- The bond vigilantes are back and are selling fixed income products. Higher inflation, stronger growth, and more debt issuance by governments on both sides of the Atlantic are leading to higher bond yields on the longer end.
- The US 30-year bond yield has risen by about 100 basis points since the Federal Reserve commenced its easing cycle with a blockbuster 0.5% rate cut. This is very unusual and speaks to the pressure debt issuance is putting on the bond market.
- The United Kingdom has come into the limelight this week as bond yields rose to the highest level so far in the 21. century due to budgetary uncertainties. The pound has suffered the damage of weakening confidence in the government to fill the budget.
- Recent data have painted a mixed picture of the Eurozone. German factory orders and retail sales surprised to the downside this week but export growth and industrial production beat expectations. The euro remains driven by non-EU factors.
- Inflation in the US and UK will likely justify the cautious stance of the central banks and are due next week. Eurozone inflation already picked up more than expected in December and is adding to the feeling of higher-for-longer inflation and rates.
- The pound dropped more than 1% versus the USD this week, falling to near $1.22 – its lowest since November 2023.
Global Macro
2025 starts with yields on the run
Cautious policy. Uncertainty about the future policy path of major central banks continues to plague investors. In the run up to the nonfarm payrolls report, Philadelphia Fed President Patrick Harper said that the exact timing of rate cuts will depend on the economy. This data dependency leaves investors zooming in on all macro releases to gauge where monetary policy is headed. Two of his colleagues added that a lower pace of policy easing is justified given the recent upside surprises in the inflation data. Market dynamics are reflecting that as options are currently pricing in only one rate cut for 2025 for now.
Fiscal questions arise. Since October 2024, bond yields have risen globally due to a combination of persistent inflation, robust economic growth, and central banks signaling that their high-rate policies will likely persist for longer. At the same time, fiscal deficits and a global supply-demand imbalance in bond markets have added upward pressure on yields. Concerns over the long-term sustainability of debt levels, combined with higher interest rates, have led to an environment where investors demand higher returns on bonds.
Will the NFP print change anything? Only a big deviation from consensus might move the needle for the Fed when it comes to the NFP print today. Hiring likely slowed in December (165k) compared to the previous month (227k). With the unemployment rate expected to remain unchanged at 4.3% and the average hourly earnings seen cooling, this might become a jobs report underlining the status quo pricing of one rate cut for 2025. Three things to point out: 1. We see the potential for a slight upside surprise (190k) reflecting the recent uptick in leading indicators. 2. The December report will be the first one in Q4 to not be too heavily impacted by the Boeing strike and Hurricanes Helene and Milton. 3. November reports tend to be revised down on average.
Global Macro
US exceptionalism: When will it fade?
Strong US. Zooming in on the data, the US services sector expanded more than anticipated in December as the purchasing manager index rose from 52.1 to 54.1. It was the 10th time the barometer had expanded (above the 50 mark) last year. At the same time, job openings increased by 259k to 8.098 million in November and well above the expected 7.7 million. This marked the highest level in six months and the third increase in a row.
Toxic mix for Germany. The German labor market is reflecting the structural issues within the broader economy. The number of unemployed has now risen in every month for the past two years, setting a record negative streak. Furthermore, forward-looking indicators from the Ifo and AIB continue to deteriorate, making a quick turnaround unlikely. Germany is therefore suffering from both 1) a broad lack of demand for workers and 2) an insufficient worker supply in specific industries. A toxic mix with no quick fix.
UK joins the EM club? Typically, when an advanced country’s yields rise, its currency usually rises. This has not been the case in the UK. UK bonds (gilts), the British pound, and UK equity benchmarks all slumped in dramatic fashion this week. As bond prices fell, 10-year gilt yields leapt to their highest level since the financial crisis in 2008, while 30-year yields hit their highest since 1998.
