It is not that easy to discern a structured, directional market logic/trend these days
|Markets
It is not that easy to discern a structured, directional market logic/trend these days. In core (US and EMU) markets, the monetary picture is paralyzed. There were no eco data yesterday (US JOLTS delayed due to the partial government shutdown), but even if they would have been published, it was highly unlikely that they would have been be able to change expectations on the Fed rate path in any profound way. Recent data evidence only confirmed that the Fed can feel comfortable with leaning back and observing. In this context it’s also difficult to make any assumptions on the reaction function of the ‘Warsh-Fed’. US yields in technical trading yesterday eased between 0.2 bps (2-y) and 1.8 bps (30-y). In Europe, there was also little high profile news. Even so, risk premia at the ultra-long end of the curve continued their gradual, but protracted rise. The German 30-y yield even touched the highest level since 2011 (3.56%, close +3.4 bps). Short yields are blocked as also the ECB has every reason to wait and watch (2-y + 0.9 bp). Equities opened strong in Asia yesterday and the Eurostoxx 50 touched an all-time record early on, but momentum dwindled later in the session (EuroStoxx close -0.2%). In the US, fears on the potentially disruptive impact of AI on other sectors (including software) caused investors to push the brakes. The Nadaq closed the session with a loss of -1.43%. In these markets, event risk continues to complicate reaction functions. After a sharp rise last week (Iran and debasement trade), oil (Brent) end last week/early this week tumbled more than $5/b, just to rebound yesterday. A reported drone incident involving a US aircraft carrier in the Arabian Sea supports this move this morning (Brent $67.75/b). The risk-off on US equity markets didn’t help the dollar. A rebound in the likes of gold and silver, but also copper, probably was one of the drivers to keep the greenback in the defensive. Admittedly, USD losses this time were modest (DXY close 97.43 from 97.53, EUR/USD close 1.1819 from 1.1791). Also in FX markets, the traditional risk-on/risk-off reaction patterns are at least partially disturbed as investors have to come with multiple event risk that questions the ‘established patterns’.
Asian equities are holding up reasonably well this morning despite yesterday’s setback in the US. The dollar remains in the defensive (DXY 97.35). At the same time, the yen underperforms (USD/JPY 156.3) as markets turn to more cautious positioning ahead of the parliamentary elections this weekend. The eco calendar is better filled with the EMU flash CPI (headline expected to slow to 1.7%, but core seen unchanged 2.3%). In the US, the ADP private job report (expected +45k) and the services ISM are interesting, but once again we don’t expect them to profoundly change the view on the Fed policy. Later, the US Treasury will publish its quarterly refunding. Also keep an eye at the policy decision of the National Bank of Poland (close call between unchanged at 4.00%,or 25 bps cut).
News and views
New Zealand employment growth picked up from standstill in Q3 to a 0.5% Q/Q pace in Q4, beating 0.3% consensus. On an annual basis, employment was 0.2% higher compared with Q4 2024 (vs -0.1% Y/Y expected). The unemployment rate ticked up from 5.3% to 5.4%, the highest level since Q3 2015 but it was accompanied by an increase in the participation rate from 70.3% to 70.5%. Over the quarter, Stats NZ saw higher levels of engagement in the labour market as both employment and unemployment increased. Average hourly earnings grew at the same pace as in Q3, 0.7% Q/Q. Today’s labour market data don’t affect thinking on RBNZ monetary policy. Unlike the Australian central bank’s rate hike yesterday, those prospects are still some months away from the RBNZ. A first hike (from 2.25% to 2.5%) is only fully discounted by the October policy meeting. NZD/USD doesn’t budge, trading at 0.6040. Technical resistance (2025 top) stands at 0.6120.
The US House voted 217-214 in favour of the funding package cleared by the Senate last week. Twenty-one defecting Republicans who wanted to hold the package hostage to tighten election procedures were countered by twenty-one centrist Democrats mostly from the appropriations committee. The legislation provides $1.2bn spread across five spending bills, providing funding for the end of the fiscal year. It split off one bill for the Department of Homeland Security, keeping it funded through the end of next week and allowing for negotiations over new restrictions on immigration agents. The partial government shutdown that started on Saturday is now over, but Friday’s scheduled payrolls report will nevertheless be delayed because of it, likely to somewhere next week.
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