Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Brexit summit, US CPI and ECB today
John J. Hardy
Chief Macro Strategist
Summary: A busy day ahead as we look for the crunch Brexit summit to produce a long delay, possibly leaving sterling twisting in the wind. Elsewhere, the ECB will likely have little to say outside of TLTRO specifics at today’s meeting and the US March CPI release may bring more impact than the FOMC minutes later in the day.
Today’s March US CPI release may carry more weight for US dollar direction than the Federal Open Market Committee meeting minutes, especially on a downside miss for the core reading (expected unchanged at 2.1% YoY), which would likely raise anticipation of Fed moving towards an easing bias.
Trump’s recent, obviously political nominations for the Fed have been chosen for favouring rate cuts. And another political voice was out favouring rate cuts yesterday – Republican Senate Banking Chairman Crapo. If core inflation slips back below 2.0% in coming months, the rate cut anticipation will likely creep higher again after recent strong risk sentiment has actually seen the market’s expectations for a rate cut this year ease significantly. At present, odds are only slightly higher than 50/50 for a Fed cut by the December 2019 meeting.
The crunch Brexit summit today will likely produce a long delay for the UK until at least the end of this year as European Council President Tusk has rejected Theresa May’s request for a shorter postponement of the Article 50 deadline. The Tory party looks ready to rip itself apart over the issue and Theresa May’s days as prime minister are likely numbered unless she can agree on the customs union rout with Labour.
That is the last hope for the near term for sterling bulls, unless there is more fear priced into sterling at present about a cliff-edge Brexit than I believe is the case. If we see the cross party effort fails and the eventual path is towards a second referendum, it likely wouldn’t arrive until many months from now and leave sterling vulnerable to underperformance on the fear that No Deal is still a long-term possibility.
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0450
Short EURNOK with a short leash after today’s CPI release (stop above 9.65) for a move below 9.50.
Chart: EURUSD
In today’s chart, we remind readers what happened over the last two major respective central bank meetings – the March European Central Bank meeting, which produced a dovish surprise and EURUSD price action that was unable to sustain a break lower. A similar setup was the case over the March FOMC meeting, which likewise couldn’t inspire a break above the range highs. With less at stake at today’s ECB meeting, if EURUSD makes a move here, it will likely be down to other considerations – possibly US CPI data later or something anticipated in the FOMC minutes, or concerns that the EU and US are set for a round of trade hostilities, though the bar is rather high there for a reaction.
Trump’s recent, obviously political nominations for the Fed have been chosen for favouring rate cuts. And another political voice was out favouring rate cuts yesterday – Republican Senate Banking Chairman Crapo. If core inflation slips back below 2.0% in coming months, the rate cut anticipation will likely creep higher again after recent strong risk sentiment has actually seen the market’s expectations for a rate cut this year ease significantly. At present, odds are only slightly higher than 50/50 for a Fed cut by the December 2019 meeting.
The crunch Brexit summit today will likely produce a long delay for the UK until at least the end of this year as European Council President Tusk has rejected Theresa May’s request for a shorter postponement of the Article 50 deadline. The Tory party looks ready to rip itself apart over the issue and Theresa May’s days as prime minister are likely numbered unless she can agree on the customs union rout with Labour.
That is the last hope for the near term for sterling bulls, unless there is more fear priced into sterling at present about a cliff-edge Brexit than I believe is the case. If we see the cross party effort fails and the eventual path is towards a second referendum, it likely wouldn’t arrive until many months from now and leave sterling vulnerable to underperformance on the fear that No Deal is still a long-term possibility.
Trading interest
Long AUDNZD on dips for 1.0700+, stops below 1.0450
Short EURNOK with a short leash after today’s CPI release (stop above 9.65) for a move below 9.50.
Chart: EURUSD
In today’s chart, we remind readers what happened over the last two major respective central bank meetings – the March European Central Bank meeting, which produced a dovish surprise and EURUSD price action that was unable to sustain a break lower. A similar setup was the case over the March FOMC meeting, which likewise couldn’t inspire a break above the range highs. With less at stake at today’s ECB meeting, if EURUSD makes a move here, it will likely be down to other considerations – possibly US CPI data later or something anticipated in the FOMC minutes, or concerns that the EU and US are set for a round of trade hostilities, though the bar is rather high there for a reaction.
The G10 rundown
USD – most potential for a USD reaction in a negative CPI surprise as this could reinvigorate focus on the Fed’s potential to cut rates sooner rather than later, especially with rising political pressure to do so.
EUR – the latest Trump focus on slapping tariffs on EU goods is potentially a euro negative if concerns rise that a fresh front in the trade wars is opening up, but the market has largely taken it in stride, having grown accustomed to the pattern of Trump behaviour. The ECB meeting and presser likely a boring affair with some further TLTRO details the chief focus.
