Rates: ISM raises odds of additional Fed easing
The US yield curve bull steepened significantly yesterday with investors raising bets of more Fed action this year following another dismal manufacturing ISM. The market implied probability of at least one rate cut by December rises to 90%. Fragile risk sentiment remains bond friendly as well. The S&P 500 index tests first support.
Currencies: USD declines, albeit only modestly, after poor ISM
The dollar rally halted as the US manufacturing ISM dropped further into contraction territory yesterday. However, especially the rebound of EUR/USD was modest. The broader technical picture didn’t change (yet). Today’s ADP report is interesting, but probably no game-changer. The non-manufacturing ISM and the payrolls will decide on the fate of the USD.
The Sunrise Headlines
- US stocks slipped following the weakest reading of the manufacturing ISM in 10 years. The industry heavy Dow Jones underperformed (-1.28%). Asian markets decline in lockstep with Korea underperforming (-1.5%).
- Hong Kong activists planned new protests today after the police shot a demonstrator yesterday. Violence in HK flared up again recently while China is celebrating its 70th anniversary.
- North Korea fired two missiles, one of which fell in Japanese waters, according to PM Abe. The launch came just hours after the country said it would hold denuclearization talks with the US this Saturday.
- Today marks the start of the official transition by the ECB to move from Euribor and Eonia to the new benchmark short-term interest rate, ESTR. The central bank will publish ESTR daily at 8 am and is set for today at -0.549%.
- UK PM Johnson will present the EU his Brexit plan today. He aims for a time-limited backstop of four years while keeping Northern Ireland more closely tied to the EU until 2025. Ireland already said the plan is a non-starter.
- Former US special representative Volker will testify before 3 House committees on Thursday as part of the impeachment inquiry. Former ambassador to Ukraine Yovanovitch appears Oct. 11 while Secretary of State Pompeo refused.
- Today’s economic calendar is thin with only the US publishing the September ADP job report. New York Fed president Williams is scheduled to speak. Germany taps the bond market
Currencies: USD Declines, Albeit Only Modestly, After Poor ISM
Dollar corrects (modestly) after poor ISM.
EUR/USD touched new minor low (1.0880 area) yesterday morning. European and US yields jumped higher following a similar move in Japan, but the repositioning in the interest rate markets had no big impact on FX. The EMU final manufacturing PMPI (44.7) and September inflation (0.9%) only confirmed a sluggish eco momentum in the region. Yields and the dollar eased slightly early in US dealings. Yields nosedived as the manufacturing ISM dropped further in contraction territory. The details were also weak. USD/JPY tumbled from the 108.40 area to close at 107.75. The loss of the dollar against the euro was much modest. EUR/USD finished the day at 1.0933.
Overnight, Asian equities feel the fall-out from yesterday’s correction in the US as the poor US ISM raises concerns on the impact of the trade war on the global economy. In Australia, RBA rate cut also started the debate on bank profitability and on the efficacy of additional easing. The Aussie dollar rebounds back above 0.67. Admittedly, the again is small given the overall USD correction after the ISM. USD/JPY hovers in the 107.85 area. EUR/USD is going nowhere this morning (1.0935 area).
There are no EMU eco data today. In the US, markets will keep a closer look at the ADP jobs report after yesterday’s ISM. However, tomorrow’s nonmanufacturing ISM and Friday’s payrolls will be more important to guide USD trading. Even so, a new miss might raise doubts on the health of the US economy and take some shine off the dollar. To be honest, yesterday’s USD loss on the ISM was modest. The reaction also suggests that USD/JPY is more vulnerable than EUR/USD.
Of late, we advocated that the EUR/USD downtrend was well in place and that high-profile negative US news was needed to stop the USD uptrend. Yesterday’s US eco news was negative, but it didn’t change the EUR/USD picture in any profound way yet. The incoming trendline at 1.1045 remains our first reference on the technical charts. EUR/USD 1.0864 (76% retr.) and 1.0778 (gap April 2017) are next supports.
Yesterday, sterling had a volatile ride. EUR/GBP initially jumped higher, but the UK currency rebounded on rumours that the EU had discussed a time limit for Irish backstop. Even so EUR/GBP still closed the day slightly higher at 0.8886. Today, Boris Johnson is said to make a proposal for a deal (in his terms). However, it is highly unlikely that this proposal will ease political tensions. We remain cautious/ST negative on sterling.
EUR/USD succeeds only modest rebound despite US ISM miss
