Rates: Profit taking on 12-month bond rally
Future ECB president Lagarde on Wednesday threw doubt on the central bank’s “unconditional” readiness to add future stimulus, kickstarting a profit taking move in Bunds. The sell-off accelerated yesterday with US Treasuries joining on a stellar non-manufacturing ISM. The move has probably further to go. It will take a big payrolls miss to change track.
Currencies: Payrolls probably will have to be really strong to trigger a USD comeback
EUR/USD rebounded yesterday, but solid US eco data aborted the move. Today’s payrolls might decide on the next move. With a 25 bp Fed rate cut considered ‘almost certain’, the payrolls probably have to be very strong for the dollar to reverse the current correction. The sterling rebound might slow as the focus in UK politics turns to new general elections
The Sunrise Headlines
- US stocks rebounded yesterday on (geo)political and trade optimism and strong data. The Nasdaq (+1.75%) outperformed. Asian markets are coloured in green with gains varying between 0.2% – 0.6%.
- The US administration drafted plans to privatize Fannie Mae and Freddie Mac after more than a decade of federal control. Under the plans, the mortgage giants would a.o. undergo reforms to protect them from another housing crash.
- UK’s main opposition parties are now taking steps to force general elections on October 29, after Wednesday’s proposal that forces PM Johnson to ask for a delay at an EU Summit on October 17 is hoped to be written in law.
- Rating agency Fitch has downgraded Hong Kong’s sovereign rating from AA+ to AA with a negative outlook, voicing concerns that the recent political turmoil and protests raises doubts about governance.
- German Finance Minister Scholz said he would respect any decision from his Social Democrats party (SPD) to leave the government when they review the Merkel coalition in December.
- US high-grade debt sales reached $74 billion in what is the busiest week in history. The amount of deals the investment-grade debt market added up to a record 49 this week.
- Today’s economic calendar contains US August payrolls. The EMU publishes final GDP figures. We will also watch Fed chair Powell’s speech on the economic outlook.
Currencies: Payrolls Probably Will Have To Be Really Strong To Trigger A USD Comeback
Payrolls have to be really strong to support USD
A positive global risk sentiment on renewed hope of a de-escalation in the USChina trade war initially supported the EUR/USD rebound yesterday. Poor German factor orders caused only a brief pause in this upmove. Later, US data were strong. The dollar initially ignored a better than expected ADP labour report, but the US currency finally rebounded as the non-manufacturing ISM (56.4) showed this part of the economy is still shielded from the deterioration in manufacturing. EUR/USD eased off the intraday peak north of 1.1080 and closed the day at 1.1035. USD/JPY jumped temporarily north of 107 but closed at 106.94.
Overnight, Asian (equity) markets are building on yesterday’s risk-rebound with modest gains across the region. However, the picture for the dollar is a bit different from yesterday morning as strong data put a floor for the US currency. USD/CNY hovers in the 7.15 area. USD/JPY struggles to regain 107. EUR/USD is trading in the 1.1040 area.
Today, the US payrolls might decide on the next USD move going into the September 18 Fed meeting. After the close of the European markets, Fed’s Powell has ‘a last chance’ to guide markets before the Fed’s blackout period starts. A decent payrolls report might cement expectations for a 25 bp rate cut. We assume that even strong payrolls won’t cause markets to question a September Fed rate cut. Wages are a wildcard. In the end, we don’t expect the payrolls to be a big support for the dollar. The dollar might be slightly more sensitive to negative than to positive news.
The USD rally was blocked earlier this week (man. ISM), but the EUR/USD rebound ran into resistance after the US non-manufacturing ISM yesterday. ST negative momentum in EUR/USD eased. The technical picture shows tentative signs of ST bottoming, but a sustained euro comeback is not evident before next week’s ECB decision. A return north of 1.11 would call off the ST negative alert for EUR/USD.
Sterling extended gains yesterday as Boris Johnson probably won’t be able to execute its strategy to leave the EU without a deal if needed. EUR/GBP dropped to the mid 0.89 area. The political debate now shifts to (the timing of) new election. An election campaign probably will cause a new period of uncertainty. Recently, we assumed that quite some bad news was discounted and stayed cautious to engage in ‘last minute’ sterling shorts. Pressure on sterling is easing but given the lack of political visibility we don’t expect a big leap higher, yet.
EUR/USD rebounds back to previous range bottom. Payrolls to decide on next move.
