Bullish trends for US yields & USD suffer a setback

USD: US yields & USD continue to correct lower at start of week

The US dollar has continued to trade at weaker levels during the Asian trading session after the dollar index recorded a lower close for the sixth consecutive day yesterday, and hit an intra-day low overnight of 105.66. It has now declined by around -1.6% since the high recorded on 3^rd October at 107.35. At the same time, US yields have also corrected lower. After hitting a peak of 4.89% at the end of last week, the 10-year US Treasury yield fell back to an intra-day low yesterday of 4.62%. It has brought an end to the relentless sell-off in the US bond market that started in early September. The initial trigger for the move lower in US Treasury yields was the flare up in geopolitical tensions in the Middle East between Hamas and Israel that encouraged a pick-up in safe haven demand. Investor risk sentiment started to improve yesterday as market participants have become more confident that the conflict is unlikely to spread through the region and become more disruptive for financial markets. MSCI’s ACWI global equity index has staged a relief rebound over the last five trading days when it has risen by almost 4.0%. However, the improvement in risk sentiment has not lifted US yields which suggests that the dovish shift in Fed policy communication is an important driver behind the correction lower for US yields and the US dollar. As we highlighted in yesterday’s daily report (click here), there appears to have been a co-ordinated effort from Fed speakers since late last week to dampen the sharp move higher in US yields that has taken place in recent months. A similar message was repeated by Atalanta Fed President Bostic and San Francisco Fed President Daly yesterday. Atlanta Fed President Bostic stated that “I don’t think we need to increase rates anymore” and believes that policy is in a good pace now to get inflation back to their 2.0% target. San Francisco Fed President Daly added that recently rising bond yields have tightening financial conditions, and “if that’s tight, maybe the Fed doesn’t need to do as much. That’s why I said, depending on whether it unravels, or whether the momentum in the economy changes, that could be the equivalent to another rate hike”. She did add as well that the neutral policy rate could have increased but only modestly from say 2.50% up to 3.00%. It would still imply that the current policy rates is still well into restrictive territory.

While US yields have corrected lower this week, US financial conditions still remain significantly tighter than before the summer, and should encourage the Fed to keep rates on hold. The US rate market is now pricing in only around 4bps and 8bps respectively for the November and December FOMC meetings despite the release of the much stronger NFP report for September on Friday. It highlights that market participants have taken the message from Fed officials on board that higher bond yields are doing their work for them to slow growth and inflation. While the release of the minutes from the September FOMC meeting could sound relatively more hawkish, they are unlikely to fully reverse the recent dovish repricing that has weighed on the US dollar.

US YIELDS & USD ARE CORRECTING LOWER

Source: Bloomberg, Macrobond & MUFG GMR

CNY: China fiscal stimulus speculation provides a short-term boost

The US dollar sell-off yesterday was also encouraged by a Bloomberg report stating that China is considering raising their budget deficit for this year as the government prepares to unleash a new round of stimulus to help support economic growth. According to people familiar with the matter, policymakers are reportedly weighing the issuance of at least CNY1 trillion of additional sovereign debt for spending on infrastructure such as water conservancy projects. It could raise this year’s budget deficit  to well above the 3.0% cap set in March. An official announcement may come as early as this month though deliberations are ongoing and the government’s plans could change. China has long been trying to keep its official fiscal deficit that excludes special bonds or debt borrowed by local government financial vehicles under 3.0% of GDP. Nevertheless, the scale of the reported issuance under discussion is relatively modest at about 0.7% of GDP. The release of the IMF’s latest forecasts for the global economy yesterday revealed that they have downgraded their GDP forecasts for China by -0.2ppt to 5.0% for this year and by -0.3ppt to 4.2% for next year. It highlights that China’s economy is expected to continue expanding more slowly in the coming years driven by structural as well as cyclical factors. The fiscal stimulus has though provided a short-term boost for EM commodity-related currencies such as the rand.    

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
US	09:15	FOMC Member Bowman Speaks	--	--	--	!!
US	13:30	PPI (YoY)	Sep	1.6%	1.6%	!
US	15:15	Fed Waller Speaks	--	--	--	!!
US	19:00	FOMC Meeting Minutes	--	--	--	!!!

 

Source: Bloomberg