Treasury yields and the dollar remain key

KEY THEMES

  • Markets are still coming to terms with President-elect Donald Trump and the big impact has been the moves have been seen on Treasury yields and the dollar. This has had a profound impact across financial markets with commodities and equities also affected. The prospect of a massive fiscal stimulus in the US would be growth-centric and inflationary. There are a raft of Fed speakers this week and it is interesting to already hear the likes of Jeffrey Lacker already talking about the impact of this fiscal stimulus on FOMC monetary policy. Fiscal easing would allow the Fed to tighten at least more consistently and normalise monetary policy sooner.

bonds key

  • The dollar has been on a huge bull run following Trump’s victory and the way is clear now for this dollar bull run to continue towards at least the FOMC hike (which is almost a dead cert) in December. However there is still likely to be near term retracements and corrective moves, however the direction of travel is dollar strength. As the US yield curve has massively steepend in the past month (US 10 year Treasury yield is up by 40 basis points) the FOMC path of tightening on the dot plots in December will now be intriguing, given the hawkish response of some Fed members this already (Lacker and Bullard). The 10 year Treasury yield has spiked to 2.3%. Is there now going to be a possible increase in the terminal interest rate for the Fed ? Currently around 3% (which is where the 30 year Treasury yield hit yesterday), could there be room to extend this to 3.5% or 4.0%?

Treasury yields

  • Global bond yields have been sharply higher as expectations of increased US inflation has knock-on impacts around the world. Suddenly, does this mean that central banks begin to look tighter rather than looser? It is interesting to see the yen being an underperformer in the dollar rally. In a risk-on environment this is not especially surprising, but the Bank of Japan yield curve control is helping to drive the relative yen weakness. The spiking global yields relative to the JGBs which are being held relatively low due to yield curve control means that interest rate differentials are very much yen negative. This is being seen across the yen crosses, with euro yen and sterling yen joining dollar yen in pulling upside breakouts.
  • We are also seeing precious metals under pressure amid the reflation trade. Real interest rates are a significant driver of gold and the increased expectations of tighter monetary policy will have a key role in the direction of gold. Negative real rates (inflation greater than nominal interest rates) would be supportive for gold. The current outlook is under pressure in the risk on reaction and this could drive a test of $1200 support. However the weakness could be limited as the Fed has a history of being behind the curve on rates.
  • Economic data is far more of a factor this week, with US Retail Sales in key focus in the early part of the week. A solid +0.4% month on month growth would see the year on year growth continue to improve close to +3.0% again. After the UK CPI inflation came in much lower than expected eyes will be on the UK average earnings growth on Wednesday and if the ex-bonus growth of +2.4% can be achieved this will show real wages unexpectedly picking up and would be strong for sterling.  US CPI is the big focus at the end of the week with an expectation of a mild tick higher on the headline to +1.6% but the core staying at +2.2%.
  • FOMC speakers are springing out from all over the place this week and this could add to volatility. With Rosengren, Fischer, Tarullo and Kaplan speaking today; there is Bullard, Kashkari and Harker on Wednesday; whilst Yellen and Brainard are on Thursday; and Bullard and George are on Friday.
  • Watch for: US Retail Sales, US CPI and FOMC speakers

markets

MARKETS

EUR/USD – Rallies towards $1.0850/$1.0950 will be sold into

  • The interest rate differentials are driving the dollar higher which is a big drag on the EUR/USD pair. Any near term unwinding (possibly driven by a near term corrective move on Treasury yields) should ultimately be short lives and allow the dollar strength to resume once more.
  • A bounce form key support around $1.0710 is likely to be short lived with huge  overhead supply at $1.0800, $1.0850 and $1.0950. A near term technical rally could be seen with the pair oversold but would only give another chance to sell.
  • Watch for: US Retail Sales, US CPI and FOMC speakers

