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In an interview with Jutarnji List, ECB Executive Board Isabel Schnabel underlined the unpredictability surrounding the current inflation trajectory, cautioning against premature optimism despite recent encouraging data.

Schnabel stated, "We cannot say that we are at the peak (interest rates) or for how long rates will need to be kept at restrictive levels."

She emphasized the importance of closely monitoring three key metrics to make future monetary policy decisions: inflation outlook, dynamics of underlying inflation, the efficacy of monetary policy transmission. Encouragingly, she noted that "all of them are moving in the right direction."

However, the Board member didn't shy away from highlighting possible headwinds. She pointed out, "I still see upside risks to inflation," flagging potential supply-side shocks and stronger-than-anticipated wage growth, which could be offset by lower productivity growth. Firms might also face difficulty in absorbing these increased costs, which, if realized, could necessitate further hikes in interest rates.

While Schnabel acknowledged the downward trend in inflation as "encouraging," she emphasized that it still remains considerably above the ECB's 2% target. The aim, she said, should be to hit this target by 2025 to ensure inflation expectations "firmly anchored". However, she cautioned about the challenges in reaching this goal, noting that the "last kilometre" may be the most challenging.

The recent surge in oil prices was another point of concern for Schnabel, suggesting that inflation could face upward pressures from unforeseen supply shocks, especially in sectors like energy and food. She added a call for vigilance, urging that "we must not be complacent, and we should not declare victory over inflation prematurely."

Full interview of ECB Schnabel here.

• Spot Gold (XAU/USD) has a significant indirect correlation with the 10-year US Treasury yield since May 2023.
• A potential short-term pull-back in US 10-year Treasury yield below a 4.90% key medium-term resistance may offer a “relief mean reversion rebound” on spot Gold.
• Watch the key support of US$1,810 on spot Gold.

In the past two weeks, the price of spot Gold (XAU/USD) has tumbled swiftly by -6.90% from its 21 September 2023 high of US$1,947 to a seven-month low of US$1,813 printed on Thursday, 5 October.

The primary driver has been the rapidly rising longer-term US Treasury yields that increase the opportunity cost of holding gold due to its “zero-yielding asset” nature. The 10-year US Treasury yield, a benchmark for long-term interest rates has increased by 158 basis points from its May 2023 low to a recent high of 4.88% on Wednesday, 4 October.

Fig 1: Spot Gold (XAU/USD) correlation with 10-year US Treasury yield as of 6 Oct 2023 (Source: TradingView, click to enlarge chart)

Potential pull-back for US 10-year Treasury yield

Fig 2: US 10-year Treasury yield medium-term trend as of 6 Oct 2023 (Source: TradingView, click to enlarge chart)

Its current short-term uptrend phase from the 1 September 2023 low of 4.06% has been overextended to the upside where it has formed a “Bearish Harami” right below a key-medium resistance of 4.90%, a two-candlestick bearish reversal pattern taking into account of its price actions on 3 and 4 October 2023 as seen on the daily chart.

Hence, the 10-yield US Treasury yield may start to shape a pull-back towards its 20 and 50-day moving averages acting as a support zone of 4.50%/4.33% that can provide some form of short-term ‘relief mean reversion rebound” for spot Gold (XAU/USD) given its significant indirect correlation with the 10-yield US Treasury yield since May 2023.
Watch the US$1,810 key medium-term support on Gold

Fig 3: Spot Gold (XAU/USD) major trend as of 6 Oct 2023 (Source: TradingView, click to enlarge chart)

Fig 4: Spot Gold (XAU/USD) minor short-term trend as of 6 Oct 2023 (Source: TradingView, click to enlarge chart)

The five-month medium-term downtrend phase of spot Gold (XAU/USD) from its 4 May 2023 high of US$2,067 has reached a key medium-term support of US$1,810 which is defined by the median line of the long-term secular ascending channel in place since December 2015 low and close to the 61.8% Fibonacci retracement of the prior major uptrend phase from 28 September 2022 low to 4 May 2023 high as seen on the daily chart.