Dollar bulls take over. The US dollar is back on the offensive after more upbeat economic data and hawkish minutes from the December policy-making meeting of the Fed. Both have justified the aggressive response to the pivot toward a more hawkish stance of future rate cuts and the dollar’s rebound against major peers. That said, most of the good news is priced into the dollar and Treasuries, with long-term bond yields approaching 5%.
Week ahead
Inflation to justify caution
The next data patch will be about gauging how major economies ended 2024. The macro releases for the months of November and December will therefore be less impactful as investors have mentally already entered the new year. Still, data points such as inflation and retail sales for both the US and UK will have the potential to shape markets, especially against the backdrop of bond yields rising across the globe.
US strength. The consumer in the US likely rushed to front-load goods buying before Trump’s tariffs are set to take hold. Retail sales have likely been impacted positively by this development with the consensus expecting a 0.5% increase in December. Industrial orders will have risen as well last month as the manufacturing PMI rebounded.
Rising inflation. The inflation figures on the other hand might give Fed officials the confidence to slow the pace of the easing cycle. The rhetoric has recently become more cautious as the disinflationary process stalled. The December report will likely confirm that shift of views within the US central bank. Core CPI was likely unchanged in December at 3.3% but the headline number could rise to 2.9%.
No return to 2% in 2025? The same trend could be visible in the United Kingdom, where the consensus expects an increase of inflation from 2.7% to 2.9% on an annual basis on December. Services inflation could remain sticky at 4.8%. This could worry the Bank of England as the expectations of inflation returning to 2% this year have dwindled.
FX Views
Bond selloff sparks currency volatility
USD New year, same trend. The US dollar defied consensus expectations of weakening last year with a solid appreciation, powered by US economic outperformance, a hawkish repricing of Fed rate expectations, and the Republican’s election victory. The US dollar index has climbed over 20% in the last four years. It rose 7% in 2024 and recorded its highest year-end level in two decades. Fundamentally speaking, there’s little reason to bet against further dollar strength, but it won’t be a linear upward trend in 2025, and we remain cautious of the extent to which the US currency can appreciate from here on. FX volatility is expected to increase and we’ve witnessed notably price swings this week in the wake of conflicting tariff talks and US data. Ultimately though, the dollar has come out on top again, boosted by rising US yields in conjunction with solid macro data prints and the rise in energy prices given the US is a net exporter. It could be the 14th out of the last 15 weeks that the US Dollar Index has risen. But dollar bears could be revived later in 2025 depending on the timing of fiscal and tariff policy implementation and if US data starts to surprise softer.
EUR Kicking off 2025 sub $1.03. The euro remains plagued by a plethora of negative factors, and is already suffering from the so-called January Blues. EUR/USD kick-started 2025 by falling to its lowest level since November 2022, taking out the $1.03 handle, and hedge funds are raising bets on an extended slide toward parity in the coming months. The global rise in bond yields and energy prices has further weighed on EUR this week, despite a relatively healthy risk sentiment. EUR/USD is on track for five weekly losses in a row and a close below $1.03 would be the first since the end of 2021. In sum, the euro continues to be moved by external factors, but the domestic macro developments don’t raise confidence about the European growth outlook either.
GBP Volatility and bearish bets soar. The pound dropped more than 1% versus the USD this week, falling to near $1.22 – its lowest since November 2023. The surge in UK yields but fall in the pound is alarming, and reveals sterling’s disconnect from the monetary policy path, hence the widening divergence in GBP/USD and UK-US yield spreads. Sterling’s slide shows how quickly confidence can erode when investors suspect a government may not fully address its ballooning deficit. Across the G10 space, sterling experienced unusual volatile daily shifts to the downside compared to average daily performances over the past five years. In the FX options space, demand for pound exposure has surpassed levels seen during the Truss era and Brexit referendum. One-week risk reversals in EUR/GBP and GBP/USD rallied for the most pound-bearish repricing exercise in more than two years. One-month volatility in EUR/GBP had its third strongest close since July 2023 while in cable, the gauge rose to its highest in nearly two years. The upcoming week brings more tests for sterling with UK inflation, GDP and retail sales data looming.
