Investors Turn More Nervous Going into Friday’s Jackson Hole

Markets

The curve move in the US differed somewhat from previous sessions yesterday as it turned more inverse. Technical resistance levels do their part at the (very) long end. The US 10-yr and 30-yr yields shed 1.4 bps and 4.7 bps respectively, failing to take out 4.34% and 4.45% for now. The front end underperformed with yields rising by up to 4.5 bps for the 2-yr which closed above the psychological 5% mark (5.05%) for only the third time since 2007. Investors turn more nervous going into Friday’s Jackson Hole address by Fed Chair Powell. They gradually come to terms with the idea of higher policy rates for even longer, while simultaneously doubting their (the money market) view that the Fed policy rate already peaked. We stressed on many occasions the diverging view between Fed June Dots (2 additional hikes in 2023; one already implemented) and Minutes of the July policy meeting (most participants still have upward inflation risks as prime reason of concern & recession in H2 2023 no longer base case scenario) and US money markets attaching only a 16% probability to a September 25 bps rate hike. This still means room for more underperformance at the front end of the curve if Powell gives the go-ahead. Persistently high core inflation should be the trigger.

The underperformance of the front end of the US yield curve pushed the trade-weighted dollar for another test of the July high at 103.57, but a break didn’t occur. The greenback closed at 103.56. EUR/USD fell from an open at 1.0896 to 1.0846 after a first real test of the July low at 1.0834. EUR/GBP followed the slide in EUR/USD with a close at 0.8518. The YTD low at 0.8504 is near, but untested. European stock markets still managed a positive close despite waning intraday momentum while US indices closed flat to 0.5% lower. Today’s focus is on global PMI’s. There’s room for improvement especially in Europe following two months of weak figures. This could add some more selling pressure at the front end of the yield curve while temporary helping the euro in its battle of survival above first support lines.

News and views

New Zealand’s total volume of retail sales fell 1.0% in the June 2023 quarter. This fall comes after declines of 1.6% and 1.1% in the March 2023 and December 2022 quarters respectively. 11 of the 15 retail industries had lower sales volumes in the June 2023 quarter compared with the March quarter. The largest contributors to the fall in the June 2023 quarter were food and beverage services, down 4.4%, and hardware, building, and garden supplies, down 4.8%. Without adjusting for seasonal patterns and price effects, the value of total retail sales was $29bn in the June 2023 quarter, up 2.5% ($725mn) compared with the June 2022 quarter. Last week, the RBNZ left its policy rate unchanged at 5.5%, but indicated that the policy rate needs to stay at restrictive levels for the foreseeable future to ensure that CPI inflation will return to the 1-3% target range. Today’s data might ease the RBNZ’s fear that activity doesn’t slow as needed to reach the inflation target. The data had little impact on the kiwi dollar. After a protracted decline over the previous month, NZD/USD today stabilizes near 0.595.

Activity in the Japanese manufacturing sector in August stayed slightly in contraction territory with the Jibun Bank manufacturing PMI printing at 49.7 from 49.6 in July. The services PMI showed growth improving further from 54.3 to 53.8. Andrew Harker of S&P Global Market intelligence said “Growth across the Japanese private sector picked up pace during August, with the service sector again driving the overall expansion amid ongoing improvements in new orders”. With overall new orders continuing to rise, firms upped their staffing levels accordingly. The weakness in manufacturing demand acted to deter hiring there, however, with no change in employment ending a 28-month sequence of factory job creation. On prices Harker said “rising oil prices were a key feature across the latest survey, with firms across both manufacturing and services reporting an impact on input costs. Overall, input prices increased at the fastest pace in four months”. The Japanese 10-y government yield set a new cycle high at 0.68% this morning. The yen gains marginally with USD/JPY trading near 145.6.