Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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FX Update: Low beta blues, sterling churning
John J. Hardy
Chief Macro Strategist
Summary: Currency traders are struggling to find a narrative outside of a weaker yen, driven by a bounceback in US yields late yesterday. The Chinese renminbi scratches to new solid highs for the cycle, but Asian exporting EM currencies are not even responding consistently to that development. So far, 2020 is proving slow to show what themes will emerge for currencies, major and minor.
US data yesterday was mostly positive, though the US dollar was rather sluggish in responding to developments. Note that the core US Retail Sales number for December was a bit less impressive than it appeared, given negative revisions to the prior two months’ data. Elsewhere, the NAHB survey suggests US housing market activity continues to hum along at robust levels, and the weekly jobless claims plunged back to 204k, one of the lowest readings ever on a seasonally adjusted basis. Today we get a look at the US Industrial Production number for December after the prior three months were below 2018 levels (although, as we ask in this morning’s Market Call, does the still expanding services sector so dominate the US economy that we can’t read this cycle like past cycles?)
US Treasury Secretary Mnuchin expressed interest yesterday in selling 20-year US treasuries for the first time to fund growing deficits, which seemed to take long yields higher yesterday after a rather muted reaction to mostly positive US data. More information supposedly to follow on February 5th, but long US yields deserve plenty of attention if they work out of the late range and are a key coincident indicator for USDJPY, which will find life above 110.00 increasingly comfortable if yields pull higher still. (although at some point, higher longer yields would sorely test the current melt-up in risk – as we saw in 2018 – the danger zone for risky assets begins to pull into view, we would argue, if the US 10-year moves above 2.00% and/or the 30-year above 2.5%)
Chinese numbers overnight look robust, especially the +6.9% YoY in Industrial Production for December, though we are about to enter the two months of highly seasonal data around the Chinese New Year celebrations (this year, the New Year on Jan 25).
The Turkish central bank “only” cut rates another 75 basis points yesterday to a 11.25%, perhaps respecting that the last year-on-year CPI readings are running at north of 11.8%, thus taking the real rate negative. Somehow, TRY managed to rally on the day – but the move not holding well, and given the real rate picture, other EM’s look far more attractive.
Chart: EURGBP - which way?
EURGBP looked heavy this morning after giving the false impression at the beginning of this week that the needle pointed immediately higher. Given very weak UK data and prospects for a Bank of England rate cut at the January 30 meeting, this was impressive and suggested that capital is returning to the UK despite the uncertainties. We would be constructive on further downside in the near term if the pair can erase the rally after a very ugly December UK Retail Sales number this morning and close back below 0.8500. Until then, EURGBP another pair showing the difficulties in finding a directional move in this market that last more than a couple of days.
The G-10 rundown
USD – the US dollar broadly firm, but completely inert here as we await whether the Fed puts up any rhetorical protest to the current environment at the FOMC meeting on January 29th.
EUR – waiting for next Thursday’s ECB minutes and whether the data start to pick up on signs that China is stabilizing. Next Friday’s flash Euro Zone PMI’s the most recent data on that front.
JPY – the jolt higher in US yields on the possible new 20-year treasury note helping USDJPY stay aloft above 110.00.
GBP – sterling resilience looked rather interesting until this morning's weak UK December Retail Sales release spoiled that particularly move. The market firming its view that BoE cuts on January 30.
CHF – EURCHF remains heavy but has not tacked on additional downside here. A bit tough to work lower, perhaps, as yields ticked up late yesterday.
AUD – constructive on AUD if positive risk appetite continues – the Australia mining giant BHP Billiton chalking up a new highs since last summer - but we need to see something on the charts, like a move above 0.7000 in AUDUSD, to excite upside interest and more short-covering. Otherwise, interest restricted to the crosses like AUDNZD.
CAD – A busy week next week for CAD, as the Bank of Canada is out mid-week and with a few data points on the economic calendar. The recent rally has neutralized the downside risk if 1.3000 holds, but there is no momentum.
NZD – still like AUD outperformance here versus NZD, with the next major test of the AUDNZD pair over next Thursday’s Australian employment data and NZ Q4 CPI data on Friday.
SEK – bears may feel that it is worth testing the downside in EURSEK here – the backdrop just too supportive from a risk appetite angle to expect a move up through the 9.60+ pivot area.
NOK – prefer fading EURNOK rallies as long as we remain below 10.00, but the price action is completely dead. Both Norges Bank and ECB next Thursday.
Today’s Economic Calendar Highlights
- 0930 – UK Dec. Retail Sales
- 1330 – US Dec. Housing Starts and Building Permits
- 1400 – US Fed’s Harker (voter) to Speak
- 1415 – US Dec. Industrial Production
- 1500 – US Jan. Preliminary University of Michigan Sentiment
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