On the shorter-term chart, the 1-hour RSI oscillator has flashed a recent bullish divergence condition at its oversold region which suggests that the downside momentum of its short-term downtrend phase from the 21 September 2023 high to 5 October 2023 low has eased.

These observations suggest a potential short-term counter trend mean reversion rebound scenario may occur next. A break above the near-term resistance of US$1,830 sees the next resistance coming in at US$1,860 (the median line of the medium-term descending channel from 4 May 2023 high & 38.2% Fibonacci retracement of the recent decline from 21 September 2023 high to 5 October 2023 low).

On the other hand, a break below the US$1,810 pivotal support invalidates the mean reversion rebound scenario to expose the next support at US$1,780 (minor congestion area from 15 November 2023 to 15 December 2022) in the first step.

• AUDUSD pivots higher near familiar support
• Short-term risk remains skewed to the downside
• Next resistance expected to emerge near 20-SMA

AUDUSD found shelter near the descending line drawn from December 2022 for the fifth time, avoiding any declines below the 0.6300 round level.

The RSI and the stochastic oscillators have deviated above their oversold levels, backing the recent rise in the price. Still, they haven’t exited the bearish area, keeping the focus on the 0.6395-0.6455 important resistance zone, where the 20- and 50-day simple moving averages (SMAs) as well as two constraining lines could reject any potential increases. Then the bulls will need to violate the downward path above 0.6520 and run beyond 0.6570 in order to meet the 200-day SMA at 0.6625.

Should the downtrend extend below the 0.6300 round-level and the critical support line, the price could initially seek protection near the 0.6200 mark and then within the 0.6100-0.6120 region last seen in April 2020.

Overall, AUDUSD has re-activated its bearish trajectory from mid-July earlier this week and a sustainable recovery above 0.6520 is now needed to eliminate negative risks in the market.

• USDCAD in an aggressive advance, smashing previous resistance zones
• Formation of a golden cross boosts bulls’ appetite
• Momentum indicators ease but remain deeply positive

USDCAD managed to totally erase its recent downside correction and edge higher towards a fresh six-month peak of 1.3784. However, the pair has surrendered some gains in the last couple of sessions after the short-term oscillators pointed at overbought conditions.

Should buying interest persist, the pair could re-test the recent rejection region of 1.3784. A break above that zone could open the door for the March resistance of 1.3803. Even higher, the 2023 high of 1.3860 may cap further advances.

Alternatively, if the pair corrects to the downside, a couple of previous resistance regions such as 1.3693 and 1.3666 could provide initial downside protection. Sliding below the latter, the price could then test 1.3522, which overlaps with the 50-day simple moving average (SMA). Should that barricade also fail, the spotlight could turn to the September low of 1.3377.

In brief, USDCAD has experienced a solid rally in the past few sessions, storming to a fresh six-month peak just shy of the 1.3800 handle before paring some gains. Is this the beginning of a pullback or are the bulls poised to challenge the 2023 highs?

The dollar index is trading within a narrow range on Friday morning and expected quiet mode, as markets await release of the US NFP report, key event of the week.

Near-term action remains above trendline support (106.01), following a two-day pullback from new 2023 peak (107.03) which so far looks like a healthy correction of a larger uptrend and offering better levels to re-enter bullish market.

Bullish daily studies continue to support the action for renewed attack through pivotal 107.00 resistance zone (50% retracement of 114.72/99.20 / psychological / weekly cloud top) break of which would signal bullish continuation.

However, fundamentals are likely to play a key role in signaling direction today, as traders look for more clues about the condition in the US labor market, which will directly influence Fed’s view on interest rates in the near future.

US job growth is expected to slightly slow in September (NFP Sep 170K f/c vs Aug 187K), but unemployment rate is expected to ease from 1 ½ year high (Sep 3.7% f/c vs Aug 3.8%) and wage growth expected to remain elevated (Sep 0.3% vs Aug 0.2%).

