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Treasury yields surge, boosting the dollar

Vantage Updated Updated Tue, 2024 January 16 10:00

Headlines

* USD hits one-month high, sinks Gold which loses 1.3%

* US 10-year yields jumps above 4% after Fed official signals rate cuts may take some time

* Goldman Sachs and Morgan Stanley report lowest profits in four years

* Sticky core Canada CPI spurs traders to push back on rate cut bets

FX: USD broke sharply higher and out of its recent range. It closed above a Fib level (38.2%) of the Q4 drop and is nearing the 200-day SMA at 103.43. US Treasury yields jumped with the 10-year yield climbing above 4% and near to its 200-day SMA. Muted risk appetite underpinned support for the dollar, while comments from hawk Waller added to buying.

EUR dropped to a low of 1.0861 before retracing some of its losses. ECB hawks have been loud this week while even some of the doves have said markets may need to be patient on rate cuts. The Germany ZEW data showed an unexpected rise but did little to help the euro. Near-term support is 1.0882/76.

GBP dipped but remained in its recent range. UK jobs data revealed softer wage growth while the jobless rate remained steady. We note that those latter figures are experimental so may not give a true employment picture. CPI is released today and will direct price action and the pricing of the first rate cut which is predicted to be in May.

USD/JPY shot higher as Treasury yields surged after Monday’s holiday. The 50% point of the November drop is at 146.07. The next Fib level is 147.45.

AUD tanked on weak risk appetite, sliding through the NFP spike low at 0.6640. The aussie touched the 200-day SMA at 0.6581 before bouncing. The CAD outperformed its peers on stronger CPI data. The major also tapped its 200-day SMA at 1.3480 before pulling back.

Stocks: US equities were muted with only Tech in the green amid rising yields and lingering geopolitical risks. The benchmark S&P 500 lost 0.37% to settle at 4,765. The tech-laden Nasdaq 100 dipped 0.01%to finish at 16,830. The Dow Jones underperformed, closing 0.62% lower at 37,361. Two top-tier investment banks had contrasting fortunes on release of their Q4 results. Morgan Stanley lost 4.2% as income sank and the firm warned of geopolitical risks and lower margins in wealth management ahead. But Goldman Sachs finished marginally positive on the day as stock trading and asset management surged past expectations.

Asian futures are mixed. APAC stocks were softer on Tuesday amid upside in bond yields and a lack of bullish drivers Stateside. Losses were cushioned in mainland China after a PBoC liquidity operation. Beijing reportedly told some investors not to sell stocks.

Gold fell over 1% on stronger yields and the dollar – not a good mix. The 50-day SMA has acted as recent support at $2017.

Day Ahead Data Focus China Data, UK CPI

We get a data dump from China with GDP and the usual mid-month retails sales and industrial production figures. Economists predict growth of around 1.3% q/q which would translate into 5.2% y/y in Q4 and 5.2% for the 2023 figure. This would represent a “beat” over the government’s 5% target. Retail sales have been resilient in recent months but may need action from the authorities to sustain this. Modest further improvement in manufacturing and industrial production growth is forecast.

Expectations are for headline UK CPI to cool to 3.8% y/y from 3.9%, and core inflation is seen easing to 4.9% y/y from 5.1%. The previous report marked a significant downside surprise for price pressures in the UK, with the annual rate falling to its lowest level since September 2021. Crucially, the all-important services print declined to 6.3% y/y from 6.6%, which was in stark contrast to the MPC’s projection of 6.9%. This is the key metric for the MPC and is expected to move close to 6%.

Chart of the Day GBP/USD remains rangebound

From a monetary policy perspective, it will probably be too soon for the BoE to declare victory after today’s inflation report, especially with services still above 6%. Markets currently assign around a 68% chance of a 25bps cut in May and a total of 120bps of cuts by year-end. Fed March rate cut bets were reined in yesterday to around 66% from above 70%. Is that still too much, when one considers recent Fedspeak?

Cable dipped to the bottom of its recent 1.26/1.2828 range yesterday. Momentum indicators have turned more bearish on the size of the sell-off after some narrow range trading days. The midpoint of the summer downtrend sits at 1.2589 with the 50-day SMA just above here as additional support.