Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Strong US jobs data offers most interesting market test
John J. Hardy
Chief Macro Strategist
Summary: After the aggressive run-up in Fed rate cut anticipation, strong US jobs and/or earnings data would offer the most interesting test of the market’s conviction and whether it has overreached a bit for now in pricing the Fed’s dovish tilt.
The free-fall in US yields actually stopped on Monday and hasn’t progressed since – a pause that feels like the market is holding its breath after such a vicious move. US treasuries could be at risk of some consolidation if US data doesn’t play ball with the market’s recent dramatic adjustment of Fed expectations.
Either way, weak data today still offers a test of whether the market can take expectations even lower just as particularly strong data (especially on earnings) could trigger a steep reversal in the recent price action. In FX, USDJPY is clearly the proxy for US yields (I tweeted an intraday chart showing the tightness of the USDJPY-Treasury correlation) as discussed in the chart below.
The European Central Bank meeting and press conference was a test for euro pairs, with the euro ending the day higher despite Mario Draghi’s every attempt to retain dovish credibility with his promise during the Q&A that the ECB has the “headroom” and mandate to do QE. At the margin, the fact that the ECB didn’t cut rates and priced the TLTRO-III at slightly above the deposit rate (still as low as -0.3%) was seen as not the maximum dovish option. I largely agree with John Authers, who argues that Draghi has lost his ability to sway the market and that the market is looking beyond the end of his tenure for what is coming next.
With the ECB largely at the end of its mandate, despite Draghi’s protestations, it will be up to the EU Commission and European Council to expand that mandate or at least announce a large fiscal stimulus that would offer the ECB something more worth buying if QE is to have any impact (this would be a de facto MMT)
USDZAR has arched above 15.00 on recent weak growth numbers and concerns that the South African Reserve Bank risks losing its independence if it is required by the government to help bail out state-owned companies – especially Eskom, the heavily indebted electric utility.
Next week’s calendar highlights include whether tariffs against Mexico go into effect on Monday or negotiations today will delay these for now. The US May CPI print is up on Wednesday and May Retail Sales on Friday. Turkey announces rates next Thursday, the Swiss National Bank meets the same day and Russia’s central bank meets on Friday.
Trading interest
Short AUDUSD as long as below 0.7025 and NZDUSD as long as below 0.6700.
Short EURUSD via put options – 1-2 months near 1.1200 strikes.
Traders looking to trade the US jobs report can consider USDJPY calls or puts near the money for sub-1 week expiry.
Chart: USDJPY
USDJPY has paused here below 109.00, just as the drop in US yields has paused since reaching the lows on Monday. Today’s US jobs data and the whether it sparks a further move in US yields will be the key coincident indicator for USDJPY, which risks a squeeze of short-term shorts if yields rise and the price action is taken back up through that 109.00 area.
Either way, weak data today still offers a test of whether the market can take expectations even lower just as particularly strong data (especially on earnings) could trigger a steep reversal in the recent price action. In FX, USDJPY is clearly the proxy for US yields (I tweeted an intraday chart showing the tightness of the USDJPY-Treasury correlation) as discussed in the chart below.
The European Central Bank meeting and press conference was a test for euro pairs, with the euro ending the day higher despite Mario Draghi’s every attempt to retain dovish credibility with his promise during the Q&A that the ECB has the “headroom” and mandate to do QE. At the margin, the fact that the ECB didn’t cut rates and priced the TLTRO-III at slightly above the deposit rate (still as low as -0.3%) was seen as not the maximum dovish option. I largely agree with John Authers, who argues that Draghi has lost his ability to sway the market and that the market is looking beyond the end of his tenure for what is coming next.
With the ECB largely at the end of its mandate, despite Draghi’s protestations, it will be up to the EU Commission and European Council to expand that mandate or at least announce a large fiscal stimulus that would offer the ECB something more worth buying if QE is to have any impact (this would be a de facto MMT)
USDZAR has arched above 15.00 on recent weak growth numbers and concerns that the South African Reserve Bank risks losing its independence if it is required by the government to help bail out state-owned companies – especially Eskom, the heavily indebted electric utility.
Next week’s calendar highlights include whether tariffs against Mexico go into effect on Monday or negotiations today will delay these for now. The US May CPI print is up on Wednesday and May Retail Sales on Friday. Turkey announces rates next Thursday, the Swiss National Bank meets the same day and Russia’s central bank meets on Friday.
Trading interest
Short AUDUSD as long as below 0.7025 and NZDUSD as long as below 0.6700.
Short EURUSD via put options – 1-2 months near 1.1200 strikes.
Traders looking to trade the US jobs report can consider USDJPY calls or puts near the money for sub-1 week expiry.
