Markets
July FOMC Minutes showed that thinking within the Federal Reserve didn’t change compared to their June gathering which included updated growth/inflation forecasts and a dot plot. Two Fed officials favoured leaving rates unchanged instead of hiking by 25 bps; a preference already visible in June. “A number of participants judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the committee’s goals had become more two-sided, and it was important that the committee’s decisions balance the risk of an inadvertent overtightening of policy against the cost of an insufficient tightening”. Again, referring to June, this “number of participants” are probably the 4 governors which pencilled in a final rate hike delivered in July. “Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy”. This is the group op 12 Fed governors which in June hinted at at least another two policy rate hikes (1 going forward). We remain flabbergasted by the fact that US money markets only attach a 1/3 probability for a final Fed rate hike by November despite this clear Fed guidance. The disinflation process runs as expected while US growth outperforms expectations, significantly reducing the 2023 recession probability. Next week’s Jackson Hole symposium offers an opportunity to dot the I’s and cross the t’s on this divergence.
US Treasuries remain in sell-off mode. Ahead of FOMC Minutes, markets digested decent eco data (housing market & industrial production). Technical elements are at play as well with the US 10-yr yield breaking the YTD high at 4.2% and pushing for a test of the 2022 high at 4.34%. Interestingly, the move is driven by higher US real yields. The US 10y real yield moved above 1.9% for the first time since 2009. We think that it’s both an indication of improved growth prospects, a return of US credit risk premia, a recognition of a higher future US neutral rate and embracing the higher for even longer scenario. Daily US yield changes yesterday varied between +1.2 bps (2-yr) and +3.9 bps (7- yr). The US 2-yr yield is pushing to move above 5% with the cycle high at 5.12% being next resistance. The US dollar holds its momentum though gains might have been bigger given the real interest rate support. EUR/USD closed at 1.0879 from an open at 1.0905. A test of the July low at 1.0834 is imminent. The Japanese yen remains on the weak side (USD/JPY > 146) following last week’s rise in core yields. Back in September, the Japanese Ministry of Finance did its first FX interventions since 1998 at the current spot rate. They later stepped it up as USD/JPY briefly passed 150 in October. We expect ruling trends – core bond weakness & dollar strength – to persist short term with today’s soft eco calendar (US weekly claims & Philly Fed index) not\interfering.Sterling yesterday outperformed the single currency on higher than expected July core CPI figures with EUR/GBP sliding to 0.8504 support.
News and views
Australian July payrolls disappointed with employment dropping by 14 600 people while consensus expected an increase by around the same amount. Details showed full time occupations falling by 24 200 with a 9 600 gain in part time employment softening the blow. The unemployment rate increased by 0.2 percentage points to 3.7% with the participation rate decreasing 0.1 ppt to 66.7%. Both indicators remain near their historically best levels, suggesting an ongoing tight labour market. The head of labour statistics at the Australian Bureau of Statistics downplayed the job losses by pointing to the average monthly employment increase of +42 000 in the first half of the year with employment also being 387 000 higher compared with last July. On top, July includes the school holidays which often shows job changes around when people take their leave and start of leave a job. Monthly hours worked increased 0.2% in July and are 5.2% higher than in July of last year suggesting that the demand for labour is partially met by people working more hours. In a separate report, the ABS said that average weekly earnings rose by 3.9% on an annual basis in May, which is the strongest annual growth since May 2013 apart from a brief spike early in the pandemic. Australian swap rates follow the global move this morning, rising by 4.1 bps (2-yr) to 8.8 bps (30- yr). The Aussie dollar continues to trade on the weak side against a strong USD with AUD/USD falling below the 0.64 big figure for the first time since November last year. The 2022 low at AUD/USD 0.6170 is key support.
