Written by Convera’s Market Insights team
Jobs report to leave Fed on fence?
A broad selloff in world government bonds has stabilised for now, with the 30-year US Treasury yield at 4.9%, after spiking above 5% for the first time since 2007. US Treasury yields and the US dollar have been very reactive to economic data releases coming from the US recently and therefore there’s potential for elevated volatility today as markets brace for the all-important US jobs report.
The sell-off at the long end of the yield curve can be seen as a supply vs. demand issue. Important factors explaining the move higher in yields can be found on the supply side, but on the demand side, stronger economic growth has supported the thesis of a higher for longer rates regime. Today, the closely watched jobs report comes on the heels of a run of mostly resilient US economic data such as job openings and ISM PMIs this week and yesterday’s initial jobless claims close to a 7-month low. The data added to evidence that the US labour market remains at historically tight levels, adding leeway for rates to remain high for longer. Although we expect the US employment report today to show a slight deceleration in job growth last month, it probably won’t be enough to take the risk of another Fed hike completely off the table. That said, we do expect the labour market to weaken further later in the year as the economy slows in response to higher interest rates, tighter lending standards, and a pullback in consumer spending.
In the short-term, everything depends on the non-farm payrolls report. Looking beyond this or the next week, however, US congress would have to establish the perception of fiscal responsibility again to avoid a continued rise in yields. We see lower yields ahead next year based on the deterioration of US private activity due to the lagged effect of higher interest rates. This supports our call that the US dollar might soon find a peak and embark on a weaker path through 2024.
George Vessey – Lead FX Strategist
Sterling’s rebound loses traction
Despite bouncing almost two cents from its 7-month lows this week, GBP/USD still looks set to print its fifth weekly decline in a row. However, a softer US jobs report today could be the catalyst for the pound to reclaim the $1.22 threshold.
Elsewhere, sterling is attempting to build on last week’s rebound against the euro after having found support at its 50-week moving average. The €1.15 area appears to be a strong support zone for the pound, but seasonal trends suggest the final quarter of the year could be tough for sterling. Since 2001, GBP/EUR has ended the fourth quarter, on average, over 0.8% lower. This coincides with the notion that we’re approaching the peak of macro pessimism in Europe. Indeed, studying the Eurozone’s average economic surprise index over the last decade, we see the fourth quarter usually generates more positive surprises. If seasonal trends persist, this could be one of the catalysts to drag GBP/EUR below €1.15 – a level it has only been below for around 20% of the 21st century.
In the macro space, the latest Bank of England (BoE) Decision Makers Panel survey was published yesterday, suggesting UK price expectations are continuing to fall and the jobs market is cooling. Policymakers appear wary about putting too much emphasis on surveys, but the findings do bolster the case for another pause by the BoE in November. This might limit the pound’s attempted recovery versus the dollar given widening US-UK yield spreads.
George Vessey – Lead FX Strategist
Neutral euro at $1.05 before big data
Investors have calmed down a bit after US 10-year government bond yields reached a 16-year high on Wednesday in a move that shook global financial markets. Since then, both the euro and equity markets across the US and Europe have started a minor recovery attempt. However, light, and somewhat neutral positioning before the anticipated release of the US jobs report later today has meant that the upwards movement of risk assets has been limited.
Markets are expecting the European Central Bank to be done raising rates and are placing a less than 20% probability of another tightening this year. Against the backdrop of weak economic data, speeches from Governing Council members have been mostly ignored. Today, a report on German factory orders showed a slight rebound in August, with demand for German goods increasing by 3.9% on the month in August. The German 10-year yield has come down from its highest level since 2011 above 3% from Wednesday and is now trading at around 2.89%.
The fall in yields and the slight increase of the euro by 0.8% has been supported by oil prices heading for their biggest weekly drop since March, being down around 9%. The decline in gasoline demand in particular is a sign of how demand is being destroyed at these high price and yield levels. Both real rate differentials and our fair value model for EUR/USD suggest, that a $1.05 level remains appropriate for the euro to trade around. It is more likely that the Fed and US data will influence the yield differential more than the ECB in the months ahead, with Europe remaining in the shadows.
Boris Kovacevic – Global Macro Strategist
CAD hurt by 10% drop in oil
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: October 2-6
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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.