Forecasted numbers suggest that the US labor sector remains resilient and the least impacted from high borrowing cost among the economy’s key pillars, with expected small easing not to significantly impact overall positive picture.

The Federal Reserve would, in such conditions, opt for another rate hike by the end of the year, or more likely, keep monetary policy tight for some time, as recent drastic measures in putting inflation under control, still did not provide desired impact on the economy.

The other two reports from the US labor sector, released earlier this week, were mixed as job openings rose well above forecasts, while hiring in private sector fell significantly last month.

Better than expected numbers in Sep NFP report would add to Fed’s hawkish stance and subsequently further support the dollar, while demand for greenback would ease on NFP miss.

Expect initial direction signals on sustained break of trendline support (bearish) or lift above 107.00 zone pivotal barriers (bullish).

Res: 106.96; 107.13; 107.88; 108.79.
Sup: 106.01; 105.50; 105.13; 104.32.

AUD/USD is attempting a recovery wave from 0.6285. NZD/USD is also rising and facing a major hurdle near the 0.5980 level.

Important Takeaways for AUD/USD and NZD/USD Analysis Today

• The Aussie Dollar found support near 0.5870 and is now recovering against the US Dollar.
• There is a key rising channel forming with resistance near 0.6385 on the hourly chart of AUD/USD at FXOpen.
• NZD/USD is attempting a recovery wave above the 0.5930 resistance.
• There is a major bullish trend line forming with support near 0.5950 on the hourly chart of NZD/USD at FXOpen.

AUD/USD Technical Analysis

On the hourly chart of AUD/USD at FXOpen, the pair recovered above 0.6450. However, the Aussie Dollar failed to clear 0.6500 and started a fresh decline against the US Dollar.

The pair declined below the 0.6385 support. Finally, the bulls appeared near the 0.6285 zone. A low was formed near 0.6285 and the pair is now correcting losses. There was a move above the 23.6% Fib retracement level of the downward move from the 0.6500 swing high to the 0.6285 low.

The pair is now above 0.6350 and the 50-hour simple moving average. On the upside, an immediate resistance is near the 50% Fib retracement level of the downward move from the 0.6500 swing high to the 0.6285 low at 0.6385.

The first major resistance is near a rising channel at 0.6450. A clear upside break above 0.6450 could send the pair toward 0.6500. The next major resistance on the AUD/USD chart is near 0.6550, above which the price could rise toward 0.6620. Any more gains might send the pair toward 0.6650.

On the downside, initial support is near the channel trend line at 0.6350. The next support could be the 0.6325. Any more losses might send the pair toward the 0.6285 support.

NZD/USD Technical Analysis

On the hourly chart of NZD/USD on FXOpen, the pair also followed a similar pattern and declined from the 0.6050 zone. The New Zealand Dollar gained bearish momentum and traded below 0.5950 against the US Dollar.

The pair even dropped below the 50-hour simple moving average and tested 0.5875. A low was formed near 0.5870 and the pair is now attempting a fresh increase. It is back above the 0.5930 level and the 50-hour simple moving average.

It is now consolidating to clear the 50% Fib retracement level of the downward move from the 0.6048 swing high to the 0.5870 low. There is also a major bullish trend line forming with support near 0.5950.

On the upside, the pair is facing resistance near the 61.8% Fib retracement level of the downward move from the 0.6048 swing high to the 0.5870 low at 0.5980. The next major resistance is near 0.6000. If there is a move above 0.6000, the pair could rise toward the 0.6050 resistance.

Any more gains might open the doors for a move toward the 0.6120 resistance zone. On the downside, immediate support on the NZD/USD chart is near 0.5950.

The next major support is near the 0.5930 zone. If there is a downside break below 0.5930, the pair could extend the decline toward the 0.5870 level. The next key support is near 0.5820.

