USD Momentum for Now Doesn’t Look that Convincing

Markets

September US payrolls confirmed that demand for labour remains much stronger than what is needed for inflation to sustainably return to the Fed’s target anytime soon. The US economy added another 336k jobs (170k expected) driven by a 234k rise in the private service sector jobs. Job growth for the previous two months was also raised by a combined 119k. Data from the Household Survey were less spectacular, with the jobless rate holding at 3.8%. Average hourly earnings even printed on the softer side of expectations at 0.2% M/M and 4.2% Y/Y (4.3% expected). Yields initially jumped sharply higher on the outsized payrolls beat. US 10 & 30‐y yields even briefly touched new intraday cycle peak levels at 4.88% and 5.05%. However, it was one step too far to force a sustained break going into the long US weekend. US yields closed well off the intraday top levels closing 6.3 bps (2‐y) to 8.25 bps (10‐y) higher. The US 10‐y real yield closed at a new cycle top of 2.483%. First Fed comments evidently kept the door open for an additional hike at the November 01 meeting. Fed Mester reiterated a balanced, data‐dependent approach. Fed Bowman outright indicated that higher rates are needed. German yields also briefly jumped higher post‐payrolls but in the end decoupled and closed with changes of less than 1 bp across the curve. A bit surprising: US equities ignored the rise in (real) yields and gained up to 1.6% (Nasdaq). Maybe softer wage data gave some comfort. The combination of higher equites and at the same time a higher US real yield provided conflicting input for the USD dollar. EUR/USD briefly spiked below 1.05, but reversed intraday losses soon to even close in positive territory (1.0586) despite a widening interest rate differential. Brent oil closed little changed at $84.6/b.

Markets try to assess the impact of rising geopolitical tensions after the Hamas attack on Israel this weekend. However, with Japan, Korea and US markets closed, it’s difficult to assess the markets’ reaction function. China reopens after the Golden week holidays with modest losses. US Treasury futures are gaining modestly as does the dollar (DXY 106.34, USD/JPY 149.21 & EUR/USD 1.056). Brent oil jumped higher this morning but at $87.5 already trades off the earlier top. The eco calendar is almost empty except for some Fed and ECB speakers. Looking at the equity futures, a (modest) risk‐off open in Europe is likely which might trigger some consolidation/correction on recent bond sell‐off. USD momentum for now doesn’t look that convincing. A break below the 1.045 short‐term low apparently isn’t that easy. Later this week the focus is on the Minutes of the Fed September meeting (Wednesday) and the US CPI release (Thursday; 0.3% M/M expected both for core and headline). Also keep an eye at the US Treasury selling 3‐,10‐ & 30‐y bonds as US yields are holding close to the cycle peak levels.

News and views

German Chancellor Scholz’s ruling coalition suffered another defeat in state elections. All members of the SPDGreens‐ FDP triangle lost votes, with conservative opposition parties (CDU/CSU) easily clinging on to power. In Bavaria, the CSU got 37% of the vote (‐0.2%) compared to 16% for the Greens (‐1.6%), 8.5% for SPD (‐1.2%) and 3% for FDP (‐2.1%). The current regional coalition between CSU and the conservative Freie Wähler (14.4%) will likely be prolonged. In Hessen, the CDU accumulated 35.5% (+8.5%) compared to 16% for SPD (‐3.8%), 15.5% for the Greens (‐ 4.3%) and 5% for FDP (‐2.5%). The current regional link‐up between CDU and Greens can be extended as well. Remarkably, the extreme‐right AfD which has its stronghold mainly in former communist eastern German states, managed to increase its influence with best results to‐date in western states: 16% of the vote in Hessen (+2.9%) and 14% in Bavaria (+4.8%).

Total US consumer credit decreased by $15.6bn in August, the most in three years. The sudden slump is related to a record drop in non‐revolving credit related (‐$30.3bn) to student loan forgiveness by the Biden administration. Outstanding revolving credit, including credit cards, rose by $14.7bn, the most since November. The average annual interest rate that consumers are paying on credit card balances hit a record high of 22.8% at the end of August, up from 16.3% a year ago.