Yields move higher post FOMC minutes, AUD jumps after jobs report

Summary:

• FOMC minutes point to further gradual rate hikes, going beyond the neutral rate possible

• Australian dollar jumps following mixed macroeconomic data

• US Treasury refrains from labelling China as a currency manipulator

The initial market reaction to the FOMC minutes was subdued to say the least but then yields crept up. As a result, we saw the overnight increase in the 10Y yield from below 3.17% to above 3.20% in the morning on Thursday. What did the minutes bring? Not too much to be honest. The most important line concerns the pace of rate hikes in the future as “a number of Fed officials saw the need to hike above the long-run level”. The problem is the Federal Reserve does not accurately know the neutral rate it is aiming for hence both under or overshooting this target in the near-term could be quite easy. Looking back to the September meeting one needs to recall that Jerome Powell suggested that rates could be lifted beyond the neutral level if the economy stayed robust. In fact, the account openly said that “estimates of the neutral rate would be only one factor in setting rates”. In terms of removing a phrase ‘accommodative’ almost all policymakers considered it appropriate. The account also touched on an impact from the yield curve moves suggesting that “the rise in longer term yields made an inversion of the curve less likely”. The 10y/2y spread actually steepened slightly from around 29 bps to subtly above 31 bps over the Asian session. All in all, the minutes could be considered as neutral to hawkish with the major line pointing to a possibility of a quicker pace of rate increases. The US stock market barely changed after the minutes were released. The SP500 (US500) and the NASDAQ (US100) closed flat while the Dow Jones (US30) lost 0.4%.

The divergence between full- and part-time jobs in Australia has lately become more apparent. Source: Macrobond, XTB Research

Looking at macroeconomic events taking place overnight one needs to single out the Australian jobs report which offered mixed results. Admittedly, employment grew just 5.6k and fell short of the median estimate of a 15k increase, the unemployment rate declined from 5.3% to as low as 5%. However, the drop in unemployment corresponded to a decrease in the labor force participation rate as it fell to 65.4% from 65.7%. As far as employment is concerned one may notice that a disappointment came both from full- and part-time jobs. Growth in the former group totalled 20.3k while the latter group subtracted 14.7k jobs. Did the Australian jobs market send a warning signal? From a broader standpoint today’s release did not change the overall buoyant backdrop neither it offered more arguments for the Reserve Bank of Australia to consider any moves in rates in the foreseeable future. Based on the money market expectations no changes are expected at least until October next year (with a probability exceeding 50%). Also during the Asian session we also got two soft indicators from the Australian economy concerning business confidence and conditions. The former dropped to 13 from 15 whilst the latter went down to 3 from 7 - both for the second quarter. A combined effect for the Aussie turned out to be positive. The currency is trading almost 0.3% higher as of 6:40 am BST having even more impressive gains during Asian hours trading.

Technically it looks that the AUDUSD could continue climbing toward the trend line after it managed to stay above 0.71 (it broke and then tested this level). Therefore, a move toward 0.72 seems to be justified from this angle. Nevertheless, any more sustained gains could be only possible when the pair moves through the bearish trend line. Source: xStation5

The last being worth mentioning is the US Treasury semiannual report which did not label China as a currency manipulator, instead it included a stern warning about a recent slide in the Chinese yuan. The PBoC set the USDCNY reference rate at 6.9275 today from 6.9103 on Wednesday. Treasury also said that the direct intervention by the PBoC this year “has been limited”. Do note that the USDCNY increased as much as 7% since mid-June fuelling concerns about the ongoing trade war between the two largest economy in the world. On top of that, the report said that China along with Germany, India, Japan, South Korea and Switzerland had currency practices that required monitoring.

The Chinese Hang Seng (CHNComp) has dropped during the Asian session and it is trading more than 1% lower at the time of writing. Stocks in Shanghai are trading almost 2.4% down. Higher yields in the US could be a reason for this slide. The crucial support stands at 10000 points. Source: xStation5

In the other news:

• EU leaders dropped a plan for a ‘extraordinary’ Brexit summit in November (17-18) and added that if Barnier made decisive progress, they could put it back on

• Japanese trade balance reached a surplus of 139.6 billion JPY in September instead of an expected decline of 45.1 billion JPY