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Markets

The (very) long end of the US yield curve failed to build out additional (Treasury) gains after Wednesday’s meaningful correction. A third consecutive week of extremely low jobless claims (202k-207k range) might already halted bond enthusiasts even as oil prices tanked further ($86/b to $84/b). However, we’d still err on the correction side today with US payrolls scheduled. Anything bar an outrageously positive number will likely call for some cautiousness going into the weekend. Consensus expects a net job gain of 170k with unemployment rate ticking lower again to 3.7%. Although the correlation is weaker than in the past, Wednesday’s job report by payroll processor ADP suggests that the US labour market is becoming more balanced again. Daily changes on the US yield curve eventually ranged between -4 bps (3-yr) and +3.2 bps (30-yr) yesterday. The outperformance at the front end of the curve is related to the recent underperformance of the very long end. As San Francisco Fed Daly pointed out at an high-profile event at The Economic Club of NY: the tightening of financial conditions is equivalent to about one rate hike. “When bond yields rose, we saw the probability on the November meeting go down. To me, that says the markets are understanding how we think about things and they do have the reaction function in mind,” she said. Additionally, holding rates steady is an active policy action she argues as policy will grow increasingly restrictive as inflation and inflation expectations fall. The German yield curve showed a more or less similar pattern with yields sliding 4.9 bps (5-yr) to 1.8 bps (30-yr). Intra-EMU spreads remain under pressure with the 10-yr Italian spread closing above 200 bps for the first time since the start of this year.

FX and stock markets remain reluctant to really enter correction mode as well. European equity markets recovered 0.5% while key US gauges ended with small losses. Technical pictures remain fragile for both going into Q3 earnings which get going next Friday with several US banks. Apart from the results, it could be (worrying) outlooks that influence risk sentiment. The trade-weighted dollar (DXY) closed at the intraday low of 106.32 from an open at 106.77, but remains within the upward trend channel since mid-July. EUR/USD rebounded from around 1.05 to 1.0550 and is similarly locked in a downward channel.

News and views

Japan labour earnings growth remained below expectations in August. Labour cash earning were unchanged at 1.1% Y/Y. Corrected for inflation this translated into a decline in real earnings by 2.5% Y/Y, indicating a further erosion of purchasing power for Japanese households. Real household spending dropped by 2.5% Y/Y but M/M-growth was rather strong at 3.9%, suggesting some improvement in spending momentum. The wage growth data are still below the (real) growth that the Bank of Japan considers as important to conclude that the structural deflationary trend isover. As such, the data suggest that the BoJ won’t be in a hurry to make a U-turn in its ultra-easy policy. At the same time, the combination of a weak yen and rising bond yields are putting pressure on the BoJ to consider catching up with the broader trend of monetary normalization. The 10-y Japanese bond yield holds this morning near the cycle top (0.805%). The yen stabilizes near USD/JPY 148 area after testing the 150 barrier earlier this week.

In a press conference one day after the National Bank of Poland cut its policy rate further by 25 bps to 5.75%, governor Glapinski commented on the NBP’s policy intentions/assessment. He indicated that the NBP favours gradual changes in the in the policy rate in order not to disturb economic agents. Glapinski expects CPI inflation near 6-7% at the end of this year, with a further decrease next year (5% mid 2024) as the economy would grow only slightly this year an gradual in 2024. He advocated that current cuts won’t affect the path to the NBP inflation target. He still considers the current rate level as high. On the zloty, Glapinski suggested that the NBP doesn’t worry about the current level of the zloty. There is no reason to intervene in the FX market now. Still a stronger zloty would help to bring inflation back under control over time. The zloty yesterday lost modest ground during the press conference after rebounding post the NBP decision on Wednesday (close EUR/PLN near 4.60).

