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: Pressure mounts on Fed to surprise hawkish.
John J. Hardy
Chief Macro Strategist
Summary: The Powell Fed was probably hoping that it could fly under the radar at today’s FOMC meeting, giving itself the luxury of two more data cycles as inputs before providing fresh guidance and forecasts at the mid-December FOMC meeting. But no such luck, given the recent significant easing of financial conditions and yesterday’s very hot September jobs opening survey.
FX Trading focus: Powell in the hot seat at tonight’s FOMC, needing to surprise hawkish
The US September JOLTS jobs openings release yesterday was a shocker, as August data was revised up 250k and the September release was nearly a million more than expected at 10.72M. This jolted US yields and the US dollar back higher, keeping the greenback largely in the tactical neutral zone ahead of tonight’s FOMC meeting. It is the latest data point to suggest that the Fed will have a hard time pre-committing to any slowdown in the pace of its policy tightening after the 75-basis-point hike that is fully priced in for tonight. The December 14 FOMC meeting odds have not shifted much over the last couple of weeks, as investors still favor the idea of a downshift to a 50-basis-point hike at that meeting, followed by another 50 basis points of tightening early next year over the space of a couple of meetings. (An interesting psychological block for this market appears to be the 5.00% level for the Fed Funds rate – markets have been unwilling to project the Fed to hike above this level – which is about where we are now for the March-May FOMC meetings)
As I outlined in yesterday’s update, if the Fed merely keeps quiet and endorses current expectations and punts on further guidance until December, we might see an extension of the melt-up in risk sentiment and see another wave of USD weakness. But yesterday’s JOLTS data point raises the odds that the Fed will want to push back against that outcome or at least against complacency on its potential policy path in general. To surprise hawkish today, Powell and company will have to make it very clear that the Fed is willing to continue tightening beyond current expectations. At the same time, that task will be difficult if they are reluctant to pre-commit to another large hike in December. One possible tactic to keep maximum forward potential for hawkishness would be for the Fed to indicate very high reactivity to further incoming data and openness to continuing with large hikes as long as necessary if the data supports doing so.
It's hard to tell how the market would treat such a stance at tonight’s meeting if that is what the FOMC delivers, but in coming days and until the December 14 FOMC meeting, it would certainly mean extreme volatility on the next bits of Incoming data, starting with the ISM Services tomorrow and then especially the October jobs report this Friday. Then we’ll have the October JOLTS survey, the November jobs report, and the October and November CPI releases before that meeting.
Chart: EURUSD
EURUSD is perched between the important parity level to the upside and perhaps 0.9875-0.9850 support to the downside, an important level on the way up, awaiting today’s FOMC meeting. Downside risk for a test of the cycle lows below 0.9600 if the Fed manages to surprise hawkish and lift rate expectations, while we’ll have to close north of parity and see a continued improvement in risk sentiment and perhaps some weak US data through Friday to sustain a new upside leg.
Bank of Japan minutes surprise. It’s been a while since we got a surprise from the BoJ, and normally we don’t look for them in the minutes, which are not released until after the following meeting. But last night’s minutes from the September BoJ meeting generated a few waves and JPY strength as they showed considerable signs of member discomfort with rising price pressures and even brought up the subject of an eventual policy shift, even if not suggesting one is imminent: one member said that “when the appropriate time comes, it’s important to communicate to markets an exit strategy”. This won’t sustain a JPY rally if US treasuries run back higher after the FOMC today and/or in the wake of the key US data through Friday.
NZD strength getting stretched after the strong jobs report overnight extended the NZD rally against the Aussie and even keeping the currency near the top of the recent range versus the US dollar. Not sure how much more the little kiwi can get out of this run of strength here – a turn in broad sentiment could suddenly see vulnerability. The RBNZ is concerned about the impact on the policy tightening on the country’s financial system in its financial stability report released yesterday. I don’t see any meaningful ability for policy to diverge from here from Australia’s for example. Bloomberg put out an interesting article on the globally weather-stressed dairy industry. New Zealand is the world’s largest dairy exporter and combined, milk, beef, butter and cheese make up some 30% of New Zealand’s exports in physical goods. The article mentions climate-linked legislation possibly limiting future output – worth watching.
Table: FX Board of G10 and CNH trend evolution and strength.
CNH weakness still prominent, sterling’s relative strength fading, kiwi strength looking overdone and USD at maximum indecision here.
Table: FX Board Trend Scoreboard for individual pairs.
EURCHF making a bid at a reversal of the uptrend that was established more than four weeks ago if it drops through the 0.9850-0.9800 zone in coming days. Look at AUDUSD ready to possibly tilt lower again if the USD can get a leg-up post-FOMC. EURUSD is also close to flipping lower again after its uptrend attempt didn’t extend very far from its launching point, which was near the current rate.
Upcoming Economic Calendar Highlights
- 1215 – US Oct. ADP Employment Change
- 1800 – US FOMC Meeting
- 1830 – US Fed Chair Powell Press Conference
- 2000 – New Zealand RBNZ Governor Orr before Parliamentary Committee
- 0145 – China Oct. Caixin Services PMI
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