The Bull

Monday 22

April, 2019 6:55 PM



The Daily Fix - The Fed push the dovish theme even further

The Daily Fix - The Fed push the dovish theme even further

I suggested yesterday that the markets were not seeing the March FOMC meeting as a volatility event.

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21.03.2019 06:39 PM

I suggested yesterday that the markets were not seeing the March FOMC meeting as a volatility event. With the benefit of hindsight, this was somewhat misplaced, especially if you were to look at the US bond market.

US bond markets continue to not only give us a message that the Fed will be highly accommodative for some time to come, but that we are also likely to see policy easing into late Q4. In theory, this setting is positive for equities and, if the negative reaction seen in the USD is to extend lower, then it should be good for Emerging Markets too. Its no surprise we saw solid gains in the ZAR and BRL and if the market pricing is anywhere near on the money, these currencies should find further buyers easy to come by – obviously a deterioration in the China-US trade talks changes that and we all head to the JPY.  

It is perhaps a touch worrying that both the ECB and the Fed have had to go so strongly above and beyond market expectations, and for those with any doubt that the Fed took out expectations, then they need to look at the 12-basis point (bp) drop in UST five-year yields. At 42bp, could we feasibly see a situation where we see negative real rates in the US bond market? On current trajectory, it wouldn’t be out of the question and perhaps this is what the Fed desire.

It wouldn’t be out of the question to see an inverted yield curve, with the UST 3-month and UST 10-year spread at just 6bp. The Fed see this part of the yield curve as the best precursor of a future recessionary environment and at current levels is giving us a worrying message. As I have argued for a while, the rates market has been telling us for weeks that the next move in Fed policy is down.


Take a look at the daily of the USDX (US dollar index) and we can see price has broken through the September uptrend and the 200-day MA. Its hard to justify buying the USD with the Fed chasing markets.


I touch on the Fed meeting in more detail in the video, but there is clear evidence the Fed are trying to get in front of the economic story and boost inflation expectations. USD bulls have clear cause to re-think, and once again we are left at a point in time when there really are few attractions to hold any G10 currency. In fact, if we look at the pool of negative yielding bonds in global markets, we can see this has pushed out to the highest levels since November 2017 and gold has followed every step of the way higher. In a bygone era, gold may have been bought as a hedge against inflation, but in todays markets, we buy as a hedge against economic deterioration and the message the bond market is portraying. But we also treat gold as a currency in its own right, with gold the best house in the neighbourhood.


In yesterdays note, I touched on the importance of todays Aussie jobs report. The numbers themselves were mixed, with 4600 net jobs created, and below the 15,000-consensus held by economists. What’s more, all the job creation was from part-time employment, with 7300 full-time jobs lost. Yet, the interesting aspect has been the move in the Aussie rates market, with the 30-day interest rate future gaining 4.5bp. That is a pretty punchy move, and leaves the probability of a rate cut (from the RBA) at 57% (from 64%). Perhaps this partly reflects the fact the unemployment rate have fallen to 4.9%, and perhaps this is partly driven by Suncorp reducing 3-and 5-year fixed by 20bp and 70bp respectively.

If the banks are cutting fixed rates, I guess it lowers the need for the RBA to ease and this may become a trend among the banks given falling bond yields and the BBSW-OIS spread is headed lower (see Bloomberg chart below).


AUDUSD actually looks like it might want to push higher here. Largely as a result of USD weakness and as I mentioned yesterday the AUD just has so few friends. That said, we always trade price and if price is moving, we respect it and a move into 72c, takes us to the 200-day MA at 0.7217. The 200 day MA has been a reliable guide to fade rallies really since March 2018. One to watch.  

Published by Chris Weston, Head of Research, Pepperstone
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