For most of this year, the market was focused on inflation numbers, as inflation was all that mattered for the Federal Reserve (Fed) expectations. And inflation fainted thanks to a significant downside correction in energy prices compared to last year and due to waning supply chain disruptions, which resulted in higher supply. But now, it becomes increasingly clear that we come toward the end of what we could get from post-Covid normalization and… energy prices. Therefore, the US jobs market must do the rest of the heavy lifting if the Fed wants to see inflation return and steady around its 2% monetary policy target. That makes the US employment and unemployment numbers critical for investors, again.

Today’s data could be one of the most important jobs data of the year because the US bond and equity markets are at a crossroads. The US 2-year yield refuses to lose the 5% mark from sight, while the US 10 and 30-year claim a further rise to 5% on expectations that inflation will remain higher for longer and that would require interest rates to stay higher for longer.

The S&P500 on the other hand is waiting in ambush, a few points above the critical 200-DMA (4205). Below, at 4180, the major 38.2% Fibonacci retracement is waiting to judge whether the S&P500 should remain in the positive trend, or sink its teeth into a medium-term bearish consolidation zone. The S&P500 kicked off the year at around 3850, and gains for the good part of the S&P493 have already vanished. Today’s jobs data could help investors find the next direction for the S&P500. Or not.

The US economy is expected to have added 170K new nonfarm jobs in September. That makes sense as last month’s figure stood at 187K and we expect the numbers to gently come down. Last year’s average remains at a strong 270K, but the last 6-month average is down to 235K additions in average per month and the last 3-month average is slightly below 200K job additions. The wages growth on the other hand is seen steady at around 4%, meaningfully above the actual CPI number (3.7%). T

Today, a reasonable wages growth data combined with another NFP number below 200K, preferably near the expectation of 170K, or ideally lower, should pour some cold water on bond yields, especially on the longer portion of the yield curve. But the impact of a cool down in US sovereign markets doesn’t mean that the stocks are out of the woods. For stocks to continue to perform well, the earnings expectation should keep up with the yields, and if the economy is slowing – a signal that we could get from eventually softer jobs data – investors may remain reluctant to return to stock markets.

In the series of Keeping Up with the Fed Members, Richmon Fed President Barkin said that there is a lot of fiscal issuance that’s creating a lot of supply, combined with the strong data and the Fed’s QT, the increased treasury issuance sure contributes to pushing yields higher. SF Fed President Mary Daily said yesterday that the Fed could refrain from raising rates again as the latest meltdown in the bonds market has had about the same effect than on more rate hike. Going into the data, activity in Fed funds futures gives around 78% chance for another pause in November, it appears that traders are betting historic sums on the outcome of the November meeting. That outcome depends on jobs and inflation numbers. So, I stop here, and let the numbers talk.

In energy, the oil selloff extended to a second day, prices fell in five over the past six trading days. The barrel of US crude hit the $82.5pb level yesterday. The selloff could extend toward $80pb level no matter what, if the market focus remains on ‘growth’ and ‘demand’. In case of a soft set of US jobs data, economic slowdown fears would boost the oil bears. In case of strong jobs data, the hawkish Fed expectations would fan recession worries and push oil to $80pb. I however don’t see the barrel of crude sink below the $80pb without OPEC intervening, at least verbally.

Market movers today

Today we get the key US jobs report for September. We expect data to be generally consistent with a further cooling of the economy and expect non-farm payrolls growth at +140k and average hourly earnings at +0.2 % m/m SA, both is a bit below consensus.

German factory orders from August are published. Factory orders have declined both this year and last year in sync with the extremely weak manufacturing sector.

The 60 second overview

US yields rose from the long end again extending the recent trends. The recent uptick in long-end UST yields reflects rising term premium, while risk-neutral rate expectations have remained stable. We published Research US - Yields not bound to remain high for long, 5 October, in which we also examine the unfavourable supply-demand dynamics that are likely to persist into Q4, but we still see improving demand driving yields lower, with 12M 10y forecast at 3.70%, though risk is tilted to the upside.