GBP/USD – Support around $1.2330 is key

  • Trump is apparently an “Anglophile” and has suggested that a UK/US trade deal could be forthcoming and this could allow for a less hard Brexit. This has helped to support sterling. However, disappointing UK inflation has put the pressure on once more and the key tier one US data this week along with Fed speakers could add to pressure.
  • The move above $1.2330 has left support and this is a key medium term level to watch. Near term deterioration in the outlook could put this level under pressure this week and a breach would put the bears back in control. Resistance is now at $1.2673
  • Watch for: US Retail Sales, US CPI and FOMC speakers

USD/JPY – Buy into any dips for support between 105.50/107.50

  • The BoJ’s yield curve targeting is helping to keep JGB’s relatively flat compared to US Treasuries and this is driving yen weakness relative to the dollar.
  • The breakout above 107.47 key resistance completed a base that implies 750 pips of further upside. The next key resistance is 111.40/112.00. Although there may be some near term unwinding move in the coming days, any weakness is a chance to buy.
  • Watch for: US Retail Sales, US CPI and FOMC speakers

Gold – Selling into strength continues  

  • Gold remains under near term pressure as the positive risk appetite from the Trump victory continues. The market now needs to re-price for expectations of Fed tightening and how this impacts on real interest rates will be key to the support for gold.
  • Near term rallies are a chance to sell for a test of $1200. A break of $1200 would be a key change of expectations for gold. Resistance is now between $1241/$1265.
  • Watch for: US Retail Sales, US CPI and FOMC speakers

Oil – Volatile, choppy but support should be underpinned for now

  • Can issues of oversupply be overcome? As we move closer to the OPEC meeting at the end of the month there will be increasing chatter from the members and this will drive volatility. The dollar strength has been a drag on oil.
  • WTI has hung on to the key support at $42.55, but can this continue with Brent Crude having already made the break? The bears are in control still and rallies remain a chance to sell.
  • Watch for: News on production levels, EIA Oil Inventories

Indices – S&P and DAX still range as FTSE 100 underperforms    

  • S&P 500 – The rally on the Dow Jones to an all-time high has not been reflected in the S&P 500 which is now beginning to stall slightly. Could there be some temptation to take some profits (at least near term) if Treasury yields rolls over too? Resistance is growing around 2180 as momentum indicators begin to run out of steam.
  • DAX Xetra – The incredible tendency for rallies on the DAX to run out around 10,800 continues. There is still a mid-range pivot band around 10,450 which is a pull for the price and once more there could be a retracement if the bulls run out of steam
  • FTSE 100 – The negative correlation to sterling remains a key factor for FTSE, with a mild sterling weakness again starting to prop up the index. Can this continue? Technically FTSE 100 looks vulnerable and the support band 6612/6676 is key.

Economc Calendar

WATCH OUT FOR THIS WEEK

Tuesday 15th November

  • US – Retail Sales
  • US – Empire State Manufacturing

Wednesday 16th November

  • UK – Unemployment and Average Weekly Wages
  • US – PPI
  • US – Industrial Production & Capacity Utilization
  • US – NAHB Housing Market Index
  • US – Crude Oil Inventories

Thursday 17th November

  • Australia – Unemployment
  • UK – Retail Sales
  • US – CPI
  • US – Housing Starts & Building Permits
  • US – Weekly Jobless Claims
  • US – Philly Fed Manufacturing Index

Friday 18th November

  • Canada – CPI

 

NEXT WEEK

Tuesday 22nd November

  • Eurozone – Consumer Confidence
  • US – Existing Home Sales

Wednesday 23rd November

  • Eurozone – Flash Manufacturing PMIs
  • US – Durable Goods Orders
  • US – Flash Manufacturing PMI
  • US – Weekly Jobless Claims
  • US – EIA Crude Oil Inventories
  • FOMC – Meeting Minutes

Thursday 24th November

  • Eurozone – German Ifo Business Climate
  • US – Public Holiday (Thanksgiving)
  • Japan – CPI

Friday 25th November

  • US – Flash Services PMI

 

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