Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: Too much Brainard on the market’s brain?
John J. Hardy
Chief Macro Strategist
Summary: If the action since last Friday has mostly to do with the shifting odds in favour of President Biden nominating Lael Brainard to serve as the next Fed Chair, then the market may be making too much fuss on what the shift from Powell would mean for Fed policy down the road. In any case, we are only wiser once the announcement is made, very likely inside the next week or two. In the meantime, the US October CPI release today is the next focus.
FX Trading focus: To much Brainard on the brain? US CPI, yields in focus.
In today’s Saxo Market Call podcast, I discuss the Bloomberg chart I also show below of USDJPY (inverted), gold and US Ultra T-bond futures, which all jumped to attention on Friday, first seemingly in reaction to a fairly strong US jobs report (a bit of a head-scratcher) but later the move was clearly accelerated by news that both Fed Chair Powell and potential nominee Lael Brainard were seen at the White House. The Bloomberg columnist John Authers does a great job of pointing out the market reaction to this development as well as arguing that it makes little sense and why he sees it as unlikely that Brainard will be nominated.
I would agree and underline that it will matter very little to nothing for the course of future Fed monetary policy if Brainard is chosen over Powell, but it will definitely mean that the Fed has a far more hawkish regulator at its helm, a very different approach from Powell (and might mean that anyway, as even if she is nominated to head the Fed, she will very likely receive a prominent new regulatory position and title under a second term at the Fed).
I really don’t know who Biden will choose, accepting Authers’ argument as logical, but having a hard time seeing why Biden wouldn’t take the opportunity to be seen as making Powell pay for the trading scandal that happened under his watch. Either way, we are likely to get a considerable one-off reaction to the nomination announcement once it is made, and if those market moves on Friday are linked to the potential for a Brainard nomination, they could very quickly reverse if the market decides that the course of Fed policy is unlikely to veer much from where it was before – likely in my book.
We also have today’s US October CPI release, where the bar may be high for a surprise to generate significant volatility unless the market is willing to roll back its anticipation of a possible Brainard nomination. A 0.8% or higher month-on-month headline print or especially a 0.5% or higher ex-food-and-energy print could have the market on tilt, driving the USD higher, yields higher, risk sentiment lower, etc…with the JPY caught somewhere in the crosswinds.
Chart: USDJPY (inverted) vs. gold and US T-bond futures.
The chart discussed above, where we watch today’s CPI release and the imminent news of who Biden will nominate to head the Fed next February for the effect on the US dollar, particularly USDJPY, and on US treasuries, with a big new sell-off in the last of these possible driving a consolidation in the recent strong rally in risk sentiment.
Table: FX Board of G10 and CNH trend evolution and strength
The US dollar and JPY stuck effectively in neutral here waiting for next steps, which feel like they should come soon in the US dollar’s case as discussed above. Note some of the negative momentum in the G10 smalls, including NZD, SEK and especially AUD.
Table: FX Board Trend Scoreboard for individual pairs
Lots of yellow in the “Age” category as we se the AUD and suddenly NZD flipping to a negative trend in places. The NZDUSD chart in particularly looks set for a test lower if the USD puts up a further fight here – it is almost ready to flip and the 200-day moving average has been a key focus on the chart. Also watching EURSEK for a squeeze risk if not yet a trend change as I suspect stops may be lined up near and just above 10.00.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Weekly Initial Jobless Claims
- 1330 – US Oct. CPI
- 1400 – UK BoE’s Tenreyro to speak
- 1530 – US Weekly DoE Crude Oil and Product Inventories
- 1700 – US Weekly Natural Gas Storage Change
- 0001 – UK Oct. RICS House Price Balance
- 0030 – Australia Oct. Employment Change / Unemployment Rate
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