Yesterday's US jobless claims did not provide any evidence of a noteworthy cooling of the US labour market. Initial jobless claims came in more or less in line with expectations at 207k (cons.: 210k, prior: 205k), while continuing claims stood at 1664k (cons.: 1671k, prior: 1665k). The four-week moving average of initial claims edged down to 209k, the lowest level since February. After mixed signals on the latest development in the US labour market during the week (strong JOLTS data and weak ADP employment report), we look for non-farm payrolls at 140k today, which is 30k lower than the consensus. Additionally, we expect average hourly earnings at 0.2% m/m, slightly below consensus of 0.3% m/m. If we are right, EUR/USD will most likely move higher on the release, in line with our tactical case based on US data starting to disappoint.

Equities: Yields stalled which was enough for equities to calm. Europe somewhat higher (Stoxx 600 +0.3%) and US a tad lower (S&P 500 -0.1%) but both a bit off best levels. Growth and quality sectors outperformed as the rates-fear eased, with sectors such as real estate, health care, financials and utilities in the lead (Evolution, Atlas, Nibe, Orsted in the Nordics). Our Nordic select list member Pandora also surging 12% amid higher financial ambitions at the CMD. One sector worth noting is consumer staples, down -2% in the US session. This has been one of the worst performing sectors in the rates surge and underlines the risk of being overweight defensives when risk free alternatives (bonds) are rising.

FI: European yields were trading mostly sideways yesterday until late afternoon when European curves shifted lower by 3-5bp with the move slightly more pronounced in the longer end. Real rates edged slightly lower with inflation swaps broadly unchanged on the day. The news flow yesterday was mainly characterised by central bank speakers indicating that they are done on rates, where particularly ECB's Kazimir said that changing PEPP reinvestments may be considered once they are certain that they are done hiking rates. Villeroy said that past expectations for rate cuts were too optimistic and also that he sees no justification for rate hikes. The transatlantic spread widened again yesterday by 2bp to 183bp in the 10y UST vs. 10y Bunds. This is the widest since November last year.

FX: In yesterday's session EUR/USD extended the latest rebound with the cross hitting the 1.0550 level. Meanwhile, the rally in EUR/NOK and EUR/SEK eased while USD/JPY dropped to 148.50 on the decline in global yields.

Credit: Overall the slightly weak tone in credit markets continued yesterday with iTraxx Main 2bp wider at 87bp while iTraxx X-over was 7bp wider at 461bp. Due to the general market turmoil following higher interest rate levels primary activity remained muted - although we saw some activity both in Scandi and European space.

Nordic macro

In Norway, the government will be unveiling its fiscal budget for 2024. We are most interested in how expansionary the budget will be - in other words, how the proposals would affect economic activity. We expect the budget to be more or less neutral, which would tie in nicely with Norges Bank's projections in the September monetary policy report.

The main event in Sweden is the Debt Office's release of the September budget balance. The accumulated difference vs. forecast up to and including August is a hefty SEK 46bn surplus. The main reason for this was much smaller than expected payments in August for company electricity support (SEK 30bn less than assumed), but corporate taxes were also higher than expected. The Debt Office forecasts a SEK 8bn deficit in September and it seems fair to assume that delayed payment of electricity support can push that deficit considerably higher.

Daily Pivots: (S1) 180.55; (P) 180.81; (R1) 181.34; More...

Intraday bias in GBP/JPY stays neutral at this point. Near term outlook stays bearish as long as 183.00 resistance holds. Break of 178.02 will resume the fall from 186.75 to 176.29 support. However, firm break of 183.00 will argue that the pull back has completed, and turn bias back to the upside.

In the bigger picture, fall from 186.75 is currently seen as a corrective move only. As long as 176.29 support holds, larger up trend from 123.94 (202 low) should still be in progress. Break of 186.75 will target 195.86 (2015 high). Nevertheless, firm break of 176.29 will confirm medium term topping, and bring lengthier and deeper consolidations.