FX and Stock Markets Remain Reluctant to Really Enter Correction Mode

Markets

The (very) long end of the US yield curve failed to build out additional (Treasury) gains after Wednesday’s meaningful correction. A third consecutive week of extremely low jobless claims (202k-207k range) might already halted bond enthusiasts even as oil prices tanked further ($86/b to $84/b). However, we’d still err on the correction side today with US payrolls scheduled. Anything bar an outrageously positive number will likely call for some cautiousness going into the weekend. Consensus expects a net job gain of 170k with unemployment rate ticking lower again to 3.7%. Although the correlation is weaker than in the past, Wednesday’s job report by payroll processor ADP suggests that the US labour market is becoming more balanced again. Daily changes on the US yield curve eventually ranged between -4 bps (3-yr) and +3.2 bps (30-yr) yesterday. The outperformance at the front end of the curve is related to the recent underperformance of the very long end. As San Francisco Fed Daly pointed out at an high-profile event at The Economic Club of NY: the tightening of financial conditions is equivalent to about one rate hike. “When bond yields rose, we saw the probability on the November meeting go down. To me, that says the markets are understanding how we think about things and they do have the reaction function in mind,” she said. Additionally, holding rates steady is an active policy action she argues as policy will grow increasingly restrictive as inflation and inflation expectations fall. The German yield curve showed a more or less similar pattern with yields sliding 4.9 bps (5-yr) to 1.8 bps (30-yr). Intra-EMU spreads remain under pressure with the 10-yr Italian spread closing above 200 bps for the first time since the start of this year.

FX and stock markets remain reluctant to really enter correction mode as well. European equity markets recovered 0.5% while key US gauges ended with small losses. Technical pictures remain fragile for both going into Q3 earnings which get going next Friday with several US banks. Apart from the results, it could be (worrying) outlooks that influence risk sentiment. The trade-weighted dollar (DXY) closed at the intraday low of 106.32 from an open at 106.77, but remains within the upward trend channel since mid-July. EUR/USD rebounded from around 1.05 to 1.0550 and is similarly locked in a downward channel.

News and views

Japan labour earnings growth remained below expectations in August. Labour cash earning were unchanged at 1.1% Y/Y. Corrected for inflation this translated into a decline in real earnings by 2.5% Y/Y, indicating a further erosion of purchasing power for Japanese households. Real household spending dropped by 2.5% Y/Y but M/M-growth was rather strong at 3.9%, suggesting some improvement in spending momentum. The wage growth data are still below the (real) growth that the Bank of Japan considers as important to conclude that the structural deflationary trend isover. As such, the data suggest that the BoJ won’t be in a hurry to make a U-turn in its ultra-easy policy. At the same time, the combination of a weak yen and rising bond yields are putting pressure on the BoJ to consider catching up with the broader trend of monetary normalization. The 10-y Japanese bond yield holds this morning near the cycle top (0.805%). The yen stabilizes near USD/JPY 148 area after testing the 150 barrier earlier this week.

In a press conference one day after the National Bank of Poland cut its policy rate further by 25 bps to 5.75%, governor Glapinski commented on the NBP’s policy intentions/assessment. He indicated that the NBP favours gradual changes in the in the policy rate in order not to disturb economic agents. Glapinski expects CPI inflation near 6-7% at the end of this year, with a further decrease next year (5% mid 2024) as the economy would grow only slightly this year an gradual in 2024. He advocated that current cuts won’t affect the path to the NBP inflation target. He still considers the current rate level as high. On the zloty, Glapinski suggested that the NBP doesn’t worry about the current level of the zloty. There is no reason to intervene in the FX market now. Still a stronger zloty would help to bring inflation back under control over time. The zloty yesterday lost modest ground during the press conference after rebounding post the NBP decision on Wednesday (close EUR/PLN near 4.60).