Risk rally continues, yields go lower ahead of NFP

Headlines

* BoE leaves rates unchanged, vote 6-3 in favour, vows to hold line on inflation

* 10-year Treasury yield falls as investors weigh if the Fed is done raising rates

* Dow rallies 500 points, S&P 500 enjoys for best day since late April

* Dollar on pace for biggest drop in two months, oil rallies nearly 3%

FX: USD settled close to 0.5% lower as markets detected signs that the Fed may actually be relenting on rates. Time will tell if that is the correct reaction to Wednesday’s FOMC meeting. But continued soft data in the form of ISM manufacturing and a further fall in Atlanta Fed’s GDPNow tracking point to an economy that might finally be rolling over. Treasury yields also fell sharply for a second straight day. The 10-year yield is now at 4.65% having been above 5% just over a week ago. The low point of the Fed cycle has fallen over 65bps from 4.50% in just a few weeks. The 50-day SMA is at 105.63 in the DXY.

EUR pushed up above its 50-day SMA at 1.0635 before paring gains. There has been some modest narrowing in EZ/US spreads though nothing decisive as yet. A base could be forming around 1.05 if the US data does disappoint. ECB’s Knot stated that restrictive policy will likely be needed for some time.

GBP closed just above 1.22 after the BoE held rates at 5.25%. Three MPC members still voted for a hike so that shows there is appetite for one more hike. But rate expectations pulled back with an August 2024 rate cut now fully priced in. Markets are focused on the grim growth outlook and not more policy tightening.

USD/JPY fell again as lower yields bolstered the yen. Prices dropped below 150 before closing at 150.46. But positive risk sentiment meant JPY lagged its major peers. Sources reported that BoJ Governor Ueda will move gradually towards a policy exit while maintaining the dovish rhetoric of his predecessor. The next focus will be on ending NIRP and pushing short-term rates to 0% from the current -0.1%. This will likely occur in Spring.

AUD rose for a fifth day in six as it outperformed on the global risk rally. Buyers surged through the 50-day SMA at 0.6389. The next target is around 0.65.  

CAD was firmer but it lagged its peers. The rebound in stocks and crude prices is supportive of the loonie. Support sits at 1.37 and 1.3667 in USD/CAD.

Stocks: US equities closed up for a fourth day in a row. The benchmark S&P 500 added 1.89% to settle at 4318. The 200-day SMA is now at 4245. The tech-heavy Nasdaq finished 1.74% higher at 14,920. The Dow settled 1.70% up at 33,839. Follow-through buying continued after Wednesday’s FOMC meeting that policymakers are now most likely done with hikes. Markets are calling Powell’s hawkish bluff (similar to the BoE). The VIX declined for a fifth straight day. Apple released its Q3 earnings which slumped despite record iPhone and services revenue. All other hardware divisions were down year over year with the stock off 2.5% after hours.

Asian futures are in the green. APAC stocks again tracked Wall Street higher after the dovish reaction to the Fed and soft data. The Nikkei 225 climbed above 32,000 with the biggest moves driven by earnings and automaker updates.  

Gold gained small and continues to consolidate its October surge. Falling yields are underpinning support for the precious metal. Central bank buying has also been noticeable over the last few months.  

Day Ahead – NFP Day

The headline is expected to rise by 180k which is well below the prior blockbuster 336k. Watch out for revisions too, which were 119k positive for July and August last time. The jobless rate is seen at 3.8% which is where the Fed predicts the rate finishing at the end of 2023.  Wages are forecast to accelerate one-tenth to 0.3%. The annual rate is expected to cool two-tenths to 4%.

Markets are now trying to figure out how long the Fed needs to keep rates at a restrictive level. The Fed has one more NFP report after this one, as well as two inflation releases before its final meeting of the year. The next dot plots and economic projections are published in mid-December. The odds of a December hike currently sit at 20% and a January move at 30%. A hot report will move these higher and should help the dollar.

Chart of the Day – Nasdaq up to the 50-day SMA

The tech-dominated Nasdaq 100 fell into correction mode last week, down more than 10% since its July high at 15,932.  But the rebound has been swift in just five straight days. It is currently up over 6% since the low last Thursday at 14,058. Falling bond yields are helpful to growth companies. Long-term Treasury yields provide the rate for discounting companies’ future cash flows, so a lower discount rate will lead to improved valuations. This is particularly true for stocks expected to deliver a lot of growth long into the future.

The index enjoyed its best day since late July. This is so far the biggest weekly gain since mid-March. Futures are marginally lower on Apple’s disappointing results. The 50-day SMA is 14,946. The midpoint of the July drop is 14,995. The 38.2% Fib level is below at 14,776.

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