CHF Still expensive. The Swiss franc suffered its worst year in a decade against the US dollar in 2024, with USD/CHF clocking an 8% return. Meanwhile, despite EUR/CHF rising 1% last year and breaking a six-year rout, it remains around 20% lower since 2018. There are good reasons to be skeptical about the franc in the near term due to expectations of falling inflation and therefore more rate cuts by the Swiss National Bank (SNB). Traders are factoring in nearly one-and-a-half rate cuts from the SNB in the first half of this year, but this could increase to accommodate any weakness in the domestic economy. Moreover, the Swiss franc remains one of the most expensive currencies in the G10 across valuation metrics, suggesting the SNB might feel the need to intervene. This is one reason why the franc is likely to trail its European peers should the dollar face a bigger correction in 2025. Its safe haven status remains a bullish driver though if FX volatility and market stress increases globally.
CAD Loonie’s Trudeau bounce short lived. The Canadian dollar extended its recent consolidation phase over the last week with the USD/CAD remaining in the three-week long trading range between 1.4280 and 1.4470. The pair has paused up near major five-year highs but the ongoing strength of the US dollar means the USD/CAD has the potential to push higher. Of course, the main focus was on prime minter Justin Trudeau, who announced his resignation after nine years in power on Monday. The Canadian dollar jumped on the news and USD/CAD fell to the lowest level in three weeks, although these markets were also impacted by a short-lived trade story that suggested the incoming Trump administration might impose tariffs only on limited “critical” imports. Trump quickly quashed the story. Technically, the USD/CAD remains in a clear uptrend, with the pair above key 20-, 50- and 100-day moving averages. Looking forward, USD buyers will be looking to the lower end of the trading range at 1.4280 with CAD buyers targeting 1.4470. In a quiet week for data, manufacturing sales on Wednesday and housing starts on Thursday are the only local news releases.
AUD Weak retail sales and inflation data fuel rate cut speculation. Retail sales in Australia were down 0.8% month over month in November, compared to a 1.0% consensus and a 0.6% before. The ABS emphasized that the October acceleration was driven by Black Friday sales, which increased retail expenditure. However, given the pressures of rising interest rates and the cost of living, the slower-than-expected increase in retail sales may indicate greater uncertainty in the future for household spending. Policymakers appeared to be growing more confident that inflation was heading sustainably in the direction of the goal, according to the December RBA minutes. The AUD/USD attempted to regain ground at the panic low of 0.6349 August before reaccelerating to the next support at 0.617-0.6185. The 0.6349–0.6396 range should now serve as a crucial resistance area. This week, the unemployment rate and changes in employment will be monitored by the markets.
CNY China projects record-breaking Lunar New Year travel season. As family visits and tourist overlap, Chinese officials anticipate a record 9 billion domestic travels during the 40-day Lunar New Year celebrations. Passenger volumes for both train and plane travel are expected to increase, according to state media Xinhua. It should be noted that while officials had anticipated a comparable volume of domestic travel during this time in 2024, the actual figures came to about 8.4 billion. The travel surge this year will run from January 14 to February 22. Chart shows PBoC’s rate cut may be restrained by the existing rate gap at all time highs. USD/CNH remains above 7.35 which is near 2-year highs. Next key resistance will be at 7.3697. This week, the CPI, PPI, trade balance, GDP, industrial output, and unemployment rate will all be watched by the markets.
JPY Consumer confidence edges lower as price expectations rise. Japan’s December consumer confidence fell to 36.2 from 36.4 the previous month, falling short of the Bloomberg-surveyed median consensus prediction of 36.6. While household view on overall livelihood slipped 0.2 point to 34.1 and willingness to buy durable goods was down 0.5 points to 29.4, their perception on employment inched up 0.2 point to 41.2 and outlook on income growth remained steady at 40.2, data from the Cabinet Office showed Wednesday. We think that any more efforts to rally around the 161.973 would be unsuccessful. The 151.073–153.16 remains the support zone. This week, the adjusted current account will be watched by the markets.
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
