Solid US data releases triggered a sharp selloff in US Treasury yields with the 10y rate climbing to its highest level in 7 years while the 30 year tenor ascended above 3.30% for the first time in four years. Both the ISM Non-Manufacturing and ADP Employment print beat expectations reinforcing the perception the US economy is currently firing on all cylinders and as a result US equities have had a positive day unperturbed by the move higher in yields. The USD is also stronger across the board with AUD and NZD the big losers within G10, both down more than 1% and again reflecting their sensitivity to EM fortunes.
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Interest Rates
The move higher in US Treasury yields is the major highlight from the past 24 hours price action with the move triggered by a jump in the September ISM Non-manufacturing print to a new cycle high of 61.6 and the second highest in the history of the series. The employment component of the report rose sharply as well, to its highest level since the survey’s inception in 1997 (see details below). Separately, the ADP employment report beat expectations as well and helped raise expectations for tomorrow’s Payrolls report. The Bloomberg consensus is for a 181k increase in US jobs last month, but the very strong employment components of both ISM surveys and the ADP surprise will undoubtedly see those Payrolls estimates revised higher (the ISM non-manufacturing employment index would point to a job gain of over 300k).
The break above the 3.12% May 2018 high in the 10y rate means that current levels are the highest since early July 2011. Back then 10y UST yields were on a downtrend after peaking at 3.73% in February of that year. Notably too, the 30y tenor now trades above 3.30% for the first time in four years, yesterday the long bond closed at 3.2175% and since 2015 moves into the low 3.20% have preceded decent downward corrections. Solid data releases, higher oil prices and a technical backdrop that suggests there are not a lot obstacles for yields to continue to push higher will have many wondering how far this new push higher can go.
Often solid US data releases tend to have a bigger impact in the front end of the UST curve, this time however the move has been led by the back end of the curve with the 2y10y curve now trading at 30.6bps. Late in August the curve traded down to 18bps sparking concerns of recession signals, so the recent steepening in the US yield curve is an encouraging sign.
Fed rate hike expectations were bolstered by the data surprises, with the market nudging up the probability of a December hike to near 80%, and moving to price slightly more than two full hikes for the 2019 calendar year. Early in the session Chicago Fed President Charles Evans, who has, until recently, been one of the most dovish voices on the committee over recent years noted that ‘’getting policy up to a slightly restrictive setting — 3, 3.25 percent — would be consistent with the strong economy and good inflation that we are looking at.’’ The market prices the Fed Funds rate to top out close to 3% in the first half of 2020.
Also speaking after the markets closed last night, Fed Chair Powel said the current combination of low inflation and low unemployment is ‘’not too good to be true,’’ and that the pleasant pairing could continue for some time. In a slightly hawkish remark the Fed Chair also noted that “Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.”
The US Treasury move reverberated around other global bond markets, with UK 10 year gilts and German bund yields up 5bps. The move higher in German yields was aided by an easing in concerns around Italy (more below) and some associated unwind of safe-haven buying.
Currencies
Solid US data releases and higher UST yields have helped the USD performed across the board. In Index terms the DXY index is up 0.58%, ADXY is -0.23% and BBDXY is +0.44%. AUD and NZD are the big underperformers within G10, both down over 1%, AUD now trades at 0.7080 which is a new low for the year.
Looking at DM markets, main equity indices ( US and Europe) have had a good session and the commodity complex is mostly above water suggesting risk sentiment should be supportive for both the AUD and NZD. Unfortunately as it has been the case this year, both currencies have displayed a high degree of sensitivity to the Emerging Market, so in an environment of higher US Treasury yields, higher oil prices (see more below), it is difficult to see EM having a good time and consequently both the AUD and NZD are likely to remain under pressure, even though from a fundamental basis both look undervalued.
The Euro has also come under significant pressure in the past hour of US trading with the break below key support level at 1.15, triggering a swift move to 1.1478. Early in the session good news on Italy turned out to be only a small reprieve. Prime Minister Conte announced that the coalition government had decided to cut its fiscal deficit targets for 2020 and 2021 to 2.1% and 1.8% respectively (lower than the 2.4% previously announced). The coalition was sticking with its deficit target of 2.4% for the 2019 fiscal year. While history would suggest that a lot can change in Italian politics over a three year horizon, so the later year fiscal targets should be taken with a grain of salt, the coalition’s decision to make the fiscal adjustments suggest its sensitive to market pressure and the moves should help calm market nerves in the near-term. Italian 2 year yields fell 27bps on the day.
After trading down to a low of 113.60 yesterday, USD/JPY is now up to 114.30 and the pair is now very close to its November 2017 high of 114.73. Buoyant DM equity markets and higher UST yields are the major factors for the move higher in USD/JPY and from a technical perspective a move above 115 will have many pondering a whether the pair can revisit the early 2017 highs of 118.60.
Equities
US equities closed higher with the S&P 500 almost breaking a new record high intraday. Looking at sector performance the move higher in yields boosted financial shares with sector up over 1% while rate sensitive sector such as utilities and real-estate under performed. Early in the session most European major equity indices also closed with positive returns.
