Yields rip higher as focus shifts to jobs data

The week that is: NFP & PCE eyed

We have a heavy week of US data on the docket, with most of the focus on Friday's US employment report for September, where market consensus sits at 84,000 (max/min estimate range between 180,000 and 35,000), and the unemployment rate is seen holding at 4.1% (max/min estimate range between 4.2% and 4.0%). Of note, the Fed recently revised its unemployment projections lower to 4.1% until 2029. The August PCE inflation numbers also land on Wednesday. Outside the US, we also have an update from the RBA on Tuesday, followed by the August Australian CPI inflation print on Wednesday, with focus on the September eurozone CPI inflation data on Friday.

As the week's key event, US data follows the Fed's unanimous 25 bps hike to 3.75-4.00%, with 16 of 18 officials projecting another rate increase by year-end. This, coupled with a raft of hawkish comments, Chairman Kevin Warsh’s comment that the rate increase was merely to ‘remove a dose of accommodation’, and the September flash PMI blowout, triggered a hawkish repricing over the past week. The OIS curve is now pricing in a cumulative 33 bps by year-end: 18 bps of tightening is implied for October’s meeting (71%) and 15 bps for December (60%), with a higher-for-longer trajectory. 

Wednesday’s PCE numbers set the inflation tone, while Friday’s employment report offers a snapshot of the labour market and may confirm or invalidate PCE. Wages are worth watching as closely as the headline payrolls figure here, in my view. Fed officials have repeatedly underlined wage pressure as a channel for inflation to remain sticky, so a soft headline NFP print that still shows firm average hourly earnings would not be as clean a dovish signal as a miss across both. 

Hotter-than-expected PCE inflation, coupled with a solid jobs report and firm wages, would offer a clean directional scenario for the USD, potentially pushing October's odds to near certainty. The issue for me is that CFTC positioning data shows the USD is overbought; therefore, it would need to be solid across the board to extend the buck's current up move.

With that, I believe a softer print for both PCE and NFP – particularly if it comes with cooler wage growth – could offer the higher impact given the positioning backdrop, with the rate hike premium unwinding adding to a move lower in the USD. However, I do want to add that revisions will be important for the NFP data, as a strong headline could still be considered dovish with downward revisions for August’s 162,000 print. 

The week that was: Bond yields surge

Across the curve, US Treasury yields were parabolic. We have 10s north of 5%, 30s touching highs of 5.5%, and 2s closing in on 5%. Additionally, US real yields are now at levels not seen since late 2008. Despite this, US equity benchmarks largely shrugged the move off. In fact, the S&P 500 added 1.2%, with the Nasdaq 100 climbing more than 3% and clocking a fresh record high of 30,770. Typically, higher real yields weigh on stocks as they increase the discount rate used to value future cash flows. Corporate credit stress is also very narrow, and below its 5-year average, signalling that elevated government borrowing costs are driven more by supply and inflationary pressures than by risk. 

Although we saw some pressure on spot gold last week – down 2.1% – it is really nothing to write home about. Historically, the yellow metal has a strong inverse correlation with real yields. For oil, price action was choppy, with back-and-forth trading in the benchmarks, though both WTI and Brent are still circling the US$100 barrier. In FX, the USD has been rallying as global capital flows into the greenback to capture risk-free yield, leaving the USD index testing highs not seen since late July.

Honestly, I cannot remember a market like this before where we have government debt aggressively rallying to multi-decade highs and other markets not playing along. We all know that yields represent the expected path of Fed policy, certainly at the short end. We also know that the OIS curve is pricing in a cumulative 33 bps by year-end, as noted above, therefore pushing yields higher across the curve. Although other drivers are at play, the global energy shock is driving price pressures and prompting a global rate-hiking cycle, with the Fed, the ECB, and the BoJ raising rates this month.

Market snapshot this morning:

Asia-Pacific equities traded mixed at the start of the week as markets digested weekend developments in the Middle East. Japan’s Nikkei 225 is little changed, dipping fractionally to 66,321, while Australia's ASX 200 added 0.3% to 8,694 ahead of Tuesday's RBA decision. South Korea's KOSPI is underperforming, down 2.2% as of writing to 6,931.

In commodities, oil regained some ground in Asian trade after Friday's slide, with WTI up 2% to US$93.33/barrel and Brent crude up 1.6% to US$99.17, as the market continues to whipsaw on headlines around a potential Strait of Hormuz reopening.

In FX, the USD index is broadly firm but has stalled just below daily resistance at 101.33, which it touched gloves with last week. USD/JPY has ticked up to ¥157.76 from ¥157.20, while EUR/USD is little changed around US$1.1387, and AUD/USD is finding a floor just north of the US$0.70 handle – its lowest since 4 August.