Bad. Yesterday’s 30-year treasury auction in the US was bad. And this time, the bad auction got the anticipated reaction. The US Treasuries saw a sharp selloff - especially in the 20-year and 30-year papers. The US 30-year yield jumped 22bp, the 20-year yield jumped more than 20bp, while the 10-year yield jumped 18bp to above 4.60%.
Then, the Federal Reserve (Fed) Chair Jerome Powell’s speech at an IMF event was hawkish. Powell repeated that the FOMC will move ‘carefully’ and that the Fed won’t hesitate to raise the interest rates again if needed. The US 2-year yield is back above the 5% level.
Of course, the sudden jump in US yields hit the appetite in US stocks yesterday. The S&P 500 fell 0.80%, and Nasdaq fell 0.82%. The US bond auction brought along a lot of volatility, questions, and uncertainty.
At 5%, the US 2-year yield is still 50bp below the upper limit of the Fed funds target range. Therefore, if the Fed could convince investors that the rates will stay high for long, this part of the curve has the potential to shift higher. On the longer end, we could reasonably expect the US 10-year yield to remain below the 5% mark – and even ease gently if economic growth slows and the job market loosens. A wider inversion between the US 2-10-year yield should boost the odds a higher of US recession. But hey, we are used to the inverted yield curve, and we believe that it won’t necessarily bring along recession. Goldman sees only a 15% chance of US recession next year.
In the FX
The US dollar jumped to its 50-DMA as a response to a rapid surge in the US Treasury yields. The EUR/USD sank below the 1.07 level. From a technical perspective, the early week rally remained capped below a major Fibonacci level, the 38.2% retracement on summer to October selloff near 1.0760. The EUR/USD remains in a bearish trend after the failure to clear an important technical resistance. Unideal political news from Spain and Portugal, and a morose economic outlook for the Eurozone will likely keep the euro in retreat against the US dollar. Even though the European Central Bank (ECB) officials cry out loud that the rates will stay high for long in the Eurozone as well, it sounds much less credible when economic data doesn’t give sufficient support.
In the UK, the Bank of England (BoE) wants to look tough and convince investors that it’s too early to talk about rate cuts. But Cable’s latest surge remained capped below the 200-DMA, and the pair is back to 1.22. The medium-term outlook for Cable remains neutral to bearish. Another surge in the dollar appetite will easily send the pair to 1.20 psychological level.
The dollar-yen is back to misery, above 151. Traders want to buy the USD/JPY, but they also know that the Japanese authorities are tempted to intervene to prevent the Japanese yen from getting shattered just because the Bank of Japan (BoJ) can’t keep up with the rest of the major global central bank policies. Japanese are happy to see inflation emerge after decades of deflation. Perhaps, the view of China – and Chinese deflation – doesn’t make them want to move any faster.
In energy, the oil bulls come in timidly near the $75pb psychological support. The oil selloff probably went too far and it’s time for – at least – a minor positive correction. A move toward the $78/80 range would be reasonable. This area includes the 200-DMA and the minor 23.6% Fibonacci retracement on September to November selloff.
Today is Friday. Fears of escalating geopolitical tensions could help strengthen the $75 support in US crude. But regarding that topic, the biggest fear of oil traders in Gaza was the implication of Iran in the war, which would then lead to another embargo on Iranian oil, decrease the global supply and send prices higher. Now, the new market narrative is that, even if the Iranian oil gets banned, it doesn’t matter because first, the Iranian shipments have been falling due to weaker Asian demand and two, 90% of the Iranian shipments go to China anyway, and China doesn’t care about the Iranian oil ban, they will continue buying it. And oh, there is also the fact that the US shale production hit a record high of 13.2mbpd. Together with the rising worries of slower global demand, the above-stated factors should ensure that a potential rebound in oil prices doesn’t extend easily above the $78/80 range.