Commodities
Brent and WTI climbed over 1%, but aluminium was the big performer up over 4% following news that Norsk Hydro ASA will temporarily close the Alunorte alumina refinery in Brazil because the only area it can use for waste processing is already close to reaching its capacity. Metal prices also had a positive day and copper gained 0.64%. Met coal and lead underperformed.
Economics
ISM Non-Manufacturing for September was much stronger than expected at 61.6 against expectations of 58.0 (58.5 previously). Driving the acceleration this month was a sharp rise in Employment to a new series high (+5.7 to 62.4) and a rise in Business Activity (+4.5 to 65.2). Yesterday’s rise takes the Index to a new cycle high and is the second highest in the history of the series.
The US ADP private sector payrolls print for September came at +230k well above the +184k expected by consensus.
This morning on the Economic Front we have no data of note from either the Euro-Zone or the UK. At 1.30 pm we have US Weekly Jobless Claims. Finally at 3.00 pm we have Factory Orders and Durable Goods.
Also at 3.00 pm the Fed’s Quarles speaks at a Banking Conference.
December S&P 500
The S&P just missed making a new all-time high while the Dow which has now closed higher for five consecutive trading sessions did make another new all-time high. Subsequently the S&P had a small sell-off into the close and that sell-off has continued overnight with the S&P trading the whole of my buy range for an average long position of 2920. The narrowness of the stock market’s rally is a concern with so many divergences between the main Indices. However the 50 Day Moving Average for the S&P is still a good bit away from current prices at 2880. Today I will now raise my stop on this long position to 2914 while lowering my T/P level to 2922. If I am stopped out of this position I will again look to buy the S&P on any further dip lower to 2894/2902 with a 2887 stop.If I am taken long a second time I will have a T/P level at 2909.
EUR/USD
I did not like the price action in the Euro yesterday and after the market traded lower to my 1.1535 buy level I emailed my Platinum Members to exit any long position at 1.1542 and I am now flat. The late break of the key 1.1500 support level saw the Euro quickly fall to an overnight low of 1.1463. The Euro is oversold and the next support level is from 1.1400/1.1440 where I will again look to buy the market with a 1.1365 stop. I have to respect yesterday’s sell-off and I will now look to sell the Euro on any bounce to 1.1550/1.1600 with a 1.1635 tight stop.
December Dollar Index
The Dollar continued to move higher yesterday with a rally of just shy of 1%. The Dollar is now severely overbought with the next resistance level from 96.10/96.50 where I will be a seller with a 96.80 stop. Given how overbought the Dollar is trading I do not want to be long the market at this time.
December DAX
So far the weak Euro is preventing the DAX from following the main US Indices lower. I am still flat the DAX and today I will again lower my buy level slightly to 12050/12120 with a 11995 stop.
December FTSE
No change as I am still a buyer on any dip lower to 7355/7395 with a 7330 stop.
Dow Rolling Contract
Yesterday as the Dow was pushing to a new all-time high, the Russell 2000 Index was declining to a new two-month low. This has never happened before. The only day that comes close is April 3, 2000 when the Dow rose to a two-month high, while the Russell 2000 Index dropped to a new two-month low. That day 18 years ago was the end of a countertrend rally in both the Dow and S&P and the market was sharply lower over the coming week. There is no doubt these markets are stretched with market sentiment back to the highest level since the end of January before the market had its semi-crash, also a major concern. The 50 Day Moving Average for the Dow comes in at 25905 so not too far from current prices and a break and close below here will be the first warning sign of a more sustained sell-off. I am still flat the Dow and today I will lower my buy level slightly to 26420/26580 with a 26350 stop. The Dow has strong resistance from 26970/27140 and today I will be a small seller on any rally to this area with a 27230 stop.
December NASDAQ
I am still flat the NASDAQ which traded in a small range yesterday. Today I will now lower my buy level to 7530/7570 with a 7495 tight stop.
December BUND
Yesterday after the Bund traded lower to my 158.65 buy level, the market subsequently traded lower to the bottom of my buy range at 158.30. Just before the Bund closed I emailed my Platinum Members to exit the second purchase of 158.30 at 158.45. I am still long my original stake and said to add to this position at 158.00. The market opened below this buy level at 157.85 this morning where I added to this position for a now average long position of 158.25. I am not comfortable in holding this long position given the aggressive sell-off in the US 10 Year Treasuries to a seven year low. Thankfully the Bund is rallying as I post this commentary and I will now lower my T/P level on this position to 158.35. I will have a stop on this position at 157.70 which is just below this morning’s low print. If any of the above levels are hit I will be back with a new update for my Platinum Members.
Gold Rolling Contract
I am still flat Gold and as I am still long Silver I will now lower my Gold buy level to 1181/1189 with a 1174 stop.
Silver Rolling Contract
No change as I am still long the market at 14.87 with the same 14.38 stop and a now lower 15.00 T/P level.
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