Thoughts & Charts
Fed Day, here we go! I wouldn’t expect any fireworks from the Fed. They won’t hike and will want, as always, to keep all their options on the table. Powell will have to acknowledge the current strength of the economy and highlight that they are still inclined to hike rates if required. This will keep the Dollar and the short-end supported for now.
The most interesting aspect will be to see any hints and signs of an opinion about the steepening of the curve, which for policymakers could be interpreted as the market’s scepticism towards their trajectory and inflation-fighting credibility. Here, he could, if he wants to, drop a relief for the long end by entertaining a thought that steepening is ultimately doing part of the Fed’s job (which it does) and will ultimately ease pressure on them to hike more. I also think he is going for a blue tie today.
Meanwhile, Bunds have de-coupled from Treasuries as of late.
FX markets are choppy, with push-back from two angles on overnight moves. JPY firmed as officials stepped up verbal intervention around the recent Yen weakness before BoJ announced an unscheduled JGB buying operation, reversing part of the JPY gain.
JPY rates also remain in play, with the focus now shifting towards normalization trades in the front end, anticipating the end of negative rate policies. China Caixin Manufacturing PMI fell back into contraction. This was a miss versus Bloomberg consensus but was expected after weak official prints earlier this week.
Softening New Zealand jobs data impacted the NZD negatively overnight, with rates seeing larger moves as 2024 cut pricing intensifies. Index flows hitting into the month-end cut-off knocked Treasuries lower late in trading yesterday but moves slowly pared during overnight trade.
Let’s now focus on what model alerts have been flashing as of yesterday. Remember to also look at the recently published model guide as for how to read the charts.