Written by Convera’s Market Insights team
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ADP report does not matter, until it does
The US 10-year government bond yield is currently the most watched market indicator in the world. While fears of oil prices pushing beyond $100 per barrel and inflation not returning to the Fed’s 2% target have not eased, it seems that the supply side is the primary driver of the move higher in yields. Although the looming fear of a temporary shutdown has been eased, or at least postponed into November, faced with a hawkish Federal Reserve, the Fed’s QT program, and heavy auction sales of US treasuries, investors continued their relentless selling of US government bonds this week. However, in addition to the supply side, strong macro data has been supporting the re-pricing of yields as economists pushed out their expectations for an imminent US recession.
The US 10-year yield reached the highest level since 2007 at 4.88% on Wednesday and most government bonds across the world have followed suit. However, while yesterday’s data releases have been mixed with the ADP jobs growth disappointing (89k vs. 180k jobs created) and the ISM PMI and especially factory orders (1.2% vs. -2.1%) surprising to the upside, investors put more weight on the labour market data. While the private report from ADP has been negatively correlated with the actual job growth reported by the US bureau of labor, and usually does not move markets, it did yesterday.
US and German 10-year yields fell from multi-year highs at 4.88% and 3.02% to 4.77% and 2.92%. The fall in interest rates gave risk assets like equities some relief with the S&P500 and Nasdaq both rising by more than 1% intra-day. The US Dollar Index fell by 0.6% from its 10-month high at 107.50 and is currently up around 7% from the July low. Now, all attention turns to the release of weekly initial jobless claims later today before the release of the non-farm payrolls report tomorrow.
Boris Kovacevic – Global Macro Strategist
Yield and oil slip, euro back above $1.05
The euro has mostly been overpowered by the US dollar in recent weeks as the global increase in government bond yields overshadowed any new developments in Europe. We are currently still in the regime, in which investors wait on the bottoming of the Eurozone economy with economic data continuing to show weakness in activity. And while we are past the point where every economic data release is weakening or disappointing expectations, a majority of indicators still are. The euro has still been able to push back a bit against the dollar in yesterday’s trading as investors stopped their relentless selling of government bonds, pausing the move higher in yields.
Yesterday’s news flow has been mixed. Lagged (hard) data is coming in weaker than expected, highlighting the Eurozone’s difficulty returning to economic growth. Producer price inflation continued its descent into negative territory, falling by the most on record at -11.5%. Retail sales for the month of August fell -1.2% and have now been negative on a year-on-year basis for 11 consecutive months. At the same time, today’s German export data showed how net trade most likely pulled GDP lower once again in Q3, as the trade surplus narrowed to €16.6B in August, from €17.7B the month prior.
The euro, currently sitting near $1.05, has also benefited from oil prices being down more than 10% in a week, as investors think about the implications of higher yields on economic growth and demand for commodities. Christine Lagarde once again confirmed her stance that the ECB has reached the peak in interest rates and that they will stay in restrictive territory for as long as necessary. However, as we have pointed out, a sustained path beyond the $1.08 level can only be engineered by higher European growth rates and falling yields in the US.
Boris Kovacevic – Global Macro Strategist
CAD hits a 6-month low amid 12% drop in oil
The Canadian dollar weakened against the US Dollar on Wednesday, hitting a 6-month low, as USD/CAD accelerated towards 1.38, after breaking 1.37. Surging US yields have supported USD demand, but the recent 12% fall in oil prices has also hurt the Canadian Dollar.
Domestically, accelerating wage growth and trimmed-mean core inflation overshooting expectations in September back the case for the Bank of Canada to maintain its terminal rate for longer. However, the Canadian economic outlook is also showing signs of weakening going into Q4 of 2023. Data released this week showed manufacturing PMI falling to 47.5 in September (down from 48.0 in August) and GDP growth for July flat at 0% m/m proved less than promising. Latest forecasts from Oxford Economics predict a 0.01% q/q growth in Q3 and a contraction of -0.96% in Q4, which, ceteris paribus, would offer little support for CAD going into end of 2024.
With Canadian employment data for September due Friday, the leading indicator could offer more clues on the health of the Canadian economy. Markets predict 20k jobs gain and with mode forecast at 15k, risks in the short term are skewed to the downside for the Canadian dollar.
Ruta Prieskienyte – FX Strategist
Oil prices down by 12%
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.
