New highs for US yields but not yet for USD

USD: US yields hit fresh cyclical highs offering more support for USD

The US dollar has continued to trade at stronger levels overnight after deriving more support rising US yields yesterday. The sell-off in the US Treasury market has regained momentum lifting the 10-year yield closer to 5.00% for the first time since July 2007. The peak prior to the Global Financial Crisis was set at 5.32% in June of that year. It has now almost risen by 100bps since the end of July. The move higher has been encouraged by further evidence that the US economy expanded robustly in Q3. The release of the stronger than expected US retail sales report for September has triggered a further upward revision to GDP forecasts. Bloomberg’s own GDP Nowcast model for the current quarter that tracks high frequency data releases is currently tracking a growth rate of 5.3%. While we don’t expect growth to be that strong in Q3, it clearly highlight the current positive cyclical momentum of the US economy. The strong growth momentum is keeping alive expectations that the Fed could deliver one further rate hike later this year or early next year. However, the release of the Fed’s latest Beige Book survey sent a timely reminder not to get too carried way by extrapolating strong growth into next year. 

The Beige Book revealed that there was “little to no change”  in economic activity in most districts and that labour market conditions had eased  further. It represented a downgrade from the last Beige Book which had described economic growth as “modest”. The districts also described the near-term outlook as “stable or having slightly weaker growth”. More specifically consumer spending was described as “mixed” especially amongst general retailers and auto dealers. The Beige Book noted that “labour market tightness continued to ease” with job candidates “less inclined to negotiate” offers on terms and wages. Wage growth was described as remaining “modest to moderate” while prices continued to “increase at a modest pace overall”. The recent disconnect between the strong hard data and softer survey data casts doubt on the sustainability of strong growth.

There will be increased market focus on the comments from Fed Chair Powell tonight who speaks at the Economic Club of New York. We will be listening closely to see if he repeats the message from other Fed officials over the past week that the Fed can wait and see before deciding whether to raise rates further. The sharp tightening in US financial conditions from the adjustment higher in market yields has taken pressure off the Fed to respond more immediately to the recent run of stronger activity data. By taking their time the Fed will be able to better understand how sustainable the growth pick-up is likely to be and what is driving the sharp adjustment higher in US yields. Bloomberg is highlighting today as well that Chinese investors sold the most US securities in Augustin four years. There were net sales of USD21.2 billion of which USD5.1 billion were Us equities and USD14.9 billion were US Treasury bonds. It takes cumulative net sales of US Treasury bonds to USD51.4 billion in the first eight months of this year. The highest amount since the 1H 2020 when the COVID shock first hit.  The report will add to current bearish sentiment towards US Treasuries. The US rate market has already moved to almost fully price out another hike at the next FOMC meeting on 1^st November which should limit downside for the US dollar from Fed Chair Powell’s comments today unless he more strongly indicates that they less inclined to hike rates again in the current tightening cycle.           

TIC REPORT INDICATES CHINA UST SALES FROM MAINLAND

Source: Bloomberg, Macrobond & MUFG GMR

AUD: Support from stronger China data offset by hit from higher US yields

The worst performing currencies overnight have been the G10 commodity currencies of the Australian and New Zealand dollars that have both fallen by around 0.5% against the US dollar. The sharp move higher in US yields has triggered a sell-off in global equity markets and undermining investor risk sentiment. It has meant that any relief for commodity related currencies from more evidence this week of strengthening economic momentum in China has proven short-lived. The AUD/USD rate rose back up to the 0.6400-level earlier this week but it has since fallen back to recent lows from last month at around 0.6290. It has though outperformed the New Zealand dollar helping to lift he AUD/NZD back in line with the 200-day moving average at around 1.0820 which is close to the target on our long AUD/NZD trade idea.

The main economic data release overnight was the latest employment report from Australia. It revealed that slower employment growth of 6.7k in September which is below this year’s monthly average of 33.6k. The data can be volatile month to month so on its own its not sufficient to signal slowing momentum. RBA policymaker Bullock did note yesterday though that “there signs that the labour market is turning, but…it is still very tight”. The tightness of the labour market is highlighted by the unemployment rate at just 3.6%. The RBA is currently forecasting the unemployment to increase modestly to 3.9% in Q4. The next important data release will be the latest Australian CPI report for Q3 on 25^th October. The tightness of the labour market is helping to support expectations for the RBA to deliver one further rate hike later this year or early next year.                    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	Current Account	Aug	--	20.9B	!
US	14:00	Fed Governor Jefferson Speaks	--	--	--	!
US	15:00	Existing Home Sales	Sep	3.89M	4.04M	!!!
US	17:00	Fed Chair Powell Speaks	--	--	--	!!!
US	18:20	Fed Goolsbee Speaks	--	--	--	!
US	21:00	FOMC Member Bostic Speaks	--	--	--	!!
US	21:30	Fed's Balance Sheet	--	--	7,952B	!!
US	22:30	FOMC Member Harker Speaks	--	--	--	!!

Source: Bloomberg