Rates: Market pressure on Fed intensifies; over to you Jay
The US yield curve’s bull steepening continued unabatedly after a dismal US non-manufacturing ISM. The market implied probability of a third consecutive Fed rate cut in October more than doubled this week to >80%. Downside risks to today’s payrolls suggests more of the same. A speech by Fed chair Powell after European close is a huge wildcard.
Currencies: dollar loses interest rate support, but decline stays modest
The dollar eased after US yields declined sharply yesterday on a poor US-non-manufacturing ISM. Even so, the decline of the USD remains modest as the eco picture in the likes of Europe or Japan is even less inspiring. A soft US payrolls report might put some additional pressure on the dollar. However, it is not sure that EUR/USD will succeed a technical break higher
The Sunrise Headlines
- WS more than offset early losses yesterday on Fed stimulus bets after a disappointing non-man. ISM. The Nasdaq (+1.12%) outperformed. Asian markets are trading mixed ahead of the US payrolls report. India outperforms.
- Japan’s finance minister Aso played down the need for fiscal stimulus after pushing through a twice-delayed sales tax rise on Tuesday. Fears are that the higher tax would hurt consumer spending and trigger a recession.
- US president Trump publicly asked China to investigate Democratic presidential candidate Joe Biden. Trump requested the Ukrainian president for a similar probe a few weeks ago, which triggered an impeachment inquiry.
- As months of unrest in Hong Kong turn more violent and show no signs of abating, the HK government is expected to discuss emergency laws today which in theory could include censorship of the media and control of transport.
- The EU gave UK PM Johnson a week to come up with a revised Brexit deal as it finds his Irish border proposal unacceptable. Johnson’s plan B would keep NI in a customs union with the EU if it agrees to put a time limit on the backstop.
- German foreign minister Maas said the EU will take retaliatory measures against the new US tariffs. Germany’s finance minister Scholz sounded more cautious however, saying escalating trade conflicts are in nobody’s interest.
- In today’s economic calendar the US payrolls report (September) takes centre stage. Markets expect a 145k increase but recent data (ADP, ISM employment) suggest downside risks. ECB’s de Guindos and Fed’s Powell are to speak
Currencies: Dollar Loses Interest Rate Support, But Decline Stays Modest
USD declines, albeit modestly on weak US data
After a poor manufacturing ISM on Tuesday, the US non-manufacturing measure missed the consensus by quite a big margin (52.6 from 56.4; 55 expected). US yields declined sharply further as markets concluded that the Fed will have to cut rates further, probably starting as soon as the end this month. The dollar spiked lower upon the release but recouped a big part of the loss later. The slowdown isn’t a US specific issue but fits in a broader trend. In this trend, the US performs rather well. Still the loss of interest rate support is gradually eroding the relative attractiveness of the dollar. EUR/USD closed the day at 1.0965 (from 1.0955). USD/JPY declined to close at 106.92 (from 107.18). Overnight, Asian equities show no clear trend after WS reversed post-ISM losses as US investors were encouraged by hopes on additional Fed support. EUR/USD hovers in the 1.0975 area. USD/JPY is also in consolidation modus (106.80 area). The AUD/USD also rebounds off the post-RBA low. The RBA in its financial stability report earmarked the housing market as a key source of potential systematic risk
Today, the reality check for the US economy continues with the payrolls. Markets expect net payrolls growth of 145k (from 130k), but a modest miss wouldn’t come as a surprise. If so, it would cement expectations for a protracted Fed easing cycle. Later markets will look out whether chair Powell at a Fed event will rubberstamp market expectations for additional Fed rate cuts this year. The dollar eased off recent tops after poor US data and a subsequent loss of interest rate support. However, for now the loss is contained as the eco picture in the likes of Europe is even more fragile. USD/JPY probably is most vulnerable to negative US news even as, until now, USD/JPY stayed quite resilient, too. We assume that EUR/USD will at least partially track a USD correction. We keep a close eye at the incoming downtrend line (today near 1.1035). We we’re not impressed by the EUR/USD rebound so far. It probably takes poor payrolls for EUR/USD to succeed a ‘technically significant’ break higher.
Sterling rebounded as UK Johnson received extensive backing for its Brexit plan from Conservative MP’s. However, enthusiasm faded later eased as EU politicians continue make reservations. Headlines currently indicated that the EU gave Johnson one week to improve its Brexit offer. For now, we stay neutral on sterling. That said, the downside in the UK currency looks rather well protected for now.
EUR/USD: rebounds modestly on overall USD correction. Key trendline coming in near 1.1035
