying to find a bottom soon if not already.
JPY – the 107.00 area in USDJPY is an important one for triggering potential further downside, as the pair is one of the most sensitive to US data surprises.
GBP – the weak UK services PMI showing that UK recession is here and now and not sure that Brexit news flow stands much of a chance of brightening the outlook – especially if EU brusquely rejects Boris Johnson’s plan today, hoping to have a different counterparty in negotiations after a delay and a UK election.
CHF – very interesting divergence in normal behaviour to see EURCHF poking back higher even as risk sentiment and EURJPY head lower. We’ll file it under “interesting” for now – but perhaps the “absolute low in EU yields more or less reached” argument helps suggest similar for EURCHF and any whiff of promise on fiscal moves from the EU could boost the pair further. First step is retaking 1.1000.
AUD – the AUD has bounced a bit against a struggling greenback, but we don’t find the AUDUSD the most compelling option for a weaker USD if we see a continuation of the present risk-off move. AUD traders awaiting inputs from US-China trade talks.
CAD – the USDCAD technical outlook pointing higher after the smart reversal as CAD is too strong here if a US recession is incoming, oil prices remain low and lower, risk sentiment weak and the Bank of Canada rate outlook is lowered.
NZD – risk for NZD bears that AUDNZD has to explore a bit lower before finding a new base, though we still likely higher for the long haul.
SEK and NOK – weak risk sentiment and bad economic data are poisonous for these currencies and EURNOK risks a squeeze higher if it gains significant separation from 10.00 on a capitulation-like move. EURSEK is not far from its highest daily close for the cycle either.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Fed’s Quarles (Voter) to Speak
- 1230 – US Weekly Initial Jobless Claims
- 1400 – US Sep. ISM Non-manufacturing
- 2235 – US Fed’s Clarida (Voter) to Speak
- 0130 – Australia Aug. Retail Sales
- 0130 – Australia RBA Financial Stability Review
- 0320 – Australia RBA’s Ellis to Speak
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