US rates extend gains to fray 4%

Overview: The stronger than expected US jobs report triggered a 20 bp jump in the US two-year yield and sent the greenback broadly higher. The market slashed the probability that the Fed would cut by 75 bp in Q4. There are now slightly less than 50 bp discounted in the Fed funds futures strip. US rates have continued to back up today, and both the two- and 10-year yields traded above 4% today. The greenback is mostly firmer, though the yen, Swiss franc, and Norwegian krone are resilient. Sterling is leading the decliners with about a 0.35% loss. Dismal German factory orders added to the weight on the euro, which is hovering near the pre-weekend low of $1.0950. Most emerging market currencies are softer, but the Mexican peso and the South African rand are bucking the move with around 0.3% gains. 

Asia Pacific equities rally. The index of mainland shares that trade in Hong Kong rose another 2% today. Japan, South Korea, and Taiwan equities rose over 1%. Among the large markets, only India failed to advance. However, European and US equities are heavy. The Stoxx 600 is giving back most of the 0.45% gained before the weekend. US index futures are around 0.50%-0.75% lower. The rise in US rates is tugging global rates higher. European benchmark 10-year rates are 2-5 bp higher. The 10-year JGB yield rose five basis points to 0.92%. Despite the mostly firmer dollar and higher rates, gold is firmer, albeit within the pre-weekend range. The Middle East war is lifting crude oil prices. November WTI rose 9% last week and is up about 2.3% today to trade above $76. It is approaching the August high near $77.50. 

Asia Pacific

Remember when many thought that Takaichi was next likely Japanese prime minister? Her opposition to further BOJ tightening saw the yen weaken ahead of the LDP leadership contest results. When Ishida was the victor, the yen rallied in relief. However, last week, Ishida signaled he also did not see a need to tighten policy further now and the yen slumped. BOJ Governor Ueda also took on a more cautionary tone. An October rate hike was never the most likely scenario and with the snap election then, it was even a more remote possibility. Today, the BOJ upgraded the assessment of two regions in its quarterly report today, and separately the central bank's branch managers found businesses see the need for higher wages. Japan reports August labor earnings, household spending, and current account balance tomorrow. Real labor earnings and household spending likely weakened, while the current account surplus may have edged higher, the trade deficit probably widened. The Reserve Bank of Australia will release the minutes from its recent meeting. The statement following the decision to leave rates on hold dropped the warning that a rate hike was considered. The issue is the extent to which the RBA softened its hawkish hold stance. The futures market has about a 45% chance of a cut discounted before the end of the year. That is down from a little less than 60% on the eve of the RBA meeting on September 24. China's mainland markets re-open tomorrow. Over the holiday, the index of mainland shares that trade in Hong Kong has risen by almost 9%. When the onshore yuan last traded, the dollar was near CNH7.0. It is now near CNH7.0750. Although there was some profit-taking on Chinese property stocks in HK at the end of last week, more measures from Beijing seem likely, and the boost to confidence appears to have bolstered economic activity over the extended holiday. 

The dollar recorded a bullish outside up day against the yen before the weekend by trading on both sides of Thursday's range and settling above it high. The greenback reached JPY148.80, its best level since mid-August, facilitated by the rise in the US 10-year yield to 3.86%, which it has not seen since August 9. There may be scope into the JPY150-JPY151 area, but last week's 4.6% surge may need consolidation. The dollar reached almost JPY149.15 in early turnover and trended back to nearly JPY148 in Europe before finding a bid. The Australian dollar fell by about 1.6% last week, its worst week in a couple of months. It settled below the 20-day moving average (~$0.6800) for the first time since September 13. It has frayed support near $0.6780 today, stretching the intraday momentum indicator. The next support area is around $0.6740. It, too, may need some consolidation, during which the $0.6800-$0.6820 may cap upticks. The dollar poked above CNH7.10 before the weekend and has come back better offered. It retreated to about CNH7.0620 but is back above CNH7.07 in Europe. 

