Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
Bullard rains on the USD bears’ parade
John J. Hardy
Chief Macro Strategist
Summary: The St. Louis Fed’s Bullard rained on the USD bears’ parade by suggesting support for a 25-bps cut at the July FOMC meeting, which kept Fed expectations flat even as Fed chair Powell confirmed a cutting bias and US equities were in for rough sledding yesterday.
In an interview with Bloomberg, voting Federal Open Market Committee member ´James Bullard, who dissented on the June FOMC decision in favour of a cut, argued that he would support a 25-basis point cut at the July meeting. As the current argument is whether the Fed goes for a bigger 50 basis point cut in July (20% probability currently), this looks on the “hawkish” side of expectations, coming from the Fed’s most aggressive voting dove. This comment, as well perhaps as the news that a US district court found three large Chinese banks in violation of North Korean sanctions, saw a dive in risk appetite and a consolidation in almost all of the recently moving parts across markets – gold consolidated sharply, the USD bounced, and risk sentiment weakened.
Fed chair Jay Powell was perhaps less dovish at the margin in a speech yesterday as well, taking some of the wind out of the USD bears’ sails. While he did confirm the bias for a rate cut on heightened concerns for the outlook, he insisted that the economic outlook is still “favorable” and defensively said that the Fed would not “overreact” to data and sentiment swings.
Yesterday we registered a very ugly 10-point drop in the US Conference Board Consumer Confidence reading in June, with the survey now poised at the same level as back in January, which was in turn the lowest level since September of 2017. This time around, confidence has weakened sharply without the semi-crash in equity markets we saw into year end of 2018. Consumer confidence measures correlate best with jobs numbers and the most high frequency jobs data we can observe are the initial weekly jobless claims, which would likely start to show elevated readings on a moving average basis if confidence is deteriorating. We don’t have evidence of a rise in claims just yet – more of a flattening after years of falling claims numbers, but these bear watching more closely. If we print a near-zero nonfarm payrolls change or worse next week, we should be able to ignore Bullard’s words and expect more aggressive easing from the Fed.
From here, we’re on to the upcoming G20 meeting and quarter-end effects with the market entirely unsure how to price the former, while for the latter, we’ll focus most on how bonds behave after quarter end after the US 10-year benchmark yield dropped 40 basis points during the quarter and has reached the round 2.00% yield level.
Trading interest
Buying EURUSD dips with stops below 1.1300 on daily closing basis.
Short EURNOK with stops above 9.71 for a go at well below 9.60
Long AUDUSD but looking to take tactical profits on a squeeze above 0.7000
Chart: EURUSD
For EURUSD to continue higher here, the pair needs to find support in the 1.1350 area ideally, and certainly needs to avoid a run below 1.1300. Note the 200-day moving average coming in around the higher level and that this was also the local pivot high.
Fed chair Jay Powell was perhaps less dovish at the margin in a speech yesterday as well, taking some of the wind out of the USD bears’ sails. While he did confirm the bias for a rate cut on heightened concerns for the outlook, he insisted that the economic outlook is still “favorable” and defensively said that the Fed would not “overreact” to data and sentiment swings.
Yesterday we registered a very ugly 10-point drop in the US Conference Board Consumer Confidence reading in June, with the survey now poised at the same level as back in January, which was in turn the lowest level since September of 2017. This time around, confidence has weakened sharply without the semi-crash in equity markets we saw into year end of 2018. Consumer confidence measures correlate best with jobs numbers and the most high frequency jobs data we can observe are the initial weekly jobless claims, which would likely start to show elevated readings on a moving average basis if confidence is deteriorating. We don’t have evidence of a rise in claims just yet – more of a flattening after years of falling claims numbers, but these bear watching more closely. If we print a near-zero nonfarm payrolls change or worse next week, we should be able to ignore Bullard’s words and expect more aggressive easing from the Fed.
From here, we’re on to the upcoming G20 meeting and quarter-end effects with the market entirely unsure how to price the former, while for the latter, we’ll focus most on how bonds behave after quarter end after the US 10-year benchmark yield dropped 40 basis points during the quarter and has reached the round 2.00% yield level.
Trading interest
Buying EURUSD dips with stops below 1.1300 on daily closing basis.
Short EURNOK with stops above 9.71 for a go at well below 9.60
Long AUDUSD but looking to take tactical profits on a squeeze above 0.7000
Chart: EURUSD
For EURUSD to continue higher here, the pair needs to find support in the 1.1350 area ideally, and certainly needs to avoid a run below 1.1300. Note the 200-day moving average coming in around the higher level and that this was also the local pivot high.
The G10 rundown
USD – the USD bounce on yesterday’s developments rather modes and has not threatened the bears’ confidence just yet. As we have pointed out, the real test for the bears will be when/if negative US news starts to negatively impact overall risk sentiment.