JPY – the yen tried to perk up a bit with yesterday’s firm treasury market and slight whiff of risk off, but this will have to deepen considerably to sustain a bid under the yen. Our measure of global risk is at it highest level since late 2017, suggesting enthusiasm for yen-negative carry trading.
GBP – as indicated above, the last leg for sterling bulls to stand on (assuming importantly that there isn’t a cliff-edge Brexit fear discount adjustment) is that the cross-party effort can produce a customs union deal that is the least disruptive of all options save for cancelling Brexit altogether. But even if a new customs union deal takes shape, would UK voters have to be asked whether this is what they meant when they voted in favour of Brexit?
CHF – CHF weakening more forceful and fits with the very complacent backdrop – a long Brexit delay could be sterling negative, but doesn’t generate any immediate safe haven need to drive CHF higher. A full pull above 1.1300 in EURCHF helps to set the focus on further CHF weakness.
AUD – the AUD dipped on the weak risk sentiment on Wall Street yesterday, but has rebounded today and continues to threaten the 0.7150 area break level ahead of today’s US event risks.
CAD – USDCAD pulls away from yesterday’s downside break – keeping the outlook dim. In the nearest term, Low beta to USD moves elsewhere in this pair unless oil market volatility expands dramatically.
NZD – we like AUDNZD higher and the price action has proven very consistent for bulls.
SEK – important day tomorrow for SEK with the latest CPI print and Average House Price data. EURSEK is lurking above the key 10.40-38 zone.
NOK – Looking for today to close below 9.60 EURNOK after the hot CPI print today (2.7% YoY at the core vs. 2.5% expected, yes – a lot of that due to the prior episode of NOK weakness and further upside pressure likely won’t be in evidence in coming months) to prove the point that all of the supportive backdrop conditions are finally getting noticed and sustaining a bid for NOK.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Feb. Visible Trade Balance
0830 – UK Feb. Manufacturing Production
0830 – UK Feb. GDP
0845 – Sweden Riksbank’s Ohlsson to speak
1145 – ECB Announcement
1230 – ECB President Draghi Presser
1230 – US Mar. CPI
1800 – US FOMC Minutes
2301 – UK Mar. RICS House Price Balance
USD – most potential for a USD reaction in a negative CPI surprise as this could reinvigorate focus on the Fed’s potential to cut rates sooner rather than later, especially with rising political pressure to do so.
EUR – the latest Trump focus on slapping tariffs on EU goods is potentially a euro negative if concerns rise that a fresh front in the trade wars is opening up, but the market has largely taken it in stride, having grown accustomed to the pattern of Trump behaviour. The ECB meeting and presser likely a boring affair with some further TLTRO details the chief focus.
JPY – the yen tried to perk up a bit with yesterday’s firm treasury market and slight whiff of risk off, but this will have to deepen considerably to sustain a bid under the yen. Our measure of global risk is at it highest level since late 2017, suggesting enthusiasm for yen-negative carry trading.
GBP – as indicated above, the last leg for sterling bulls to stand on (assuming importantly that there isn’t a cliff-edge Brexit fear discount adjustment) is that the cross-party effort can produce a customs union deal that is the least disruptive of all options save for cancelling Brexit altogether. But even if a new customs union deal takes shape, would UK voters have to be asked whether this is what they meant when they voted in favour of Brexit?
CHF – CHF weakening more forceful and fits with the very complacent backdrop – a long Brexit delay could be sterling negative, but doesn’t generate any immediate safe haven need to drive CHF higher. A full pull above 1.1300 in EURCHF helps to set the focus on further CHF weakness.
AUD – the AUD dipped on the weak risk sentiment on Wall Street yesterday, but has rebounded today and continues to threaten the 0.7150 area break level ahead of today’s US event risks.
CAD – USDCAD pulls away from yesterday’s downside break – keeping the outlook dim. In the nearest term, Low beta to USD moves elsewhere in this pair unless oil market volatility expands dramatically.
NZD – we like AUDNZD higher and the price action has proven very consistent for bulls.
SEK – important day tomorrow for SEK with the latest CPI print and Average House Price data. EURSEK is lurking above the key 10.40-38 zone.
NOK – Looking for today to close below 9.60 EURNOK after the hot CPI print today (2.7% YoY at the core vs. 2.5% expected, yes – a lot of that due to the prior episode of NOK weakness and further upside pressure likely won’t be in evidence in coming months) to prove the point that all of the supportive backdrop conditions are finally getting noticed and sustaining a bid for NOK.
Upcoming Economic Calendar Highlights (all times GMT)
0830 – UK Feb. Visible Trade Balance
0830 – UK Feb. Manufacturing Production
0830 – UK Feb. GDP
0845 – Sweden Riksbank’s Ohlsson to speak
1145 – ECB Announcement
1230 – ECB President Draghi Presser
1230 – US Mar. CPI
1800 – US FOMC Minutes
2301 – UK Mar. RICS House Price Balance
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