Chart: USDJPY
USDJPY has paused here below 109.00, just as the drop in US yields has paused since reaching the lows on Monday. Today’s US jobs data and the whether it sparks a further move in US yields will be the key coincident indicator for USDJPY, which risks a squeeze of short-term shorts if yields rise and the price action is taken back up through that 109.00 area.
The G10 rundown
USD – the May jobs and earnings report represents a great chance at checking the market’s convictions here – remember the very weak ADP number from earlier this week, while the weekly jobless claims numbers have benign or better of late and the ISM Non-manufacturing Employment gauge leaped to 58.1, the strongest since last October after a weak 53.7 in April.
EUR – the euro is firming in most crosses after yesterday’s ECB relative non-event. Hard to generate enthusiasm with the German Bund closing yesterday at new record low near -24 bps. QE to cover fiscal stimulus (essentially MMT) plus rising European rates needed to getting something going beyond a tactical short squeeze in the euro.
JPY – again, sensitivity to US yield direction is the name of the game here as we eye today’s US jobs numbers.
GBP – picking up signs of resilience versus the euro, but this could merely be on the lack of news flow. Looking for setups for re-engaging in short GBPUSD trades. Tory candidates for the leadership of the party should be known early next week.
CHF – don’t see any immediate reason for a meltdown in EURCHF with EU existential risk flat and risk appetite on an even keel. Interesting to see how loudly the Swiss National Bank rattles its cage next week at its meeting on CHF intervention.
AUD – price action is offering no clues as AUDUSD holds under 0.7000 so far. Next Thursday’s Australia jobs report the next calendar event risk of note as Reserve Bank of Australia has linked easing decisions explicitly to the strength in the labour market.
CAD – the CAD looks like a bit of an over-achiever here versus the USD unless the latter weakens. Some of this in sympathy with a solid bounce in oil prices – but an important relative test for the two later today as Canada also reports latest jobs numbers.
NZD – the bump from a recent Reserve Bank of New Zealand deputy governor fading and NZ rates never reacted. Still looking for a ways to get short of NZD outside of NZDUSD (need to stay below 0.6700 there).
SEK – Swedish short rates are collapsing back through zero as the air continues to come out of the Riksbank normalisation story. EURSEK supported as long as it remains above key 10.60 area.
NOK – important week ahead with the Norwegian CPI data for May on Tuesday and the Norges Bank’s Regions survey up the same day.
Upcoming Economic Calendar Highlights (all times GMT)
12:30 – US May Change in Nonfarm Payrolls
12:30 – US May Average Hourly Earnings
12:30 – US May Unemployment Rate
12:30 – Canada May Employment Change / Unemployment Rate
USD – the May jobs and earnings report represents a great chance at checking the market’s convictions here – remember the very weak ADP number from earlier this week, while the weekly jobless claims numbers have benign or better of late and the ISM Non-manufacturing Employment gauge leaped to 58.1, the strongest since last October after a weak 53.7 in April.
EUR – the euro is firming in most crosses after yesterday’s ECB relative non-event. Hard to generate enthusiasm with the German Bund closing yesterday at new record low near -24 bps. QE to cover fiscal stimulus (essentially MMT) plus rising European rates needed to getting something going beyond a tactical short squeeze in the euro.
JPY – again, sensitivity to US yield direction is the name of the game here as we eye today’s US jobs numbers.
GBP – picking up signs of resilience versus the euro, but this could merely be on the lack of news flow. Looking for setups for re-engaging in short GBPUSD trades. Tory candidates for the leadership of the party should be known early next week.
CHF – don’t see any immediate reason for a meltdown in EURCHF with EU existential risk flat and risk appetite on an even keel. Interesting to see how loudly the Swiss National Bank rattles its cage next week at its meeting on CHF intervention.
AUD – price action is offering no clues as AUDUSD holds under 0.7000 so far. Next Thursday’s Australia jobs report the next calendar event risk of note as Reserve Bank of Australia has linked easing decisions explicitly to the strength in the labour market.
CAD – the CAD looks like a bit of an over-achiever here versus the USD unless the latter weakens. Some of this in sympathy with a solid bounce in oil prices – but an important relative test for the two later today as Canada also reports latest jobs numbers.
NZD – the bump from a recent Reserve Bank of New Zealand deputy governor fading and NZ rates never reacted. Still looking for a ways to get short of NZD outside of NZDUSD (need to stay below 0.6700 there).
SEK – Swedish short rates are collapsing back through zero as the air continues to come out of the Riksbank normalisation story. EURSEK supported as long as it remains above key 10.60 area.
NOK – important week ahead with the Norwegian CPI data for May on Tuesday and the Norges Bank’s Regions survey up the same day.
Upcoming Economic Calendar Highlights (all times GMT)
12:30 – US May Change in Nonfarm Payrolls
12:30 – US May Average Hourly Earnings
12:30 – US May Unemployment Rate
12:30 – Canada May Employment Change / Unemployment Rate
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