EUR – again, the 1.1350 area in EURUSD is the immediate focus and stops below there on a break could drive a further dip, but as we discuss above, as long as the 1.1300 handle survives, we’ll remain constructive.
JPY – yesterday making clear that long yields more important than risk appetite for JPY direction. The USDJPY backup here threatens the bearish outlook only a rise and close above 108.00.
GBP – EURGBP etching new highs as markets continue to fret “hard Brexit or Corbyn”, and while Labour leader Corbyn is not popular, rising general election odds raise concerns that the pro-Brexit vote could be split between the Brexit party and the Conservatives, allowing a Labour win.
CHF – some of the strength here could be the flip-side of sterling weakness on Brexit uncertainty, but certainly the inability of EU yields to bounce from record lows weighing as well. The 1.1000 area in EURCHF the next area to look for whether the Swisss National Bank is putting up a fight.
AUD – the reaction to the G20 meeting between XI and Trump risks being felt acutely here on any firm developments. AUDUSD rally also nearing the key 0.7000 level, above which a large number of speculative shorts have likely placed stops, given the technical significance of the level.
CAD – the CAD rally supported by a strong surge in US WTI crude benchmark on the recent refinery explosion that is the Eastern seaboard’s largest. Have a hard time seeing USDCAD taking out 1.3050-00 if risk sentiment is weak. Key signals for both oil markets and risk sentiment over G20 and OPEC meetings this weekend.
SEK – a nice technical break lower in EURSEK that begins to break the long term uptrend as long as we hold below 10.60 locally and eventually progress toward at least 10.40, though a more robust sell-off into 10.25-20 would make a more forceful long-term statement.
NOK – EURNOK rather sluggish in moving lower after the initial break on the hawkish Norges Bank – I wonder if NOKSEK flows on the sudden surge in SEK have thrown up a temporary hurdle for overall NOK progress higher. Next focus for EURNOK is 9.55-50.
Upcoming Economic Calendar Highlights (all times GMT)
1100 – Czechia Central Bank Announcement
1230 – US May flash Durable Goods Orders
1230 – US May Advance Goods Trade Balance
1530 – US Fed’s Daly (non-voter) to speak
2350 – Japan May Retail Sales
0100 – New Zealand Jun. ANZ Business Survey
USD – the USD bounce on yesterday’s developments rather modes and has not threatened the bears’ confidence just yet. As we have pointed out, the real test for the bears will be when/if negative US news starts to negatively impact overall risk sentiment.
EUR – again, the 1.1350 area in EURUSD is the immediate focus and stops below there on a break could drive a further dip, but as we discuss above, as long as the 1.1300 handle survives, we’ll remain constructive.
JPY – yesterday making clear that long yields more important than risk appetite for JPY direction. The USDJPY backup here threatens the bearish outlook only a rise and close above 108.00.
GBP – EURGBP etching new highs as markets continue to fret “hard Brexit or Corbyn”, and while Labour leader Corbyn is not popular, rising general election odds raise concerns that the pro-Brexit vote could be split between the Brexit party and the Conservatives, allowing a Labour win.
CHF – some of the strength here could be the flip-side of sterling weakness on Brexit uncertainty, but certainly the inability of EU yields to bounce from record lows weighing as well. The 1.1000 area in EURCHF the next area to look for whether the Swisss National Bank is putting up a fight.
AUD – the reaction to the G20 meeting between XI and Trump risks being felt acutely here on any firm developments. AUDUSD rally also nearing the key 0.7000 level, above which a large number of speculative shorts have likely placed stops, given the technical significance of the level.
CAD – the CAD rally supported by a strong surge in US WTI crude benchmark on the recent refinery explosion that is the Eastern seaboard’s largest. Have a hard time seeing USDCAD taking out 1.3050-00 if risk sentiment is weak. Key signals for both oil markets and risk sentiment over G20 and OPEC meetings this weekend.
SEK – a nice technical break lower in EURSEK that begins to break the long term uptrend as long as we hold below 10.60 locally and eventually progress toward at least 10.40, though a more robust sell-off into 10.25-20 would make a more forceful long-term statement.
NOK – EURNOK rather sluggish in moving lower after the initial break on the hawkish Norges Bank – I wonder if NOKSEK flows on the sudden surge in SEK have thrown up a temporary hurdle for overall NOK progress higher. Next focus for EURNOK is 9.55-50.
Upcoming Economic Calendar Highlights (all times GMT)
1100 – Czechia Central Bank Announcement
1230 – US May flash Durable Goods Orders
1230 – US May Advance Goods Trade Balance
1530 – US Fed’s Daly (non-voter) to speak
2350 – Japan May Retail Sales
0100 – New Zealand Jun. ANZ Business Survey
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...