Europe

Eurozone's August retail sales rose by 0.2%. It is nothing to write home about, but it is the first back-to-back gain this year. Still, growth impulses remain faint. German factory orders fell a dramatic 5.8%, in August, more than twice the decline economists projected in Bloomberg's survey. It followed two months of gains (4.6% in June and a revised 3.9%, from 2.9% in July). Industrial output will be reported tomorrow. It fell by 2.4% in July. One way that German industry is trying to regain its competitiveness is through a wave of mergers and acquisitions that will consolidate sectors and boost concentration. Meanwhile, the UK's economic diary is light this week until Friday when August GDP is reported. The economy was stagnant in June and July, according to the monthly GDP. Last week, Bank of England Governor Bailey seemed to suggest the central bank's cautiousness (it has also cut the base rate once so far this year by 25 bp) may end, provided inflation pressures remain in check. The comments boosted the markets confidence that the central bank will cut next month. Bailey's comments helped trigger the first 1% decline in sterling in six months. The swaps market has 38.5 bp of easing discounted for this year, nearly unchanged from a week ago. 

The euro was pummeled through $1.10 immediately after the US jobs reports, stops were triggered and some option-related sales (1.75 bln euros in options were expiring 90 minutes after the data). The euro fell to $1.0950. The double top around $1.12 and neckline at $1.10 projects to $1.08. The $1.0980 are capped the early upticks today and the remains pinned near the pre-weekend lows. Initial support may be in the $1.0900-20 area. Note the US two-year premium over German widened by about 35 bp since mid-September. Sterling took two legs down last week. The first was on Fed Chair Powell's comments that played down the likelihood of a 50 bp cut in November and the second was in response to BOE Governor Bail's remarks. The net result is that sterling fell 2% last week. It saw $1.3070 ahead of the weekend, which it had not seen since September 12. A marginal new low has been recorded today near $1.3065. The next support is near $1.30. The $1.3135 area capped the initial upticks. The five-day moving average slipped below the 20-day moving average ahead of the weekend, further underscoring the change of the near-term trend. 

America

The US highlight this week is the CPI on Thursday. The day before, the minutes from the FOMC meeting, which resulted in a 50 bp cut to start the easing cycle will be reported. Despite the large move, seemingly signaled by a planted story during the quiet period, Fed Chair Powell has indicated a lack of urgency in the aftermath of the upward revisions to GDP and GDI. The year-over-year pace of CPI is expected to slow with a 0.1% month-over-month increase. Today, the US reports August consumer credit. Through July, the growth of consumer credit averaged about $10 bln a month. That is about a third lower than the average for the first seven months of 2023. Four Fed officials speak today (Bowman and Kashkari in the afternoon and Bostic and Musalem early evening). Tomorrow, the US reports August's trade deficit. Based on the advanced goods report, it appears that the August shortfall narrowed a little. Canada reports its goods trade balance tomorrow. Canada is running a goods trade deficit that is a little less than a third of last year's. Mexico reports its August CPI on Wednesday and the minutes from last month's meeting that resulted in a quarter-point rate cut. Banxico Governor Rodriguez recently suggested that there may scope to accelerate the rate cuts. Between the CPI and meetings minutes, the market may get some validation of its pricing in 50 bp of cuts in the Q4 and another 50 bp in H1 25. 

Broad demand lifted the US dollar last week and it approached CAD1.36 after the employment report and drew closer to it today. Nearby resistance extends toward CAD1.3620 and then CAD1.3650, last month's high. The Canadian dollar was unable to draw much support from the downgrading of the chances that the Bank of Canada delivers a 50 bp cut when it meets later this month. The odds were cut to about 25% at the end of last week from 80% the prior week. The Mexican peso was the strongest currency in the world last week, rising by about 2.6% against the greenback. Even when the US dollar was bid after the jobs data, the peso proved resilient. It reached its best level in nearly two-and-a-half weeks. The US dollar, which peaked on October 1 around MXN19.85, fell to almost MXN19.11 before the weekend. Stronger growth impulses from the US are good for Mexico, all else being equal. Still, it seems like it is more a question of market positioning than positive news from Mexico. Consolidation is the most like near-term scenario.